In 2024, the top 10% of earners owned roughly 66% of the total wealth in the United States, while the bottom 50% had 2.5%.
While there are many reasons for the poor distribution of wealth in the United States, one significant factor is our economic model. For-profit businesses overpower almost every industry in the world. Those lucky, wealthy or business-savvy enough to become substantial shareholders of a large, successful for-profit company accumulate significant wealth.
So, how can businesses and communities spread wealth more equitably? The answer lies in the cooperative business model.
What Is the Cooperative Business Model?
A cooperative business or co-op is an autonomous association of individuals who collectively and democratically own and operate a business. Simply put, the people who benefit from the cooperative’s products or services also own the business. Instead of a few shareholders controlling the company, every co-op member has a say and share of the profits.
The primary purpose of a cooperative is to serve its members and the community in which it operates. Most co-ops are not-for-profit organizations, meaning they exist to benefit the people involved and not just to make a profit. Therefore, the majority of profits go toward fulfilling the community’s social, economic and cultural needs. When a co-op does well, it benefits the community as a whole. A successful cooperative business can provide employment, investment opportunities and collaborative growth to its community.
Key Advantages of Cooperatives
A cooperative business has several advantages, especially considering all the good it does for the community, employees and members. In case you’re not already convinced, here’s a list of cooperative advantages:
1. Equal Status for Members
One of the major strengths of a cooperative business is that each member holds equal power. When members join, they get the same amount of control over the company’s decisions, no matter how much capital they contribute. In a traditional business model, a small group of shareholders would make decisions about the company because they own the most shares — this is not the case in a cooperative business. Each member gets one vote, and all voices are equal.
2. Open Membership
Cooperatives practice voluntary and open membership. The only criteria for joining a co-op are that you use and benefit from the co-op’s service or product and are willing to accept the membership’s responsibilities. This open membership means anyone can join a co-op, regardless of class, economic status, race or gender. There is also no maximum number of members a co-op can have, so it can continue to accept new members and grow.
3. Product and Service Access
Cooperative business typically focuses on access rather than profit. One way they accomplish this is by providing access to goods or services in communities that wouldn’t otherwise have access. Co-ops sometimes offer a new product or service to their community, while other times, they offer one that is higher quality or more affordable. They also reinvest profits back into the community and its members rather than ending up in the pockets of a few shareholders.
4. Social Benefit for Communities
Co-ops exist for the benefit of their members and community. In addition to providing goods and services, they also serve as beacons of good business. When a community invests in and supports a cooperative business, the rest of the community becomes stronger and equitably wealthier. Co-ops also often provide education and instruction for their members so they can contribute successfully to the co-op. The co-op may also encourage members to spread information about co-ops beyond their communities so others can benefit from this business model.
5. Business Sustainability
Another example of co-op benefits is their business stability and sustainability. Co-ops are more resilient and last longer because they have:
- Shared decision-making: Since more people make decisions in a co-op, they are less likely to make an impulsive decision that could potentially harm the company. The wide range of voices and opinions ensures they explore every business option.
- Community interest: The people making the decisions about the co-op are also local community members. They are more likely to make decisions in the community’s best interest.
- Capital stability: Co-ops are less dependent on consistent cash flow and investment. Their cash flow and capital come from a wide range of sources, so if a few fail, there is minimal impact on the enterprise.
6. Limited Liability for Members
In a cooperative enterprise, members have lower risk as they are only liable for the money they invest. They are not responsible for any company debts or other liabilities unless they result from fraud or negligence. Even if the co-op were to fail, its members would only lose what they have already invested.
7. Reduced Taxation
One of the major benefits of a co-op lies within the tax code. Co-ops still have to pay taxes on profits, but they can often lower their taxable income through member payouts like dividends, refunds and bonuses. They can also benefit from pass-through taxation, where the business passes profits to its members who pay individual tax rates. Depending on their purpose and structure, co-ops may also qualify for other tax exemptions. However, tax laws vary by state, so ensure you know your state’s specific laws before deciding on which exemptions to apply for.
