In many respects, cooperatives resemble other businesses. They have similar physical facilities, perform similar functions, and must follow sound business practices. They usually incorporate under State laws and require bylaws and other necessary legal papers. Members elect a board of directors to represent their interests. The board sets policy and hires a manager to run the cooperative’s day-to-day business.
Even though cooperatives are similar to many other businesses, they are distinctively different. Some differences are found in the cooperative’s purpose, ownership, control, and distribution of benefits. Cooperatives follow three principles that define or identify their distinctive characteristics:
The user-owned principle means the people who own and finance the cooperative are those who use it. “Use” usually means buying supplies, marketing products, or using services of the cooperative business.
Members finance the cooperative through different methods: 1) by a direct contribution through a membership fee or purchase of stock; 2) by an agreement to withhold a portion of net earnings (profit); or 3) by assessments based on units of product sold or purchased.
For instance, a tomato grower would be assessed a fee such as 10 cents for every box marketed through the cooperative. These assessments, generally referred to as per-unit retains, help finance the cooperative’s operations.
The user-controlled principle (also called democratic control) says those who use the cooperative also control it by electing a board of directors and voting on major organizational issues. This is generally done on a one-member, one-vote basis, although some cooperatives may use proportional voting based on use of the cooperative.
The user-benefited principle says that the cooperative’s sole purpose is to provide and distribute benefits to members on the basis of their use. Members unite in a cooperative to receive services otherwise not available, to purchase quality supplies, to increase market access, or for other mutually beneficial reasons. Members also benefit from distribution of net earnings or profit based on the individual’s business volume with the cooperative.
To operate under these distinctive principles, an important practice, particularly for new cooperatives, is to conduct continuing member education. This is especially important for attracting and recruiting new members. It is also necessary because the cooperative’s membership continually changes. Older members retire and new ones join.
Keeping owners informed is an important practice for any business, but vital in a cooperative for at least three reasons:
(1) The democratic control principle, exercised through majority rule, requires that the entire ownership (members) be informed and involved to assure that enlightened decisions are made;
(2) Members must indicate their needs and accept the accompanying financial responsibilities before the cooperative can fulfill those needs; and
(3) Some people are not familiar with the cooperative form of business. The educational system in the United States contains little, if any, information about cooperatives. So, the cooperative, itself, must become the educational institution.