Is a Cooperative the Right Choice?

KCARD is often contacted by individuals and groups that have a business idea and are interested in forming a cooperative. A cooperative can be a great choice and we help people form cooperatives all the time, but many times the cooperative business structure is misunderstood and people have the wrong idea about what a cooperative is and when it is the right business structure.

A cooperative is a business formed and owned by the people that use its services or in some cases, the workers that are employed there. Cooperatives solve a common need shared by a group that finds it difficult to attain certain products, services, or jobs individually. Cooperatives allow individuals to work together to find a solution to a shared need while empowering their member/owners. Co-op businesses typically return most profits earned to the member/owners of the business in addition to providing the needed product, service, or employment.

Below are a few common misconceptions about cooperatives that KCARD often hears:

“I – and I alone – want to start a cooperative.”
A single person cannot be a cooperative. Legally, a cooperative in Kentucky must have a minimum of five members at the time of formation. Signatures of the original five incorporating members are required on the articles of incorporation filed with the Kentucky Secretary of State.

To be successful, a cooperative needs to provide a product or service that is needed by multiple parties, but currently is not offered in the marketplace or not offered in a way that is needed. The cooperative business structure capitalizes on strength in numbers. When it is not feasible for an individual to do something by themselves, sometimes it is feasible for people to do it as a group. Agricultural purchasing cooperatives are a good example of multiple parties purchasing in larger quantities to procure supplies at a more reasonable cost. Farmers’ markets are another example of people successfully coming together to provide a service at cheaper cost, in many cases than each individual could do so by themselves.

“I – or our organization – will control the cooperative.”
Cooperatives are democratically owned and controlled businesses. Each member has one vote and the governing board is elected by the membership. While profits are distributed based on patronage, or the level of business that each individual or organization does with the co-op, each member has one vote regardless of how much business they do with the co-op.

When an individual or single organization tries to control or influence cooperative decisions or policy, it often has a detrimental effect on the organization as a whole. When members act with the “good of the whole” in mind, the cooperative becomes stronger as a result, to the benefit of all the members.

“Co-ops can only do business with co-op members.”
Cooperatives are allowed to do business with non-members, as long as it does not make up the majority of their business. The benefits to cooperative members are greater than for non-members for doing business with the co-op. Members are the true owners of the business, and they receive benefits as a result. In some cases, members are able to do business on more favorable terms than non-members, and any profits returned are paid to members, while non-members do not share in any of the profits. In general, if an individual or organization plans to do routine business with a cooperative, it often makes sense to become a member of the cooperative.

“Cooperatives do not care about profits.”
Cooperatives are businesses and should be operated with the intent of making a profit. Otherwise, they will not be in business very long! However, the goal of the cooperative structure is for business profit and cost savings to be passed on to cooperative members, and not to the cooperative itself. Many times, cooperatives do operate on a “not for profit basis”. They strive to keep net income low by providing products and services to members at or near cost, and profits are returned back to members in the form of patronage dividends.

Depending on the business idea, a cooperative may or may not be the best business structure. KCARD is Kentucky’s cooperative development center, and can assist in determining if the cooperative structure would best fit your business.