Forming a Cooperative

Forming a cooperative is different from forming any other business entity. To start up, a group of
potential members must agree on a common need and a strategy on how to meet that need. An
organizing committee then conducts exploratory meetings, surveys, and cost and feasibility
analyses before every member agrees with the business plan. Not all cooperatives are
incorporated, though many choose to do so. If you decide toincorporate your cooperative, you
must complete the following steps:

File Articles of Incorporation. The articles of incorporation legitimizes your cooperative

and includes information like the name of the cooperative, business location, purpose,
duration of existence, and names of the incorporators, and capital structure. Once the
charter members (also known as the incorporators) file with your state business entity
registration office and the articles are approved, you should create bylaws for your
cooperative.

Create Bylaws. While the law does not require bylaws, they do need to comply with
state law and are essential to the success of your cooperative. Bylaws list membership
requirements, duties, responsibilities and other operational procedures that allow your
cooperative to run smoothly. According to most state laws, the majority of your members
must adopt articles of incorporation and bylaws. Consult an attorney to verify that your
bylaws comply with state laws.

Create a Membership Application. To recruit members and legally verify that they are
part of the cooperative, you must create and issue a membership application. Membership
applications include names, signatures from the board of directors and member rights and
benefits.

Conduct a Charter Member Meeting and Elect Directors. During this meeting,
charter members discuss and amend the proposed bylaws. By the end of the meeting, all
of the charter members should vote to adopt the bylaws. If the board of directors were not
named in the articles of incorporation, you must designate them during the charter
meeting.

Obtain Licenses and Permits. You must obtain relevant business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find
a list of federal, state and local permits, licenses and registrations you'll need to run a
business.

Hiring Employees. If you are hiring employees, read more about federal and state
regulations for employers.

Each state will have slightly different laws that govern a cooperative. Consult an attorney, your
Secretary of State or State Corporation Commissioner for more information regarding your
state's specific laws.
Cooperative Taxes

Most businesses need to register with the IRS, register with state and local revenue agencies, and
obtain a tax ID number or permit. A cooperative operates as a corporation and receives a "passthrough" designation from the IRS. More specifically, cooperatives do not pay federal income
taxes as a business entity.
Instead, the cooperative's members pay federal taxes when they file their personal income tax.
Members pay federal and state income tax on the margins earned by the cooperative, though the
amount of taxation varies slightly by state. Cooperatives must follow the rules and regulations of
the IRS's Subchapter T Cooperatives tax code to receive this type of tax treatment.
To file taxes on income received from cooperatives, please refer to IRS instructions on how to
file Form 1099-PATR . More information about taxable distributions received from cooperatives
is available at IRS.gov. If you create a consumer cooperative for retail sales of goods or services
that are generally for personal, living, or family, you will need to file Form 3491 Consumer
Cooperative Exemption Application for exemption from Form 1099-PATR.
Some cooperatives, like credit unions and rural utility cooperatives, are exempt from federal and
state taxes due to the nature of their operations. Check with your state's income tax agency for
information about state taxes.
Advantages of a Cooperative

Less Taxation. Similar to an LLC, cooperatives that are incorporated normally are not
taxed on surplus earnings (or patronage dividends) refunded to members. Therefore,
members of a cooperative are only taxed once on their income from the cooperative and
not on both the individual and the cooperative level.

Funding Opportunities. Depending on the type of cooperative you own or participate in,
there are a variety of government-sponsored grant programs to help you start. For
example, the USDA Rural Development program offers grants to those establishing and
operating new and existing rural development cooperatives.

Reduce Costs and Improve Products and Services. By leveraging their size,
cooperatives can more easily obtain discounts on supplies and other materials and
services. Suppliers are more likely to give better products and services because they are
working with a customer of more substantial size. Consequently, the members of the
cooperative can focus on improving products and services.

Perpetual Existence. A cooperative structure brings less disruption and more continuity
to the business. Unlike other business structures, members in a cooperative can routinely
join or leave the business without causing dissolution.

Democratic Organization. Democracy is a defining element of cooperatives. The

democratic structure of a cooperative ensures that it serves its members' needs. The
amount of a member's monetary investment in the cooperative does not affect the weight
of each vote, so no member-owner can dominate the decision-making process. The "one
member-one vote" philosophy particularly appeals to smaller investors because they have
as much say in the organization as does a larger investor.

