Cooperatives are private organizations that are controlled and owned by the individuals who use the supplies, services, or products they produce. This business opportunity can vary in size, type, and membership, but all of them get formed to meet the specific objectives of the members. Each one also has the structure to adapt to the changing needs of the membership over time.
Cooperatives form to help people coordinate among themselves so that vertical integration becomes possible. Even though communities have worked together for their mutual benefit throughout our history, this specific business structure formed during the first days of the Industrial Revolution. It allowed people without as much money or influence to still support the best interests of each other.
Those traditions still exist today. Cooperatives can be in virtually any industry, but you typically see them operating in the agricultural sector.
If you’re thinking about joining one, then these are the cooperative advantages and disadvantages that you’ll want to consider.
List of the Advantages of a Cooperative
1. Cooperatives help people come together as a community.
Proponents of cooperatives accentuate the overall psycho-social impacts created by the control parameters in these communities. This worker-related factor helps to change the adversarial connections that are prevalent in most of today’s established firms into an atmosphere of cooperation.
Once members start to recognize their collective and individual efforts with the organization’s enhanced performance, cooperative problem solving also begins to take place. This advantage allows for a more communicative workplace, resulting in improvements in production processes because of improved flows of information. It also leads to heightened satisfaction spreading throughout its members, which can help with reducing worker turnover and desertion.
2. A cooperative uses democratic principles.
One of the best perks of having a cooperative model in business is the democratic approach it takes to ownership. The obligations of members get met with it, without one member governing the process of decision-making. It is a structure that can be appealing to individuals who want to become members themselves eventually.
The structure of this model also means that it remains resolute during evolving circumstances so that members can come and go without having to severely impact the business.
3. This structure can provide several economic benefits to its members.
Each cooperative comes with defined economic advantages that get based on the industry in which it operates. Consumers receive entitlements to patronage dividends through the productivity generated in activities based on net earnings. It’s an amount that’s determined by what members spend on products or services based on each financial period.
Members who work within cooperative structures typically qualify for substantial discounts in compensation for their efforts to create results. If some individuals own property that the cooperatives use, then they serve a dual purpose as a stockholder that can receive ongoing interest payments.
4. Cooperatives work toward the best interests of everyone.
When individuals have a significant stake in the outcome of a business effort, then each person remains more productive and stays engaged with the required processes. This advantage results in significantly better outcomes in time because everyone involves themselves at their highest capacity levels. Ownership almost always creates better efforts because there is a stake in the results.
Customers prefer to work with cooperatives in some industries because of this advantage. When engaged people produce goods or services, the items tend to be of a higher quality without much of a price differential.
5. Taxation benefits are possible for some cooperatives.
Members get taxed once on their income from a cooperative. It’s similar to the pass-through income that occurs with LLCs, partnerships, and sole proprietors. That means it avoids the double taxation issue of separate charges on the individual and corporate level.
If a cooperative is a for-profit business, then it receives special treatment concerning federal taxation in the United States. While these business ventures are usually taxed as regular companies, each one can reduce tax exposure by issuing patronage dividends. This resource is a refund that gets rendered to people who purchase goods or services.
6. Cooperatives may have access to unique funding opportunities.
Some cooperatives could be eligible to apply for specific grants that can work to fund their operations. These financial awards don’t require a repayment plan, making it a useful option for startups who receive this money. The U.S. government reports that up to 60% of the available grants go unfulfilled each year because no one applies for the allocated money, so it may be wise to bring in a professional accountant who can help to provide some advice in this area.
7. The cooperative structure reduces liabilities for each member.
Equal distribution of ownership in a cooperative also means uniform distribution of liability. Each member has only limited liability for company debts and obligations. This is in contrast to partnerships, where each member is fully responsible for both their own actions and those of every other partner. The liability of the cooperative members is limited only to the extent of their investment in the coop, assuming that they were not involved in unlawful or neglectful activities.
8. Cooperatives benefit from lower overhead costs.
Owner-employees have a greater motivation to keep their costs low. It is those expenses that ultimately dictate the levels of profitability that are possible in this structure. Cooperatives can leverage their larger size to reduce prices on raw materials and initial supplies or services, lowering the cost of production as part of this advantage. That’s how a successful coop can keep prices lower than what is available at the current market rate while maintaining higher quality levels.
9. Most cooperatives don’t operate with a for-profit motive.
One of the primary attractions that a cooperative brings, especially in real estate, is their operations that are on an at-cost basis. Most coops, including the smaller ones, use resident members to keep expenses as low as possible. Although unexpected expenses could result in liabilities that could be personally troubling to some individuals, many of the costs can get recouped at tax season.
Each member is entitled to receive all of the tax deductions that homeowners can access when they are in a real estate cooperative. That includes any tax benefits that may be available to reduce overall income levels.
10. Two different membership options are available.
There are two different types of cooperatives operating in the United States: non-equity and ownership. In the first option, the coop shareholders secure rights through proprietary leases or agreements. The second gives the member a specific right to an outcome, such as an occupancy right to a specific apartment through the action of a title transfer. These purchases can occur at the market rate, through limited equity, or leasing options.
This advantage means that there is enough flexibility within this structure to ensure that each unique need of the membership can get met.
