How to Start a Cooperative Part One

Who Sparks a Cooperative?

A compelling need and a few community leaders can spark the idea of forming a cooperative. Usually, these leaders have an economic need or desire a service they believe a cooperative can provide. They also know others who have similar interests.

These leaders can be business owners, manufacturers, growers, artisans, or citizens who lack, or are losing, a market for their products, satisfactory sources of production supplies, or services related to their occupation. Or they may wish to secure some other needed service or develop sources of additional income.

What Is a Cooperative Business?

A cooperative is a business owned and controlled by the people who use its services. They finance and operate the business or service for their mutual benefit. By working together, they can reach an objective that would be unattainable if acting alone.

The purpose of the cooperative is to provide greater benefits to the members such as increasing individual income or enhancing a member's way of living by providing important needed services. The cooperative, for instance, may be the vehicle to obtaining improved markets or providing sources of supplies or other services otherwise unavailable if members acted alone.

Distinctive Features

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:

user-owned,

user-controlled, and

user-benefited.

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.

Why Cooperatives Are Organized

People organize cooperatives to improve their income or economic position or to provide a needed service. This may be achieved through one or more of the following:

Marketing Activities

Improve bargaining power- Combining the volume of several members leverages their position when dealing with other businesses.

California: The California Canning Peach Association is a cooperative bargaining association based in Lafayette. Peach growers contract their production to processors. The grower-owned cooperative bargains with the largest processors for grower price and delivery schedule. Members realize significant additional money per ton for their peaches than growers who market on an individual basis. The cooperative also keeps growers advised on projected market volume and other conditions that may effect their operations.

Reduce costs- Volume purchasing reduces the purchase price of needed supplies. Earnings of the cooperative returned to individual members lower their net costs.

Maine: St. Mary's General Hospital in Lewiston, a 230-bed rural health care facility, is a member of Synernet, a cooperative that serves 20 hospitals. In one year, St. Mary's saved more than $479,000 by purchasing fuel oil, medical supplies, laboratory products, food, film, pharmaceutical, and services through the cooperative. These savings helped health care providers stretch limited resources.

Obtain market access or broaden market opportunities - Value is added to products by processing or offering larger quantities of an assured type and quality to attract more buyers.

Oregon: Tillamook County Creamery Association was organized in 1909 as a quality control organization for 25 cheese factories operating in Tillamook County, an area 30 miles wide and 60 miles long between the Pacific Ocean and the Coastal Range Mountains. During the past years, the 25 cooperatives have consolidated into a single cooperative. Tillamook produces and sells more than 45 million pounds of cheese a year. Sales are mainly in the Pacific Coast States of Oregon, Washington, and California, with an ever-growing volume going to all parts of the United States. Due to the emphasis the cooperative places on family farm operations, young dairy producers have been encouraged to stay on the farm and continue to build on the foundation laid by earlier generations.

Improve product or service quality - Member satisfaction is built by adding value to products, competition the cooperative provides, and improved facilities, equipment, and services.

Iowa: Frontier Cooperative at Norway started out in a van in 1976. Its mission was to provide low-cost organic herbs and spices to its members. Today, with 5,400 members, Frontier is a solidly managed cooperative that's become the Nation's premier distributor of organic seasonings. Developing new products rates high on the cooperative's list, such as Frontier Pure Lager, an organic beer, as well as encapsulated herb products.

North Carolina: Watermark Association of Artisans was formed in 1978 by 35 rural women near Elizabeth City. They pooled their efforts to sell baskets, quilts, and other handmade gift items. Today, the 750 member-artisans produce decorative wooden products, rocking horses, antique quilts, rag dolls, teddy bears, duck decoys, wreathes, and baskets which are marketed around the world. About three-fourths of the members are from low-income backgrounds. Many are single, unemployed mothers with few job skills.

Purchasing Supplies/Services

Obtain products or services otherwise unavailable - Cooperatives often provide services or products that would not attract other private businesses.