Disadvantages of a Cooperative

Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow
since a member's incentive to contribute depends on how much they use the cooperative's
services and products. While the "one member-one vote" philosophy is appealing to small
investors, larger investors may choose to invest their money elsewhere because a larger
share investment in the cooperative does not translate to greater decision-making power.

Lack of Membership and Participation. If members do not fully participate and

perform their duties, whether it be voting or carrying out daily operations, then the
business cannot operate at full capacity. If a lack of participation becomes an ongoing
issue for a cooperative, it could risk losing members.

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Forming a Cooperative
Forming a cooperative is different from forming any other business entity. To start up, a group of
potential members must agree on a common need and a strategy on how to meet that need. An
organizing committee then conducts exploratory meetings, surveys, and cost and feasibility
analyses before every member agrees with the business plan. Not all cooperatives are
incorporated, though many choose to do so. If you decide toincorporate your cooperative, you
must complete the following steps:

File Articles of Incorporation. The articles of incorporation legitimizes your cooperative

and includes information like the name of the cooperative, business location, purpose,
duration of existence, and names of the incorporators, and capital structure. Once the
charter members (also known as the incorporators) file with your state business entity
registration office and the articles are approved, you should create bylaws for your
cooperative.

Create Bylaws. While the law does not require bylaws, they do need to comply with
state law and are essential to the success of your cooperative. Bylaws list membership
requirements, duties, responsibilities and other operational procedures that allow your
cooperative to run smoothly. According to most state laws, the majority of your members
must adopt articles of incorporation and bylaws. Consult an attorney to verify that your
bylaws comply with state laws.

Create a Membership Application. To recruit members and legally verify that they are
part of the cooperative, you must create and issue a membership application. Membership
applications include names, signatures from the board of directors and member rights and
benefits.

Conduct a Charter Member Meeting and Elect Directors. During this meeting,
charter members discuss and amend the proposed bylaws. By the end of the meeting, all
of the charter members should vote to adopt the bylaws. If the board of directors were not

named in the articles of incorporation, you must designate them during the charter
meeting.

Obtain Licenses and Permits. You must obtain relevant business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find
a list of federal, state and local permits, licenses and registrations you'll need to run a
business.

Hiring Employees. If you are hiring employees, read more about federal and state
regulations for employers.

Each state will have slightly different laws that govern a cooperative. Consult an attorney, your
Secretary of State or State Corporation Commissioner for more information regarding your
state's specific laws.
Cooperative Taxes
Most businesses need to register with the IRS, register with state and local revenue agencies, and
obtain a tax ID number or permit. A cooperative operates as a corporation and receives a "passthrough" designation from the IRS. More specifically, cooperatives do not pay federal income
taxes as a business entity.
Instead, the cooperative's members pay federal taxes when they file their personal income tax.
Members pay federal and state income tax on the margins earned by the cooperative, though the
amount of taxation varies slightly by state. Cooperatives must follow the rules and regulations of
the IRS's Subchapter T Cooperatives tax code to receive this type of tax treatment.
To file taxes on income received from cooperatives, please refer to IRS instructions on how to
file Form 1099-PATR . More information about taxable distributions received from cooperatives
is available at IRS.gov. If you create a consumer cooperative for retail sales of goods or services
that are generally for personal, living, or family, you will need to file Form 3491 Consumer
Cooperative Exemption Application for exemption from Form 1099-PATR.
Some cooperatives, like credit unions and rural utility cooperatives, are exempt from federal and
state taxes due to the nature of their operations. Check with your state's income tax agency for
information about state taxes.
Advantages of a Cooperative

Less Taxation. Similar to an LLC, cooperatives that are incorporated normally are not
taxed on surplus earnings (or patronage dividends) refunded to members. Therefore,
members of a cooperative are only taxed once on their income from the cooperative and
not on both the individual and the cooperative level.

Funding Opportunities. Depending on the type of cooperative you own or participate in,
there are a variety of government-sponsored grant programs to help you start. For
example, the USDA Rural Development program offers grants to those establishing and
operating new and existing rural development cooperatives.

Reduce Costs and Improve Products and Services. By leveraging their size,
cooperatives can more easily obtain discounts on supplies and other materials and

services. Suppliers are more likely to give better products and services because they are
working with a customer of more substantial size. Consequently, the members of the
cooperative can focus on improving products and services.