List of the Disadvantages of a Cooperative
1. Cooperatives have fewer investment incentives to offer.
Fundraising activities can become a significant issue for cooperatives because there are few incentives for angels and venture capitalists to fund operations. Smaller investors from customers who want to become involved in the community are often high, but that involvement can also lead to lower shares of whatever outcome gets earned from the effort.
This issue can result in some cooperatives facing funding issues because they can’t secure lending products from local institutions. Banks and credit unions are hesitant to get involved because the risks of a negative return are quite high for this business structure. That’s why you see many communities using it as more of an informal approach to helping one another.
2. Underinvestment is a significant challenge that cooperatives face.
Cooperatives receive a vast majority of their funding from their members. Then each person either contributes labor, resources, or both to create the desired outcome. The profit share that each member receives gets based on their contribution within the outlined structures of the contract that gets signed. That’s why most agricultural cooperatives have members pay a specific amount to receive a percentage-based share of whatever harvest is achievable during the season.
That means the ebb and flow of retail becomes a significant factor in the operations of a cooperative. With fewer options available for lending or outside fundraising, the risks of going bankrupt can be significantly high in some communities.
3. Cooperatives struggle to establish unique branding.
Cooperatives can sometimes lose sight of their unique branding because their members are part of a diverse community. It becomes part of each individual instead of standing separately as a unique brand. This issue is similar to what a sole proprietor faces when they operate under their given name instead of a brand.
That means individuals participating in the cooperative receive direct associations with one another. It can be a positive outcome if good results occur, but this issue can become problematic if someone gets caught embezzling funds or starts participating in unethical or other illegal activities.
4. Slow decisions come out of cooperatives.
Cooperatives spread out the decision-making power to each member in a manner that’s similar to a shareholder. Each person may have the opportunity to offer their opinion on a matter before a final choice gets made. This disadvantage creates a process that can take a lot of time to complete, especially if feedback from several thousand members may require sorting. That’s why many businesses focus on power centralization.
Some cooperatives can get around this disadvantage by designating members who have a role in making unilateral decisions. You might receive the option to purchase a specific share of a person’s productivity. It still doesn’t replicate the fast results that a clear hierarchy can produce.
5. Cooperatives share pricing with the competition.
It is challenging for a cooperative to gain a competitive edge because the pricing tends to be equal or greater than what is already available on the market. That’s why most members tend to use this option as a supplemental investment instead of a primary resource. Imagine purchasing an agricultural share in a farm as a way to manage your grocery budget. What would happen if a weather event devastates the property and no products get delivered?
That’s why a cooperative is closer to an investment than a purchase. You can receive superior quality goods and services, but it comes at the risk of receiving nothing at all in some industries.
6. There are legal restrictions to follow in every U.S. state.
Some people may not have the option to incorporate their business as a cooperative. This disadvantage depends on a person’s geographic location in the United States. Every state has a different set of rules and regulations to follow when someone wants to pursue this kind of opportunity.
Some states have restrictive coop laws that only allow incorporation in specific industries, such as agriculture. Others allow for this business structure to apply in almost any industry that could benefit from the presence of cooperatives. Every member must comply with the published expectations to avoid facing some legal challenges to this effort.
7. Cooperatives aren’t as profitable to the owners or founders.
The earnings and profits of a cooperative receive equal distribution among every employee. That means this business type is nowhere near as profitable to the initial owners or founders of the company. This disadvantage doesn’t mean that everyone within the coop receives equal wages, but every member does receive an equal share of the remaining profits after expenses get considered.
Most people don’t form a cooperative because profit is their top priority. It is still an essential disadvantage to consider because a lack of cash can lead to a quick bankruptcy.
8. Some coops don’t provide access to real property.
Real estate cooperatives are not considered real property. That means there is an advantage in the fact that there are no individual property taxes to consider. It does mean that the entire building receives one bill. Then the costs get divided up among the members by virtue of the shares held in the company. It’s the coop’s responsibility to manage insurance, utilities, and similar expenses – and those get distributed throughout the membership each month.
Members may not have a say in this situation regarding the amount they must pay to maintain their status. If there is a failure to pay the obligation, the contract will dictate what happens to that person’s share. Forfeiture is a common result.
9. Some cooperatives may not have any staff.
The smaller coops that exist throughout the United States typically have limited staff resources. Many of them don’t hire anyone at all, relying on the membership to handle needs on a volunteer basis. That means members must set aside time to work fields, maintain building upkeep, or manage resources based on the industry in which the organization operates. It is an arrangement that can create a sense of community for those involved with the work, but this issue can also push away prospective buyers who don’t have time resources they can commit to the project.
Cooperatives make sense when a group of highly skilled individuals comes together to create specific results in a particular industry. The best groups limit membership shares so that outcomes can become as predictable as possible. That means you may need to seek out early involvement in some industries to become part of the community.
It can be a good choice to pursue if you want to start a business with a lower level of risk. This option can also be quite challenging because fundraising efforts must go through non-traditional challenges.
The advantages and disadvantages of cooperatives show the need for peer support. There must be an emphasis on de-centralization while the entire community works toward producing results. That’s why most businesses that use this structure have like-minded individuals working with one another to reach a specific goal.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.