Financing for Your Cooperative
A cooperative is like any other business, in that it requires capital to begin operations. Capital for a cooperative typically comes from two sources:
- Capital contributed by the members of the cooperative (equity capital)
- Money borrowed by the cooperative from third parties (debt capital)
Initial equity capital typically comes from membership fees paid by the cooperative’s members when joining the cooperative.
The balance between these two sources depends on the size of the cooperative and its line of business.
If you are a member of a group considering whether to form a cooperative, it may be helpful to consider the following factors in deciding whether a cooperative is the right choice. Because the cooperative business form is so different from the typical corporation or limited liability company, cooperatives are best suited for business enterprises that have certain characteristics.
Advantages of the Cooperative Form
- A built-in customer base for the business from the beginning – the cooperative’s members.
- Directors and officers with a strong incentive to help the cooperative succeed, since directors and officers
Forming and organizing a cooperative is unlike forming any other kind of business. Why this is so requires a brief explanation of what makes the cooperative a unique business form.
Unlike most other businesses that operate for the benefit of their investors, cooperatives exist for the benefit of their members. The members of a cooperative are not only the cooperative’s primary customers, but also own and control the cooperative. Members receive a share of the cooperative’s earnings in proportion to how much they use the cooperative’s services or buy its products. Members also provide the capital for their cooperative. The goal of a cooperative is not to create profits, but to serve its members at the lowest reasonable cost.
This unique relationship between the cooperative and its primary customers – its members – makes beginning a cooperative more complex than starting other types of businesses. Cooperatives must identify a substantial number of their potential customers in the planning stages and involve those customers in the formation of the enterprise. Because a cooperative depends for its success on meeting its members’ needs, forming a cooperative is a group effort. Starting a cooperative is thus very different than organizing other types of businesses, which can be formed in relatively short order by a few people with a business idea.
This guide is intended to give a brief overview of the steps required for starting a cooperative, and covers the following subjects:
- Initial Considerations and Helpful Resources. This section discusses general considerations for starting a cooperative and provides methods to reduce the time spent on the initial planning stages.
- Exploratory Analysis and Organizational Development. This section identifies the steps for deciding whether a cooperative should be formed and gathering the information needed for organizational planning.
- Planning Your Cooperative. This section covers the steps required for planning the details of the cooperative and developing “vision” documents to serve as the blueprint for the cooperative’s scope and structure.
- Developing Your Cooperative. This section explains the documents and meetings required to establish and organize the cooperative.
- Launching Your Cooperative. This section covers the final steps involved in opening the cooperative for business.
For more information on cooperative matters, please contact Charles Autry, Roland Hall or David Cook. Further information can be found in the book The Law of Cooperatives by Charles Autry and Roland Hall, available at Amazon.com and other online booksellers.
Initial Considerations and Helpful Resources
Many cooperatives are formed in reaction to an inability to obtain needed goods or services in a certain location or at a reasonable price. Those most affected by the gap in the marketplace start discussing the problem and identify a cooperative as one possible solution. At this point there are certain steps the group should consider taking that can assist its analysis and save valuable time as well.
- A significant (and often surprising) amount of work is involved in the early stages of deciding whether to form a cooperative. The initial group should consider identifying others in the community that may be interested in the project and inviting them to participate. Including additional people with different skill sets will yield better input for the decision-making process and provide more manpower for the work that lies ahead.
- The group should consider reaching out to cooperatives in other geographic areas that are providing the same type of work or service as the proposed cooperative. Cooperatives are often willing to discuss the steps they took to begin business, and can also point out helpful resources, requirements and pitfalls that may not be obvious.
- The group should also consider involving an attorney experienced with cooperative law early in the process. Such an attorney can provide guidance with issues best addressed at the beginning, such as comparison of the cooperative form with other business forms, an overview of how cooperatives work from a legal and economic perspective, and the roles of the board, officers, and members. If cost is an issue, an attorney may be willing to donate some time to give an overview of how cooperatives work and help the group head in the right direction.
- Depending on the type of cooperative, the group may be able to obtain guidance and other kinds of assistance from cooperative groups. For example, a group interested in forming a worker cooperative could obtain information from the U.S. Federation of Work Cooperatives, while a group considering a cooperative grocery store could turn to the Cooperative Grocer Network. Other types of cooperatives have many resources available to them as well, including university centers such as the University of Georgia’s Center for Agribusiness and Economic Development and the USDA’s cooperative programs.
Exploratory Analysis and Organizational Development
The initial idea for a cooperative often comes from discussions between a small group of people who have identified a common need and are seeking a collaborative solution. What steps should this initial group take to move their idea forward?
- Identify a group of potential participants and invite those persons to an informal meeting to explore their interest. If there is sufficient interest, schedule a meeting of the larger group to discuss organizational issues and plan next steps.
- At the next meeting, discuss whether a cooperative is the correct form of entity and if so, what goods or services the cooperative would provide and how the cooperative could best assist its members. If possible this meeting should include an attorney or other person familiar with cooperatives who can provide an overview of cooperatives and how they work, answer the group’s questions and help guide brainstorming efforts.
