The Role of Shares in Cooperatives

Groups interested in forming a cooperative that is structured as a for-profit corporation often have questions about how shares are issued, who can purchase shares, and whether non-members can purchase shares as an investment in the cooperative.  In this first post in this series, we’ll discuss various topics related to issuing and owning shares in a cooperative.

Are Shares an Option?

The first question is whether the type of cooperative selected by the group can issue shares.  In states that do not have general cooperative statutes, cooperatives are often formed using for-profit corporations, which are authorized to issue shares.  In states that do have cooperative statutes, the cooperative group will need to find out whether issuing shares is permitted.   For purposes of this article, we will assume shares can be issued.

Common and Preferred Shares

As discussed below, shares work differently in a cooperative than they do in normal for-profit corporations, even though the terminology may be the same.  Two important terms are “common shares” and “preferred shares.”   Common shares give the shareholder an ownership interest in the cooperative and the right to vote on certain matters, such as director elections.  Preferred shares provide a specified return on investment (typically a fixed dividend) and do not have voting rights.

The Role of Common Shares in a Cooperative

While common shares in a cooperative have the features above, in some ways they work differently than common shares in a normal for-profit corporation.  For example, a for-profit corporation can sell its shares to anyone.  In contrast, state laws and tax requirements typically limit issuance of shares to the cooperative’s members, and purchasing a share is thus a membership requirement that distinguishes members from non-members.

Common shares in a typical for-profit corporation give the shareholder certain rights proportionate to the number of shares purchased.  Generally speaking, a shareholder with 100 shares has 100 votes on shareholder matters, while a shareholder with 50 shares has 50 votes.  When the for-profit corporation’s board of directors, in its discretion, decides to issue dividends, shareholders may receive those dividends.  Generally, dividends are paid based on the number of shares owned, so the shareholder with 100 shares will receive double the payout than shareholder with 50 shares.

Common shares in a typical cooperative work differently – in that regardless of how many shares a member owns, the member has only one vote on matters requiring a member vote.  The one member, one vote requirement is a fundamental principle that sets cooperatives apart from other types of businesses.  Also, for reasons to be discussed in the next post on this subject, cooperatives do not pay dividends on common shares.