Advantages & Disadvantages of a Cooperative Business

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One of the key decisions in launching any business is its legal structure. Forming a cooperative makes for a business responsive to the needs of its owner-members. While this structure has some limitations, most notably in raising capital, its advantages may outweigh them. Creating a detailed business plan and seeking expert advice -- including the services of a lawyer -- may help to avoid costly problems down the line.

The Co-op Difference

  • All the members of a cooperative are its owners. They're also called user-owners. The business operates to the members' benefit because they use the services or products produced. Cooperatives range in size from small local food co-ops to credit unions and large retail companies. Members may have multiple shares in a co-op, yet each individual has only one vote. Cooperatives can also be made up of businesses as in the case of The Associated Press or certain agricultural co-ops.

Advantages of This Business Structure

  • A cooperative benefits from a broad knowledge base and the ability to tap into its built-in and accessible network of members who have a personal stake in the business' health and growth. Cooperatives also benefit from increased buying power that allows them to obtain goods and services at substantial discounts. Cooperatives get a significant break from Uncle Sam, in that they aren't taxed the way corporations are, although each shareholder has the responsibility to pay taxes on income from the business. Another significant advantage is that surplus dividends paid out to members aren't taxed by the IRS. Cooperatives may be eligible for grants specifically intended to help this kind of business.

Key Disadvantages

  • It's crucial to consider a cooperative's financial health at the outset and strategize how to manage its capital and cash flow. While this is a key step for any business, cooperatives can be at a serious disadvantage when it comes to seeking outside financing. Large investors have little incentive for dealing with so many owners and having so little power, because the potential investor is limited to only one vote, no matter how large the investment. Another potential problem lies in the possibility of diminishing involvement by members. If active engagement drops off, it weakens the cooperative. Many cooperatives weather these challenges. Agricultural cooperatives have shown overall growth in assets, revenue and market share gains since 1950, according to the Agricultural & Applied Economics Association's Choices Magazine.

Weighing These Factors

  • Meeting with potential cooperative members and discussing the pros and cons of forming a cooperative is a valuable step in assessing the feasibility of this structure. Draft a preliminary business plan to address in detail the mission statement, financing, practices, methods of conflict resolution, rights and responsibilities of members, competition and potential pitfalls. Develop contingency plans for problems with supply, sales, cash flow or unanticipated difficulties. Discuss the advantages and disadvantages of the cooperative structure in detail to check the mettle of the membership. A group that focuses on solutions and moves forward through disagreements demonstrates a better chance of success than one that becomes derailed in disagreements without making decisions.

References

  • Photo Credit Ridofranz/iStock/Getty Images
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