Challenges Faced by Cooperatives
Although starting a cooperative introduces multiple benefits to its owners and community, several challenges come with running a co-op:
Access to Capital and Financing
One of the significant challenges co-ops face is their limited ability to raise capital. Due to their unique model, ownership in cooperatives is by membership. This model means co-ops don’t traditionally welcome outside investors or go public on the stock market. They raise capital from members, which can significantly restrict their financing opportunities.
Raising capital from members is also not always feasible due to a lack of resources. Members don’t always possess the financial resources to provide substantial financing.
However, several financing avenues can take co-ops beyond member financing:
- Cooperative banks: Co-op banks are designed specifically to offer co-op banking solutions and don’t dilute ownership.
- Government programs: The government recognizes the efforts of co-ops and backs them with several grant programs. Co-op members can apply for grants like the Rural Cooperative Development Grant. Our team has and continues to be at the forefront of co-op advocacy, speaking up for more support for co-ops nationwide through different advocacy programs.
- Nonmember investments: Co-ops can also sell preferred stocks to nonmembers. Preferred stocks mean holders don’t have voting authority, preserving the co-op model. They are, however, entitled to a return on their investment.
Scaling Limitations
One of the major advantages of the co-op model is the inclusive decision-making environment. Every member’s vote counts. But this democracy has a flip side.
Getting a group of diverse individuals to come to a consensus can take time, especially if they have conflicting interests. This delay in decision-making can limit the business’s ability to respond quickly to market changes, limiting growth. This delay can widen as the organization grows.
There are three solutions that organizations can implement to deal with the growth inhibitors:
- Governance policies: Your organization can develop and document clear governance and decision-making standards. These could limit the time spent arguing about strategic decisions.
- Educate: Organize training sessions for your board members so they are aware of and can support effective governance policies that encourage growth.
- Hire managers: Having professional, business-centric managers with a proven background in co-ops can also help your organization grow without diluting the business model.
Fostering Member Participation
Co-op success relies on the collective participation of its members. However, when members don’t understand their roles or impact, they can feel disconnected from the organization. This disconnect can limit their active participation or even cause them to abandon ship. You can encourage member participation through:
- Training workshops: Hold educational sessions to ensure that every member understands their role and contribution to the organization. You can also emphasize the co-op’s vision and mission.
- Clear communication: Ensure there is always clear and transparent communication on every level of your co-op.
- Member events: Interactive and fun member events are a great way to foster participation. You can also offer rewards for participation. For example, a grocery store co-op can provide discounts for involvement.
Lack of Visibility
The last challenge co-ops face is the biggest across all sectors. It is the lack of co-op awareness or understanding of its unique business model. Most consumers don’t know what a co-op is, let alone its benefits, reducing the business’s competitive edge.
A lack of resources also means organizations cannot compete effectively against bigger for-profit businesses. The best way to deal with awareness is advocacy. You can take steps like:
- Strategic marketing: Use co-ops’ benefits as your marketing superpower. Ensure that your identity, the people you serve and your organization’s impact are clear.
- Network: Partner with other co-ops to share ideas and resources. The NCBA CLUSA membership benefits include access to an international network of co-ops and the latest data and resources on co-op governance.
We also host the ultimate cooperative event, the Cooperative Impact Conference, which brings together the brightest minds in co-ops to help set you up for success.
How Cooperatives Compare to Traditional Businesses
Co-op businesses operate differently from traditional companies, such as sole proprietorships and partnerships, in the following ways:
1. Ownership and Control
When an individual joins a co-op, they contribute a certain amount of equity to the company. Equity varies from company to company, but the amount of goods or services that members buy typically determines how much equity they contribute. The more equity a member contributes, the more of the co-op they own. However, this does not translate to more control.
With a traditional business format, the shareholders with the largest percentage of shares have control over the company. If an individual holds over 50%, they have the most control over that enterprise. Ownership and control are directly linked in this business format — whoever owns the most shares has the most power.
