What Is a Cooperative?
Cooperatives are companies owned by the people who use their services. These member-owners form the company for a particular purpose: to satisfy an economic or social need, to provide a quality good or service (one that the market is not adequately providing) at an affordable price, or to create an economic structure to engage in needed production or facilitate more equal distribution to compensate for a market failure. The International Co-operative Alliance (ICA), a nongovernmental trade association founded in 1895 to represent and serve cooperatives worldwide, defines a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise” (ICA 2012b). Cooperatives range across the globe from small-scale to multi-million-dollar businesses. There are more than one billion members of cooperatives throughout the world (ICA 2012a).1 According to the ICA, in 1994 the United Nations estimated that “the livelihood of nearly 3 billion people, or half of the world’s population, was made secure by co-operative enterprise” (2012a)—and the cooperative movement has continued to grow since then. Moreover, the United Nations designated the year 2012 “the international year of cooperatives,” with the theme “cooperative enterprises build a better world” (UN 2011), recognizing the viability of the model in addition to its widespread use. Although they were not a well-publicized economic structure before 2012, cooperatives are a significant force in the world economy. Building on the successful year of cooperatives, the ICA and UN have now declared the following ten years to be the international decade of cooperatives.
Cooperatives are classified into three major categories, depending on the relationship between the member-owners and the co-op’s purpose: consumer-owned, producer-owned, or worker-owned (or some combination of the three).2 Consumers come together and form a buying club or cooperative retail store in order to pool their money to buy in bulk the kinds of goods and services they want, and the quality they want, at an affordable price. Consumers establish a grocery cooperative, for example, if fresh produce and natural and vegetarian foods are not supplied elsewhere or are very costly. Consumers also come together to buy electricity, financial services (as in a credit union), environmentally friendly fuels, pharmaceuticals, or child care, for example. Cooperative retail enterprises such as natural-food grocery stores and rural electric and energy cooperatives, together with credit unions, are the most common and successful examples of consumer cooperatives. Credit unions offer financial services and loans to a specific group of members (affiliated with a union, a workplace, or a church, for example) or to underserved communities, and keep financial resources circulating in the community. Housing co-ops expand home or apartment ownership to more people, addressing both financing and maintenance issues, and often build in long-term affordability.
Producers also form cooperatives to jointly purchase supplies and equipment or to jointly process and market their goods. Here again, cooperative economics facilitates the pooling of resources to supply producers or to help produce or enhance their product, to standardize procedures and prices, to increase the selling price, or to decrease the costs of distribution, advertising, and sales. Agriculture marketing and craft cooperatives are the most common form of producers’ cooperatives.
Workers form cooperatives so as to jointly own and manage a business themselves, to stabilize employment, make policy, and share the profits. Worker cooperatives are often established to save a company that is being sold off, abandoned, or closed down, or to start a company that exemplifies workplace democracy and collective management. Worker-owned businesses offer economic security, income and wealth generation, and democratic economic participation to employees, as well as provide communities with meaningful and decent jobs and promote environmental sustainability.
Cooperative businesses must operate democratically, according to a set of principles that include open membership, equal voting rights for each member regardless of how much is invested, returns based on use, continuous education, and concern for the community.3 According to the ICA, “co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity” (ICA 2012b), as well as accountability and transparency. Cooperatives operate on a “double bottom line”—paying attention not just to good business practices and producing a surplus but also to good functioning of the association and to member and community participation (democratic participation) and well-being (Fairbairn 2003; Spear 2000). Because many cooperatives also address sustainability (both economic and environmental), they are often seen as addressing a “triple bottom line”: economic (business), social (mutuality and participation), and ecological sustainability. Fairbairn argues, however, that making distinctions between social and economic sustainability is reductionist because it suggests tradeoffs instead of synergies. A more integrated approach recognizes that “social and economic functions come together” and that economic activities achieve social goals (Fairbairn 2003, 4). This is not an either/or relationship in which one goal has priority over others.
Comparisons with Other Business Forms
The co-op participation structure and its mission or purpose are the major ways in which cooperatives differ from other businesses. Like all businesses, “all types of co-operatives have to cover costs with revenues raised in a competitive context” (Fairbairn 2003, 5). Cooperative enterprises, however, modify capitalist principles by limiting the amount of dividends earned, limiting voting power, and limiting the number of shares any one member may own (Emelianoff 1995, 83). In cooperative enterprises, the three major interests of any business—ownership, control, and beneficiary—are all “vested directly in the hands of the user” (ICA 2007). Cooperatives are organizations of buyers and sellers and consumers and owners—not one or the other.4 This combination solves the general economic problem of overproduction and business uncertainty, eliminating the middle man and reducing costs, according to Warbasse (1918). The University of Wisconsin Center for Cooperatives (2012) provides a chart that explains the major purpose, membership/ownership requirements, and tax liability differences between cooperatives and other corporations and legal business structures (see table I.1). A co-op’s purpose is to meet member needs, not just to earn a return on investment (the purpose of a traditional corporation). Profits, or what co-ops call surplus, are distributed to members in proportion to use, with a limited return on capital in general in cooperatives, a departure from the practice of corporations, where profits are distributed according to stock ownership (in proportion to investment). Tax liability is also different. Under U.S. law, members pay income tax on “qualified profit distributions based on patronage,” and the cooperative pays taxes on unallocated surplus and nonqualified profits (University of Wisconsin Center for Cooperatives 2012). Owners of C corporations (the stockholders) pay taxes on their dividends and capital gains from the sale of stock, while the corporation pays taxes on profits. Stockholders of S corporations pay individual-rate taxes on their profit share and their capital gains.
Table I.1 provides more details about differences and comparisons with other business structures. For specific details about how cooperatives compare with employee-owned businesses, table I.2 compares cooperatives, particularly worker cooperatives, with employee stock-ownership plan (ESOP) companies. Under worker-cooperative-ownership structures, the employee-owners vote for the board of directors, which sometimes consists of all the employee-owners. In worker cooperatives, labor rents capital instead of capital renting labor, which allows the “new assets and liabilities created in production” to accrue to the residual claimants (workers) (Ellerman 1990, 207). In worker cooperatives, “the relationship between the worker and the firm is membership, an economic version of ‘citizenship,’ not employment”—the employment relationship is abolished (206). In ESOP structures, ownership is still determined by traditional corporate stock ownership—with voice and profits determined by how much stock is owned—and the proportion of stock ownership allocated