How It Works

The International Cooperative Alliance 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.” It is, essentially, an enterprise formed by a group of people who join forces and work together to solve a problem or reach a goal that they all share. In a cooperative, only members are permitted to own common shares of equity. All cooperatives are owned and governed democratically, applying the principle of “one member, one vote.”  Cooperative members come from all walks of life, and they are all ages and belong to all income groups. People form and join cooperatives to meet all sorts of needs, and they buy and sell all kinds of products and services, ranging from child care to groceries to agricultural products to financial services. There are cooperative day-care centers and cooperative burial societies. There is probably a cooperative somewhere in the country to meet every kind of need imaginable. Cooperatives are differentiated from other business entities in three ways: member ownership, member control, and member benefit. A cooperative is an enterprise where ownership, control, and benefit are all held by the same group of people: the cooperative members.

Joint Ownership
Co-op members are not just customers, employees, or users of the business—they are also the business owners. In an investor-owned business, owners are concerned mainly with making money. In a cooperative enterprise, by contrast, member-owners are concerned not only about whether the enterprise is making money, but whether the business is meeting the needs of its member-owners. These needs may be economic (making a fair wage), non-economic (contributing to a healthy environment, or setting an example of worker participation in business management), or some
combination.

Democratic Control
Participation in the decision-making process is one of the primary ways business owners exercise their rights as owners. In a typical investor-owned company, each investor casts votes in direct proportion to the number of shares the investor owns—that is, more shares equals more votes equals
more control. In a cooperative ownership structure, by contrast, control is vested with each member, not each share of stock. This means that each member casts one vote in any business decision that is put before the membership, regardless of the number of shares owned. Cooperatives are operated according to the democratic principle of “one member, one vote.” Co-ops are led by member-elected boards of directors. The co-op’s manager or other top staff report directly to the board. Since the board members are the ones who will be leading the organization
and making key decisions on behalf of the membership, the most important vote that any co-op member makes is for the board of directors. In a worker co-op, all members engage in electing their top leadership. In an investor-owned business, by contrast, the board of directors is typically composed of top company management, plus some outsiders.

Member Benefit
Cooperatives are operated for the benefit of their members. Like any business, a cooperative must make at least as much money as it spends, but spending decisions are also based on delivering the greatest value to members. In an investor-owned business, profits are distributed based on the number of shares owned. In a cooperative, net income (income over and above expenses) is redistributed back to the members based on some equitable system. This system is called “patronage” and the redistributed profits are called “patronage rebates,” “patronage refunds,” or sometimes “patronage dividends.” Members are “patrons” of the co-ops, and profits are redistributed back to members based on how much business they do with the co-op (that is, how much they “patronize” it). In a producer co-op, this might be how much grain, milk, or other product the farmer-member markets through the cooperative. In a consumer co-op, patronage refunds would generally be based on the total annual
purchases from the co-op.  In a worker co-op, patronage is measured based on an equitable formula of labor input, either according to hours worked, pay level, seniority, or some combination of all three.  Thus, while a conventional investor-owned business provides returns based on capital input, a worker cooperative provides returns based on labor input.

Because cooperatives are operated for the benefits of members and not as speculative investment vehicles, they function essentially at cost. This fact means that cooperatives enjoy the attractive tax benefit of single taxation. In an investor-owned corporation, profit is taxed at the corporate level before it is distributed to members as dividends. Individual stock owners must then pay tax a second time on this income at their individual level.  In a co-op, by contrast, only profits that are kept by the company’s retained earnings are taxed at the corporate level.  Earnings that are passed through to members are only taxed once, at the individual level.

Cooperative Principles
Equity. Equality. Self-help. Self-responsibility. Democracy. Solidarity. These are the values on which the modern cooperative movement was founded and the basis for the organization of every cooperative enterprise in the world today. The origins of the modern cooperative movement can be traced to the city of Rochdale, England, at the beginning of the Industrial Revolution. In 1844, a group of industrial trade unionists, tired of the poor quality and high prices of goods sold through the company store, set out to make things right. The Rochdale Society of Equitable Pioneers opened its first cooperative store on Toad Lane. From the outset, the group’s purpose was more noble than simply selling quality, affordable provisions and clothing. It also proposed the building of houses “in which those members desiring to assist each other [in] improving their domestic and social conditions, may reside.” The group also recommended “the formation of worker cooperatives to help the unemployed; the purchase of land for common cultivation; and the promotion of education and sobriety.” While some of these early efforts were more successful than others, the clarity, consistency, and breadth of these cooperative principles are striking. From the beginning, these co-op pioneers envisioned cooperatives as a way to give ordinary people greater control over their lives, to improve their economic conditions, and to protect them during hard times. These principles, developed more than 150 years ago, live on today in the thousands of cooperative institutions that exist throughout the United States and the world.

Co-ops Today
Any type of business can be a cooperative. In the United States the largest co-ops are often agricultural co-ops and credit unions. Indeed, since the beginning of our nation, farmers and ranchers have joined together to pool the funds and manpower necessary to process or harvest their goods.
Credit unions are often developed by employees of large organizations to provide financial services to their members.  Co-ops also abound internationally. In Quebec (Canada), Northern Italy, India, and Japan, for example, cooperatives play a significant role in the national and regional economies. The most famous worker co-ops in the world are the Mondragon cooperatives in the Basque region of Spain, an
association of over one hundred cooperative enterprises, forming an entire cooperative economy in  which factories, schools, banks, retail stores, and services operate on a cooperative basis.

1. Voluntary and Open Membership
Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership without gender, social, racial, political, or religious discrimination.

2. Democratic Member Control
Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives, members have equal
voting rights (one member, one vote), and cooperatives at other levels are also organized in a democratic manner.

3. Member Economic Participation
Members contribute equitably to, and control democratically, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members allocate surpluses to any of the following purposes: developing their cooperative, possibly by setting up reserves, part of which would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership. 

4. Autonomy and Independence
Cooperatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy.

5. Education, Training, and Information
Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public—particularly young people and opinion leaders—about the nature and benefits of cooperation.

6. Cooperation among Cooperatives
Cooperatives provide the most effective service to their members and strengthen the cooperative movement by working together through local, national, and international structures. 

7. Concern for Community
Cooperatives work for the sustainable development of their communities through policies approved by their members.