Oregon: Members of Blue Water Harvesters Cooperative in Port Oxford harvest sea urchins. They depended on several private firms to extract and clear package "roe" for export to Japan. In recent years, all of these firms ceased operations. The watermen were left without a processing facility. So, the cooperative purchased a processing facility which enabled members to continue their livelihood through cooperative action.

Michigan: Frankfort is a small city of 1,500 on the shores of Lake Michigan. Many older residents wanted the comfort and convenience of retirement living, but didn't want to leave the area. Initially, 54 couples moved into an especially designed, new elderly housing cooperative close to the center of the community. The new cooperative is the latest example of an emerging trend in providing affordable senior citizen housing facilities that are ideally suited to small rural communities.

Flexible manufacturing networks-These are a mechanism for small manufacturing enterprises in local geographical areas. By joining under a cooperative umbrella, members achieve certain shared objectives that might be otherwise impossible to achieve on their own. Through networks, members share costs for market research, environmental compliance, or technical training for employees. Joint production development and market penetration are also feasible objectives.

Farm Credit System - This nationwide network of cooperative lending institutions provides credit and financially related services to farmers, ranchers, and their cooperatives. In existence for more than 75 years, the System is the largest provider of agricultural credit in the United States. The System specializes in low-cost financing for agricultural enterprises and rural utilities. Its expertise is unequaled by any other lender.

Obtain market access or broaden market opportunities-Value is added to products by processing or offering larger quantities of an assured type and quality to attract more buyers.

Franchise Purchasing Cooperatives- Individually owned units are organized to gain economy of scale in purchasing goods and services. Some have formed insurance companies, established leasing programs, or developed financing programs for members' equipment. Benefits are derived not only from savings through group purchasing, but also from sharing earnings based on each member's business volume with the cooperative.

Reduce Cost/Increase Income - Reducing the cooperative's operating costs increases the amount of earnings available for distribution to members to boost their income.

Missouri: Glasgow Cooperative, Inc., was organized in 1923 as a farm supply purchasing association. It serves farmers in a 15-mile radius of Glasgow. In its 70-year history, it has returned nearly 8 percent of the gross sales in patronage back to the members. The cooperative also has an excellent history of revolving member equities. Both activities have reduced the cost of providing farm supplies to the members.

Organizing Steps

Starting a cooperative is a complex project. A small group of prospective members discuss a common need and develop an idea of how to fulfill it. Depending on the situation generating the idea, a new cooperative may be welcomed with enthusiasm or may be met with vigorous competitive opposition.

If opposed, leaders, must be prepared to react to various strategies of competitors such as price changes to retain potential cooperative members' business; better contract terms or canceled contracts; attempts to influence lenders against providing credit; and even publicity, misstatements, and rumors attacking the cooperative business concept.

Regardless of the business climate for the proposed cooperative, leaders must demonstrate a combination of expertise, enthusiasm, practicality, dedication, and determination to see that the project is completed.

1. Invite leading potential member-users to meet and discuss issues. Identify the economic need a cooperative might fill.

2. Conduct an exploratory meeting with potential member-users. If the group votes to continue, select a steering committee.

3. Survey prospective members to determine the potential use of a cooperative.

4. Discuss survey results at a second general meeting of all potential members and vote on whether to proceed.

5. Conduct a needs or use cost analysis.

6. Discuss results of the cost analysis at a third general meeting. Vote by secret ballot on whether to proceed.

7. Conduct a feasibility analysis and develop a business plan.

8. Present results of the feasibility analysis at the fourth general meeting. If participants agree to proceed, decide whether to keep or change the steering committee members.

9. Prepare legal papers and incorporate.

10. Call a meeting of charter members and all potential members to review and adopt the proposed bylaws. Elect a board of directors.

11. Convene the first meeting of the board and elect officers. Assign responsibilities to implement the business plan.

12. Conduct a membership drive.

13. Acquire capital and develop a loan application package.

14. Hire the manager.

15. Acquire facilities.

16. Begin operations.

Leadership and Advisers

Responsibility for starting a cooperative and seeing the project through rests mostly with the leadership group. Leaders begin by discussing their idea at one or more small group meetings with other prospective members or users. If the group supports the idea, the next step is to seek the advice of someone familiar with cooperatives.

