Basic Cooperative Principles

Cooperatives July 19, 2013 Print Friendly and PDF
G. McKee.

 

 

Authors: Greg McKee, North Dakota State University, gregory.mckee@ndsu.edu, and Donald Frederick, Rural Business-Cooperative Service, USDA
 

 

 

Summary: This article provides a comprehensive summary of basic information on the cooperative way of organizing and operating a business. It covers the nature and extent of the use of cooperatives, compares cooperatives to other business structures, explains the roles various people play in a cooperative and discusses equity accumulation and income taxation. The purpose is to make available, in a single article, the information someone would need to acquire a general understanding of how cooperatives function.

 

What is a Cooperative?


Photo courtesy of New Pioneer Food Coop.

This article provides a comprehensive summary of basic information on the cooperative way of organizing and operating a business. It covers the nature and extent of the use of cooperatives, compares cooperatives to other business structures, explains the roles various people play in a cooperative and discusses equity accumulation and income taxation. The purpose is to make available, in a single article, the information someone would need to acquire a general understanding of how cooperatives function.

  • How Cooperatives Serve Niche Markets or Needs
  • How Members and Communities Benefit
  • How Risks are Managed

Characteristics of all Legal Business Structures

In the United States, historically there are three basic categories of private business firms: individually owned, partnerships and corporations. Cooperatives are a type of corporation. Recently, most states have approved a new business structure, the limited liability company. This section explains the similarities and differences between cooperatives and the other business forms.

Cooperative Business Principles for Employees

Because a cooperative is owned and controlled by the people who use its services, the various persons affiliated with a cooperative must work even more closely together than in a noncooperative firm. Customer service and satisfaction are the driving forces behind a cooperative, not maximizing bottom-line return to investors. These take on a highly personal tone when the owners and directors, in their role as users, have regular contact with management and staff.

  • Member Communication
  • Employee Understanding of Cooperatives
  • Employees Need to Know How Member-Owners Benefit

Cooperation Among Cooperatives

Photo courtesy of NRCS-USDA.
Many cooperatives, especially local associations, are too small to gather the resources needed to provide all the services their members want. By working with other cooperatives--through federated cooperatives, joint ventures, marketing agencies in common, and informal networks--they pool personnel and other assets to provide such services and programs on a collaborative basis at lower cost.
 

This permits members of local cooperatives to participate in owning and managing fertilizer plants, food manufacturing facilities, power plants, national financial institutions, wholesale grocery and hardware distribution programs, and so forth. Benefits flow back through the local cooperatives to the individual members.


These principles and practices have survived and flourished through 150 years of continuous evolution in the business world. They remain the foundation that supports the distinctive cooperative method of doing business.

History of Cooperatives

In one sense, cooperation is probably as old as civilization. Early people had to learn to work together to meet their common needs or perish. The Pilgrims who settled at Plymouth, Massachusetts, jointly cleared fields abandoned by the Native Americans, broke up the soil, and planted and cared for their corn. After the harvest, the corn was shared equally among the settlers, but not before they and the Native Americans celebrated with a Thanksgiving feast in 1621.


Legend suggests that the initial structured cooperative business in the United States was the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, a mutual fire insurance company established in 1752. This association's reputation is likely based on two factors. First, Benjamin Franklin was the organizer. Second, the business has been conducted so efficiently over the years that it is still operating today.

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References and Resources

Agricultural Cooperative Fundamentals - This self-directed course introduces fundamentals of ag supply cooperatives, which includes: cooperative principles, patronage refunds/finance, organizational structure, and member and community benefits.
 
Rural Cooperatives magazine, USDA Rural Development, September/October 2012 - The nation’s nearly 2,300 agricultural cooperatives set new records for both sales and income in 2011, besting the previous sales record by more than $10 billion. The nation’s 100 largest ag cooperatives also set records, largely because of higher commodity prices.
 
2010 Cooperative Statistics Report, USDA Rural Development, 2011 - A survey of 2,310 U.S. farmer, rancher and fishery cooperatives ending their business year during 2010 showed a net business volume of $146.1 billion, with a net income of $4.0 billion. This was the second highest income and third highest net sales for these cooperatives. Agricultural cooperatives had 2.2 million members and remained a major employer in rural areas. Marketing cooperatives comprise about 53 percent of all cooperatives; supply cooperatives, 42 percent; and service, 5 percent of the total.
 
Ag Co-op Sales and Income Second Highest on Record, Rural Cooperatives magazine, Cooperatives Programs, USDA Rural Development, 2010.
 
A Day in the Life of Cooperative America, National Cooperative Bank, Washington, D.C.
 
Do Yourself a Favor: Join a Cooperative, RBS Cooperative Information Report 54, USDA, 1996.
 
Farmers, Cooperatives, and USDA: A History of Agricultural Cooperative Service, Agricultural Information Bulletin 621, USDA, 1991.
The Rochdale Pioneers: Roots of the Cooperative Movement, CDS Consulting Co-op.
 
Understanding Cooperatives, RBS Cooperative Information Report 45, sections 4-6, USDA, 1994.
 
Welcome to Cooperatives, National Society of Accountants for Cooperatives, Springfield, Virginia.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.