- If the group concludes that it wants to proceed with forming a cooperative, it should select a steering committee. The steering committee should include persons who can devote substantial time to the effort, as the committee will be the group that takes the concrete steps toward formation and operation.
- The steering committee will likely hold a series of meetings over an extended period to gather information, consult helpful resources and identify the steps required to move the cooperative concept forward. The steering committee should consider involving other interested persons in the process as well to provide a variety of viewpoints and assist with the workload.
- During this time, the steering committee will be identifying the specific products and services that the cooperative should offer, the geographic area that can be served, and the types of individuals and organizations that will be targeted as potential members.
Planning Your Cooperative
At this point in the process the steering committee should have agreed upon the general details of the cooperative, such as who the cooperative will serve and what products and services the cooperative will offer. The steering committee is now ready to take the next steps in making the cooperative a reality.
- For larger cooperatives, identify sources of pre-development funding needed for market research, consultants and feasibility studies. Sources might include the steering committee, other potential members, community organizations and grant programs through cooperative associations.
- Conduct market research to determine the anticipated need for the cooperative’s goods or services. Such research will assist in deciding whether the proposed cooperative is viable from an economic perspective.
- Develop “vision” documents that set forth the core aims of the cooperative, the cooperative’s goods and services, expectations for growth, and responsibilities of members. Preparing these documents will prompt the steering committee to distill its work to date in written form and can be used in reaching out to potential members and discussing the cooperative with lenders and other organizations.
- Research and identify any special licenses or permits that may be required for the cooperative’s operations. For example, licensing may be required to sell certain agricultural products or to serve food. The steering committee can reach out to other cooperatives to assist with this process, and will likely want to involve an attorney or other consultants as well.
- Identify what equipment, locations and employees the cooperative will require for operations. Determine whether members will perform work for the cooperative, and if so, whether members will be compensated through salary or through other benefits.
- For larger cooperatives and cooperatives seeking grants or loans, have a feasibility study conducted to evaluate the strengths and weaknesses of the proposed cooperative and its planned operations and business model.
Developing Your Cooperative
At this point in the process the steering committee has accomplished the bulk of its work. Most of the planning for the cooperative has been completed, and the time has come to take the concrete steps necessary to form the cooperative and put in place the resources necessary to begin operations.
- Develop draft business plan and marketing plan that sets forth in detail the cooperative’s products or services, forecasts expenses and sources of income, and states growth strategies and identifies prospective member groups. This document will incorporate the results of any marketing surveys and feasibility studies and can be used for multiple purposes, such as obtaining loans and grants or making presentations to potential partners and members.
- Conduct a meeting that includes the steering committee and the larger group of potential members. Present the results of all work to this point, including “vision” documents, studies and the business plan and marketing plan. Obtain input from the group and agree upon any suggested changes.
- The steering committee should have enough information at this point to discuss and analyze how the cooperative’s initial operations will be financed. For smaller cooperatives, the membership fees paid by members may be sufficient. Larger cooperatives may require loans for capital expenditures.
- Once all work to date has been approved, develop the documents for the formation and organization of the cooperative, including articles of incorporation, bylaws, membership agreements, membership applications and an employee manual (if applicable). File the articles of incorporation to officially “start” the cooperative as a legal entity. This is another point at which the group should consider involving an attorney experienced in cooperative law, as it is highly unlikely that “form” documents will meet the cooperative’s needs.
- Develop orientation materials for members and pamphlets/information packets for potential members. Orientation materials for members should educate members on what a cooperative is, explain member rights and responsibilities, including financial obligations, and discuss the cooperative’s core mission and how the cooperative will work in practice. For certain types of cooperatives, such as worker cooperatives, the materials will likely be more in-depth and cover policies regarding compensation, organization and work responsibilities.
- Hold a meeting of the initial members of the cooperative, including the steering committee. Formally approve the articles of incorporation and the bylaws and elect the initial Board of Directors. At this point the steering committee’s work will be done, as the Board will assume the task of governing the cooperative pursuant to the bylaws and any policies put in place.
Launching Your Cooperative
Now that the cooperative has been formed and organized and a Board of Directors has been elected, the members will be looking forward to opening their new cooperative for business. The remaining steps are focused on using the framework developed thus far to make the cooperative an operating business enterprise.
- Apply for any required financing if this step has not been taken previously. The lender will likely require many of the materials previously developed, such as the business plan, financial projections, feasibility studies and copies of the cooperative’s organizing documents.
- Hire a manager/CEO and any required employees. Some smaller cooperatives may not need a manager, and in such cases day-to-day operations could be handled by the Board or by officers or members appointed for that purpose. Larger cooperatives will likely want the Board to select a professional manager or President/CEO to report to the Board and run the cooperative’s business operations.
- Open the cooperative for business and recruit additional members. At this point the cooperative should be ready to begin operations. The cooperative can also begin seeking additional members. Although this might be achieved through advertising, a cooperative’s existing members are typically its best resource for spreading the word about the cooperative to their friends, families and business acquaintances.