Perpetual Existence. A cooperative structure brings less disruption and more continuity
to the business. Unlike other business structures, members in a cooperative can routinely
join or leave the business without causing dissolution.

Democratic Organization. Democracy is a defining element of cooperatives. The

democratic structure of a cooperative ensures that it serves its members' needs. The
amount of a member's monetary investment in the cooperative does not affect the weight
of each vote, so no member-owner can dominate the decision-making process. The "one
member-one vote" philosophy particularly appeals to smaller investors because they have
as much say in the organization as does a larger investor.

Disadvantages of a Cooperative

Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow
since a member's incentive to contribute depends on how much they use the cooperative's
services and products. While the "one member-one vote" philosophy is appealing to small
investors, larger investors may choose to invest their money elsewhere because a larger
share investment in the cooperative does not translate to greater decision-making power.

Lack of Membership and Participation. If members do not fully participate and

perform their duties, whether it be voting or carrying out daily operations, then the
business cannot operate at full capacity. If a lack of participation becomes an ongoing
issue for a cooperative, it could risk losing members.

Some of the worlds most successful businesses are co-operatives. If you are planning
on starting a business and are looking at a co-operative model, here is a simple guide to
setting up a co-op.

Is a co-operative right for you?

The co-operative model is flexible. It works in sectors across the economy and can be
organised in a range of ways. It enables businesses large and small to thrive, gives the
people closest to the business a stake in it, harnesses their ideas and as a result boosts
productivity. It is a tried and tested business model.

Co-operatives are businesses owned and controlled by their members, who can
be customers, staff, suppliers, local residents or a combination of these
stakeholders.

Members have an equal say in how the business is run.

Members choose what to do with profits, whether distributing among members,

reinvesting in the business or giving to the community

Before deciding whether or not a co-operative is right for your business, you will need to
consider your answers to two simple but important questions.

Do you want members to own and control the business?

A co-op is a member-owned business. The members may be employees, customers,
suppliers or local residents, but this shared ownership is central to a co-operatives
existence. If you want to limit ownership to just a few people, even as the co-op grows,
then a co-operative may not be for you.

Have you got a viable business plan?

A co-op must be a viable business. As for any business, most co-operatives will aim to
bring in enough income not just to cover costs but to make a profit, with members
deciding on whether that surplus is reinvested in the business, distributed among
members or given to the community. You need to be sure that your co-operative will
generate an income from the goods or services provided.

After reading this, is a co-operative for you?

If you want to check that your business plan has all the right ingredients in order for it
to operate as a co-operative visit the Planning your co-op page
If your business plan works but you are unsure about which legal structure your cooperative should take, use our Select-a-Structure tool

Grow your co-op

As a co-operative develops and grows, so must the way it is run and governed. Growth
for a co-operative can mean any number of things: increasing the membership base;
launching new products or activities; or taking the current activities up to the next level.
In addition to an increase in profits and size, growth could also mean finding the
resources to do new things, or changing the way a co-operative works.
These pages introduce governance and what good co-operative governance looks
like; examine membership and what to consider in order to make your cooperative's membership work; and help you to understand what services Co-operatives
UK can provide to help you grow your co-operative.

Topics in this section:

Governance: an introduction
Governance is the systems and processes concerned with ensuring the overall
direction, supervision and accountability of an organisation. CUK, 2004

Why is good governance important?

Good governance is crucial to the effective operation of co-operatives particularly
those looking to grow regardless of size, legal form or business sector. It supports the
governing body of a co-operative in its task of creating and maintaining a strong and
sustainable business that meets the needs of its members and is robust enough to
embrace change. A neglect of governance weakens accountability and carries multiple
risks to the business and its strategy.

Making membership work

Members are the lifeblood of a co-operative and are critical to its success. It is
important to keep members engaged as and when your co-operative grows and
develops.
The ultimate aim of a well-functioning co-operative is to involve its members in the
decision-making processes to enable them to have a real say in how the business is run
and to encourage a sense of true ownership. Whether it is a worker co-op with only a
handful of members or a consumer co-op with a membership of millions, it is essential
to encourage members to be active.
In the early days, with the excitement a new co-operative brings, members are often
more interested in participating. However, as the co-operative develops, members may
become disengaged and as such less likely to participate in the running of the business.
While member engagement can be difficult, and there is no quick-fix, there are tried and
tested approaches that can help.

