Co-op 101: When Does a Cooperative Make Sense?

The cooperative business structure can be an effective organization, but it is not appropriate for everyone or every business idea.  When deciding whether to develop a business as cooperative, there are four key factors that need to be present for the cooperative structure to be the right choice.   

  1. Three to five people who would be members of the cooperative are driving the business idea, and these people are comfortable starting a business with each other. It is important for potential members of the co-op to be active in developing the co-op to ensure members understand the business and its structure as a cooperative.  You also need a few key members to be a driving force in the development stage to keep the process moving forward.  In Kentucky, it requires 3 people to start a cooperative unless it is an agricultural cooperative, which requires 5 people.

  2. The owners are willing to share business decisions and do not want total control of the business. Co-ops are democratically-controlled businesses, and voting rights are tied to membership status (usually one-member, one-vote) and not based on the level of investment. The members will actively participate in setting policies and making decisions. If you as an individual want to maintain control of the business or if you are not willing to share financial information with others, then you need to rethink the cooperative structure for your business idea. 

  3. A shared need and mutual goals exist for the potential members of the cooperative. The people starting the cooperative should be able to agree on the direction of the cooperative.  Successful cooperatives tend to start with a group who have a shared need, such as access to food products not currently available in their area or to markets for their agricultural products. 

  4. The purpose of the business is driven by member benefits, not maximizing profits or returns to investors.  The purpose of a cooperative is to meet a common need among its members and to provide greater benefits to its members such as increasing income levels or improving the quality of life for its members.  Profits are distributed to members based on use of the co-op, not investment level. 

If these key factors do not exist, then you should investigate developing your business under a different business structure.  However, you could consider operating with some cooperative principles.  Limited liability companies (LLC) and corporations can be set up to follow certain cooperative principles in how they operate.  If you are interested in developing a cooperative or would like more information on whether a cooperative is the best structure for your entity, give us a call at 859-550-3972 or email us at kcard@kard.info.