2. Decision-Making
In a cooperative, one member equals one vote. No matter how much equity you’ve invested in the company or how much of it you own, you still only have one vote when making company decisions. Equal ownership in cooperatives ensures that no one person has more control. The co-op makes decisions based on the best interests of its members.
In a traditional business model, however, a small group of shareholders makes decisions about the company because they own the most shares. Each share is worth one vote, and investors can purchase as many as they need or want to gain a majority. A traditional company’s decision-makers usually prioritize shareholders and profitability when making choices.
3. Investment Requirements
Most co-ops require investors to be members and customers. Additionally, some co-ops only allow members to purchase the company’s goods or services. While some allow noninvestors and nonmembers to be customers, they typically offer substantial discounts to members.
Investors do not need to be customers to supply capital to traditional businesses and receive financial returns. Customers can also purchase a traditional business’s goods or services without paying for a membership or shares.
4. Profit Distribution
Co-ops invest any money they make back into the business and distribute it to members. Each member receives a portion of the profits, called patronage dividends, based on how much they use the co-op’s services or purchase its products. This way, each member benefits financially from the co-op’s success.
Traditional business models pay shareholders profits in the form of dividends. The dividend amount depends on how many shares the receiver has and may come in the form of cash or shares. The more shares someone has, the more dividends they receive. Customers do not receive dividends.
Common Types of Co-op Businesses
Co-op businesses exist to benefit every member and have various structures to accomplish this. Some common types of co-op business models include:
- Consumer co-ops: Consumer co-ops are owned by the customers who buy the company’s products or services. They allow the members to gain negotiation power, share earnings and meet their own needs and the needs of the community. These types of co-ops are common in food stores, retail shops and movie theaters.
- Worker co-ops: Worker co-ops belong to the employees of the company. While they receive payment for their labor like they would at a traditional company, they also own and control the company. Although you can find worker co-ops in any industry, they are most common in the retail and service industries.
- Producer co-ops: Ownership shares in a producer co-op are held by the producers who provide what the co-op sells. Producers usually form co-ops to increase their production and distribution speeds or to make their products more marketable. The most common type of producer cooperatives is agricultural co-ops.
- Purchasing co-ops: Purchasing co-ops are controlled by several smaller enterprises that have banded together to create one business. These co-ops typically form to decrease the cost of production through the power of collective bargaining. Consequently, purchasing co-ops are more likely to offer their customers better deals and lower prices.
How to Get Involved in the Cooperative Movement
If you’d like to get involved and support co-ops, there are multiple ways to do so. Depending on how much time and capital you have, you could:
- Join an existing co-op: If you’re looking to invest in and join a preexisting co-op, be sure to research and find the right one for you and your interests. The best co-ops are highly motivated to help their community and are eager to help other co-ops get up and running.
- Start a new co-op: Anyone can start a co-op for something they are passionate about. However, it’s essential to do your research and understand precisely what hoops you’ll have to jump through to make your co-op dream a reality.
- Advocate for co-ops: Whether you join a co-op or not, you can still make a difference in the co-op movement. Co-op businesses face various challenges, including public awareness. Educate your friends, family and colleagues on the co-op business model and encourage them to support local co-ops.
Support the Co-op Movement Through NCBA CLUSA
The best way to start supporting co-ops is to reach out to an association like the National Cooperative Business Association CLUSA International (NCBA CLUSA). We’re dedicated to advocacy and education for the entire cooperative movement across all sectors in the United States. Our mission is to develop, advance and protect the cooperative business model.
At NCBA CLUSA, we support a more inclusive and equitable economy by empowering people to create a system of shared prosperity, improving the quality of life for themselves, their community and future generations. We are “the cooperative of cooperatives,” representing all types of co-ops in various industries.
Contact us today to learn more about our work and the co-op model. You or your organization can also become a member of the NCBA CLUSA to help us with our mission.