Here are our four key points to developing effective member

engagement
Prioritise membership
Committing time and resources to membership engagement is important. Try to
understand why members join your co-operative and what their needs or motivations
are. Adopt a strategy for engagement.
As a first step, why not encourage your members to attend one or more of our training
courses to develop the essential skills of membership?

Understand your members

Understand the needs of your members to encourage them to participate in the cooperative. Take time to listen to and understand your members and then communicate
with them using their language and motivations.
If you have a broad membership, think about segmenting or targeting elements of your
membership in different ways. Not everyone wants the same thing. Ask yourself: Do you
understand why different members are members and what they want to get out of
membership?
As a first step, why not attend one or more of our training courses to develop the
essential skills of understanding your membership?

Identify small steps

Take small steps. Do not expect new members, with no prior experience of or contact
with the co-operative, to invest huge amounts of time. Ask them to do something small,
and when they have a good experience ask them to do something else. Equally, make it
as easy as possible for all your members to participate. Voting, completing a survey,
standing for the board, attending a meeting do what you can to make all of these
simple.

Find the tipping point

Make it as easy as possible for members to participate in the co-operative. Reflect: How
many clicks on the website does a member have to make before they get to the right
place? How much do they have to read? Wherever possible try to minimise the required
effort. Equally, if you have identified what motivates your members then play to this
and communicate with them in a way that grabs their attention and works on their
level.

Codes of governance
Co-operatives UK, working closely with its members, has helped define what good
governance looks like for co-operatives.
As well as providing practical and hands-on support, we have published a series of
codes of governance based on best practice from co-operatives in the UK and
internationally. Codes are available for:

consumer co-operatives

worker co-operatives

agricultural co-operatives.

A cooperative is a duly registered association of persons with a common bond of interest,

who have voluntarily joined together to achieve a lawful common social or economic end,
making equitable to contribution to the capital required and accepting a fair share of the risks
and benefits of the undertaking in accordance with universally accepted cooperative

principle.
The declared purpose of the law governing cooperatives (Republic Act 6938, also known as
the Cooperative Code of the Philippines) is to foster the creation and growth of cooperatives
as a practical vehicle for promoting self-reliance and harnessing people power towards the
attainment of economic development and social justice. The law provides important benefits
to the cooperative and its empowered members, based on our experience in handling client-

cooperatives.
The following are the declared principles of cooperativism:
Open and voluntary membership. Membership in a cooperative is voluntary and available

to all individuals regardless of their social, political, racial or religious background or beliefs.
Democratic control. Cooperatives are democratic organizations. Their affairs are
administered by persons elected or appointed in a manner agreed upon by the members.
Members of primary cooperatives have equal voting rights on a one-member-one-vote

principle.
Limited interest in capital. Share capital shall receive a strictly limited rate of interest.
Division of net surplus. Net surplus arising out of the operations of a cooperative belongs
to its members and shall be equitably distributed for cooperative development common
services, indivisible reserve fund, and for limited interest on capital and/or patronage refund

in the manner provided by law.

Cooperative education. All cooperatives shall make provision for the education of their
members, officers and employees and of the general public based on the principles of

cooperation.
Cooperation among cooperatives. All cooperatives, in order to best serve the interest of
their members and communities, shall actively cooperate with other cooperatives at local,

national, and international levels.

There are different kinds of cooperatives. In general, these are: (1) Credit cooperative,
which promotes thrift and savings among its members and creates funds in order to grant
loans for productivity; (2) Consumer cooperative, the primary purpose of which is to procure
and distribute commodities to member and non-members; (3) Producers cooperative, which
undertakes joint production whether agricultural or industrial; (4) Service cooperative, which
engages in medical, and dental care, hospitalization, transportation, insurance, housing,
labor, electric light and power, communication and other services; and (5) Multi- purpose

cooperative, which combines two or more of the business activities of these different types of
cooperatives. In terms of membership, cooperatives are classified as: (a) Primary, wherein
the members are natural persons of legal age; (2) Secondary, the members of which are
primaries; and (3) Tertiary, the member of which are secondaries upward to one or more
apex organizations. Cooperatives whose members are cooperatives are called federations or
unions.