Specialized help is needed throughout the various stages of starting a cooperative. Leaders need someone familiar with the cooperative-forming process to work with them step by step concerning legal, economic, and financial aspects.

Depending on the resources available and interest found among sources of specialized help, the group should request a person from one of the organizations to serve as an adviser

Business and cooperative specialists are needed. Most States have Rural Development offices and many have a cooperative development specialist on the staff who can help you get started. They can recommend other specialized services and talents that will be needed during organization stages.

Other resource people are available from county Extension Service offices or land-grant universities, State cooperative councils, Centers for Cooperatives, National Cooperative Bank, area offices of CoBank, St. Paul Bank of Cooperatives, or an established cooperative in your area. USDA's Rural Business-Cooperative Service in Washington, DC, also assists groups seeking to develop cooperatives by conducting feasibility studies, providing educational services, and helping with implementation.

Legal Counsel, preferably an attorney familiar with State cooperative statutes, is needed. Among sources to check for one are State Extension specialists working with cooperatives, the State cooperative council, CoBank, St. Paul Bank for Cooperatives, National Cooperative Bank, National Society for Cooperative Accountants, USDA's Cooperative Services, or an established cooperative in the area.

An attorney prepares the organization papers or checks the legality of those written by someone else. Early expertise is needed to acquire property, make capitalization plans, borrow money, and write agreements and contracts. Even after the cooperative is operating, an attorney should be retained who can help ensure the organization conforms to applicable laws.

Financial counsel from some financial institution should be sought early regarding anticipated capital needs and methods of financing.

This institution can provide advice on designing the feasibility study to meet requirements of a lending agent. Staff specialists on finance and accounting matters can also advise the cooperative. An independent accounting firm that has the knowledge of cooperative operations should be hired to establish the bookkeeping system, tax records, and a plan for revolving capital prior to sale of stock or collection or handling of members' money. Later, the board will need to hire an outside accounting firm to conduct the annual audit.

Technical advice may be needed periodically from a variety of technicians and persons experienced in cooperative business operations.

Exploratory Meeting

To determine the level of interest in starting and supporting a cooperative, invite potential members to a general meeting. Announce the meeting date, time, and place via newspapers, radio, telephone, at other meetings, by letter, or word of mouth. Invite outside advisers.

One approach is to have one member of the leadership group discuss the need and another summarize how the proposed cooperative might solve it. In addition, a representative of a successful cooperative might explain its operations, benefits, and limitations.

Allow plenty of time for discussion. Prospective members should be encouraged to express their views and ask questions. All issues raised should be addressed, although answers may be delayed until later meetings when more information becomes available.

Steering Committee Formation and Duties

If the group wants a more detailed study after discussion is completed, it should select a steering committee. This group should have a keen interest in the cooperative, be well-respected within the community, and have sound business judgment. Committee members often become the initial organizers and members of the cooperative's first board of directors.

The first function is to select officers of the steering committee, usually at the close of the general informational meeting. Next, establish a deadline for completing a business analysis, including a target date for surveying potential members. Periodic progress meetings retain interest of prospective members.

The steering committee, with the help of one or more advisers, determines if a cooperative is feasible. First, it judges whether the proposed cooperative is likely to succeed and benefit its members. Second, if the proposal passes this test, the committee prepares a specific, detailed business plan for the new cooperative.

Assistance from specialists in law, accounting, finance, economics, engineering, and cooperative business operations is critical during the business analysis phase.

Economic need is fundamental to the formation and successful operation of any cooperative. The committee should examine what products or services the cooperative could provide, those needed from other sources, and whether costs would be reduced or quality improved. Intangible functions also should be considered. Will the cooperative provide a needed service, preserve a market, stabilize prices, or encourage more orderly marketing?