How a cooperative business works in the 21st century

You might imagine a local co-op when you hear the word “cooperative.” However, there are many other types of cooperatives operating in the United States today. Co-ops are a viable alternative for some consumers and business owners who want to move beyond the traditional capitalist way of doing business.

 

What is a cooperative business?

Profits or earnings are distributed among its members. The co-op is similar to a corporation in that members elect officers and directors, and purchase shares. The co-op differs from corporations in that each member has one vote.

 

The cooperative movement has its roots in the mid-19th Century, but it goes even further back, with craft guilds and mutual insurance companies. The 21st century cooperative movement is gaining momentum with the increasing emphasis on equality, concern for people and planet in addition to profit (these are often called “the triple-bottom line”).

Types of cooperative businesses

There are many different types of formal and informal co-ops in existence today.

 

• The majority of mutual insurance companies (mostly with the term “mutual”) are owned by their policyholders rather than shareholders.
• Credit Unions serve their members as non-profit organizations.
• Rural Electric Power Co-opsare not-for profit, private organizations that are incorporated in 48 States to provide electric service at cost to their customers.
• Co-ops that sell consumer goods like REI Co-op. Outdoor outfitter company REI Co-op says “more than 70% of our annual profit is invested back into outdoor community.”
• Producer cooperatives like Sunkist are owned and operated by their members.
• Cooperative purchasing clubs,where a group or households get together to purchase food in bulk. The orders are then divided amongst the members.
• Retail co opslike Ace Hardware which was founded in 1924. The company is owned by “exclusively” the Ace retail entrepreneurs in each locality.
• Community owned businesses such as the Nebraska Cooperative Development Center that has assisted communities in rural towns to start cooperative grocery stores.
• Housing cooperatives form when people come together to control or own housing, and/or other community facilities. These co-ops differ from condo associations where each unit is owned privately and a shared area is owned jointly.
• Youth Co-ops is a business that has been incorporated by youth and is run by them to provide experience in a real-life working model. These can be established in a community center, school or other organization that supports young people.
• Workers cooperativesare owned and formed by employee groups who generate profits for their company and workers.

 

The pros and cons of co-ops

The descriptions of the cooperative business types above show that organizing a group to work towards a common goal can be beneficial. The positives and negatives include:

 

Pros

• Bulk purchases can reduce costs
• Mutual insurance companies: common protection against loss
• Joining together with Sunkist can give sellers more bargaining power
• Members have equal say in business
• Shared values. Shared values.
• Tax benefits for co-ops that are organized as non-profit business

You can also find out more about Cons

• Outside investors have less opportunity to invest because they cannot gain control
• Members’ lack of interest over time

 

How to start a cooperative business

You can make a co-op as simple or as complex as you like. By getting together with families and ordering food, you can start a cooperative. Once you have grown beyond the small group you started, you can form a cooperative in your state. 3

 

Step 1

Business Type. You will need to choose a business structure (corporation or partnership) and file your business with the state.

 

There are some states that have specific regulations for cooperatives. ( New Mexico, as an example. Some states require that you have a co-op to be able to use “cooperative” as part of your business name.

 

Step 2

The other steps involved in creating a corporation or a partnership include electing a Board of Directors that will oversee the operation.

 

Step 3

You must first create the business before you can apply for tax exemption. See IRS Publication 557, “Tax-Exempt Status for Your Organization,” for details.

 

Cooperative businesses and taxes

The cooperative philosophy is to run at cost. There’s no profit, and patrons (those who do business with the cooperative) get net profits on a fair basis.

 

IRS offers several options to cooperatives for federal income tax. The IRS allows two different tax options for cooperative businesses. One is tax-free and the other is taxed.

 

To qualify for and maintain exemption (Internal Revenue Code 501(c)(12), the cooperative must: For the cooperative to qualify and maintain its exemption (Internal Revenue Code, 501(c), (12), it must: 5

 

1. Be organized as a co-operative and run that way
2. Tax code and IRS regulations: How to conduct business

 

The cooperative must receive at least 85% of its annual income from its members, and the income must be used solely for the co-op’s losses and expenses.

 

Taxes are payable by a Subchapter T co-op. This type of co-op can conduct any business. Patrons or members (those who do business with the cooperative) can be either individuals or organizations. Each year, the co-op gives patronage refunds to its users based on their amount of business with the cooperative. The cooperative pays the tax on a temporary base; they receive a deduction once the money has been passed to patrons.

 

Find out more about your state

The National Agricultural Law Center offers a list of business organization forms and filing instructions by state. This could be useful. The National Cooperative Business Association also has a spreadsheet that shows regulations for cooperative businesses by state.