The following are questions we often get during the process of working with new and existing co-ops and other groups to evaluate co-op business models and strategies to meet their objectives.

Questions

What is a cooperative?
Is a co-op non-profit?
Does a cooperative pay taxes?
Who can be a member of a cooperative?
Why should I join a cooperative?
What are patronage refunds?
What are the advantages of a cooperative vs. other business forms?

Answers

What is a cooperative?

A cooperative is a unique form of business known as user-owned, user-benefited, and user-controlled. Benefits from the cooperative are returned to the members/patrons based on their use of the cooperative during the year. A cooperative is democratically controlled by their members/patrons through a one-member/one-vote policy. Members/patrons own the cooperative through their financial investment in the business.
top

Is a co-op non-profit?

A co-op operates on a not-for-profit basis. They operate to make a profit just like any other for-profit business, except that the profits in a cooperative are returned to the members in the form of patronage refunds. This assumption comes from certain states where co-ops incorporate under the non-profit statute. You cannot be a 501 (c)(3).
top

Does a cooperative pay taxes?

Cooperatives pay taxes on real estate, personal property, sales, employment, utilities, etc. just like all other businesses. Cooperatives are single taxed like all other businesses except for C-corporations, which are double taxed at the entity and stockholder levels. The single tax treatment is not special to the cooperative structure, but the taxation of the patronage refunds is unique. The net margin (income – expenses) is NOT considered taxable income because it is returned to the patrons. The net margins are returned as patronage refunds and are taxed at the patron level in all situations.
top

Who can be a member of a cooperative?

Anyone can be a member of a cooperative as long as you meet the qualifications for membership. Each cooperative has qualifications you must meet to become a member of their cooperative, these are contained in their By-laws.
top

Why should I join a cooperative?

A group of individuals must see a benefit that a cooperative can provide to put in the effort and time commitment that it takes to establish a cooperative. Some objectives that the cooperative must provide perspective members are:

Improved bargaining power – the cooperative can leverage its position more than individual producers could do alone to obtain contracts and penetrate markets.
Reduced costs – volume purchase of products/services can reduce the cost to the individual producer and increase their project margins. The cooperative can take advantage of bulk purchasing and pricing strategies.
Obtain products/services that otherwise would be unavailable – the cooperative provides a product/service that producers could not get by themselves. The collaborative effort of producers to obtain access to a product/service that is not currently available makes a cooperative more viable and successful.
Obtain market power or broaden market channels – the cooperative pools resources and provides more marketing power because of the large quantity of product that can be provided. The cooperative can also establish marketing channels to be utilized by its members.
Increase income – the cooperative eliminates some the middlemen in the marketing process by using the cooperative. The cooperative gives back patronage refunds to increase the profits or reduce the costs that the member incurs.

top

What are patronage refunds?

Patronage refunds are the amount of payment that a cooperative patron receives at the end of the year based on her/his use of the cooperative. These refunds come from the net savings of the cooperative. The patron pays income taxes on these refunds.
top

What are the advantages of a cooperative vs. other business forms?

Cooperatives are unique to other corporations because they have three distinguishing principles: user-owned, user-controlled and user-benefited. The user-owned principle signifies that the users are the ones who are financing the cooperative by transacting business. User-controlled means that the Board of Directors is elected by the members of the cooperative and serves as the link between the membership and the manager. User-benefited indicates that the members are the ones profiting from the cooperative because patronage refunds are returned to the members based on the amount of business they conducted with the cooperative. The uniqueness of cooperatives is that the customers, owners, patrons and members could be the same person.
top