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Business Types: Cooperatives

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What is a Cooperative?

Cooperatives handle all kinds of commodities and there are many different types of cooperatives doing business. For example, there are cooperatives that sell groceries, cooperatives that sell electricity, and some that provide telephone service. An agricultural cooperative may be the most common type of cooperative. An agricultural cooperative is a business organization, usually incorporated, owned and controlled by member agricultural producers, which operates for the mutual benefit of its members or stockholders, as producers or patrons. Many cooperatives do not limit themselves to doing business with only members or agricultural producers.

In a cooperative the investment and benefits gained are shared equitably by its members in proportion to their use of the cooperative's services. In other words, members share in the profits of a cooperative, usually on a patronage basis of business done with the cooperative. Members are generally not liable for any debt, obligation, or liability of the cooperative.

Unlike a traditional corporation, monies paid or equities allocated on a patronage basis to members are generally not taxed at the corporate level. Members pay income taxes on monies that they receive or equities that are allocated by the cooperative. Qualified allocations of equity to a member is accompanied by a payment of at least 20% in cash, to help the recipient pay income taxes, and many cooperatives pay at least 40% to 50% in cash. The payment of the non-cash portion of profits, in the form of equities allocated to members, is deferred until a later date and is retained by the cooperative and used to capitalize the cooperative. Payment of deferred equity is made pursuant to an equity retirement program and policies established by the board of directors of the cooperative.

Cooperatives do business with non-members. Profits generated from non-member business are not paid or allocated to members and income from non-member business stays with the cooperative and is taxed at normal corporate rates.

A cooperative is democratically controlled, often one member one vote, by its members. Proxy and cumulative voting is seldom allowed. In the case of an agricultural cooperative, the members are producers of agricultural products. Others that share in the profits of an agricultural cooperative are often referred to as "participating patrons". The primary distinction is that members have the right to vote on various issues while participating patrons do not. The result is that the control of an agricultural cooperative remains in the hands of agricultural producers by their vote, including the right to cast a vote for the election of board members to a board of directors.

Both members and participating patrons usually pay a fee to either become a member or participating patron. With some cooperatives the fee may be as little as ten dollars $10.00 or hundreds of thousands of dollars.