A cooperative, often called a co-op, is any association of members of a similar profession or industry that work together to process, prepare, market, handle products and supplies. A cooperative operates for the benefits of its members by giving each member access to the combined resources and services of the organization and sometimes earnings of the association. Co-ops differ from corporations and other business organizations both in their essentially democratic nature and in that their focus is not primarily to generate profit for shareholders but to meet some common needs of members. There are exceptions to this general rule. Cooperatives are found in a variety of areas of a nation’s economy including but not limited to:
- Consumer co-ops operating businesses as diverse as food stores, bookstores, and hardware stores
- Rural utility co-ops
- Credit unions
- Housing co-ops
- Agricultural co-ops for the supply, marketing, and manufacture of agricultural products, and
- Worker co-ops
Cooperatives typically are organized under state laws. Like other business organizations, cooperatives are governed by a charter and bylaws. Cooperatives also have directors and management. Unlike other organizations, members typically have an equal vote in the actions of the organization and voting rights must come with the membership. Often, employees of the cooperative will receive membership into the cooperative, with unique benefits. The structure, sophistication, and output of the cooperative will depend on the area of focus. Also, many statutes give unique treatment to certain kinds of associations such as exceptions to securities laws for credit unions or more relaxed benefit limitations for farmers associations.
In order to keep the benefits of the cooperative structure, cooperatives must follow the state law under which they organized and related tax laws. The federal government and most states allow for cooperatives to pay no income tax or receive other beneficial tax treatment. Cooperatives must be careful to follow statutory limits on benefits and particularly distributing profits to members. Otherwise, the cooperative may be treated like other corporations. Many other specific limitations apply depending on the jurisdiction and the business of the cooperative. For example, under the United States Code, Title 12 Chapter 7A, an association must meet at least one out of three requirements to be a cooperative.
- First, each member of the association is only allowed one vote.
- Second, the association must not pay dividends on stock or membership capital over 8 percent per annum.
- Third, the association must not deal with products, supplies, or services with nonmembers if such dealings are greater in value than such dealings with its members.
[Last updated in April of 2023 by the Wex Definitions Team]