Everything Entrepreneurs Need to Know About a 'Cooperative Business Model'

Much like forming an LLC or Corporation, a cooperative business model faces many similar requirements during the filing process. However, there are also many differences due to the nature of the entity and the role its members play. Here’s a look at the similarities and differences shared in forming a cooperative.

If you run a retail, agricultural, or healthcare-related small business, you might already be familiar with the cooperative business model.

For entrepreneurs just getting started in these industries, a cooperative (sometimes referred to as a “co-op”) is an organization run by an elected board of directors that is operated to benefit those that use its services. Members of a cooperative vote to control the direction the organization goes in and whatever profits and earnings a cooperative generates are distributed among its members.

Similar to an LLC or Corporation, a cooperative needs…

• Articles of Incorporation, which are also known as Articles of Organization. These documents are required by the state your business is filed in and includes information like the cooperative’s name, location, dates in business, purpose, and structure.
• Bylaws, which are internal documents necessary to operate the cooperative.  Some of the topics covered in bylaws include how members are elected, how meetings and operational procedures are organized, a summary of duties, and requirements for membership.
• Licenses and permits, which will vary depending on the state you’re in.

Unlike an LLC or Corporation, a cooperative needs…

• A strategy. Members meet together beforehand to discuss needs the cooperative will fill and all aspects of the business plan. Every member must mutually agree upon these decisions together before proceeding forward.
• Membership applications. Want to bring on new members for your cooperative? A membership application must be established ahead of time with necessary information including the names of members, their rights and benefits, and signatures from the board of directors.
• A charter member meeting. The board of directors is appointed during this meeting along with discussion and voting to adopt bylaws created earlier.

Due to its niche nature, a cooperative may not be an option every entrepreneur can embrace for their business. It also faces the difficulties of appealing to investors that seek a financial return with a slower cash flow and “one member-one vote” philosophy which applies to all members regardless of how much involvement or investment they put into the cooperative.

However, a cooperative business model still has plenty of advantages to offer if you feel like it might be the best fit for your needs. The structure operates on a democracy with every member getting the right to their vote and no one vote outweighing another. It’s also inexpensive to register with members taxed only once on their income from the cooperative, and members are free to join or leave with the entity needing to file for dissolution as a result. 

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