Starting a cooperative is a complex project. A small group of prospective members discuss a common need and develop an idea of how to fulfill it.

Organizing Steps

Business Climate

Starting a cooperative is a complex project. A small group of prospective members discuss a common need and develop an idea of how to fulfill it.images/article_financial_planning%5B1%5D.jpg

Depending on the situation generating the idea, a new cooperative may be welcomed with enthusiasm or may be met with vigorous competitive opposition. If opposed, leaders must be prepared to react to various strategies of competitors such as, price changes to retain potential cooperative members' business; better contract terms or canceled contracts; attempts to influence lenders against providing credit; and even publicity, misstatements, and rumors attacking the cooperative business concept.

Regardless of the business climate for the proposed cooperative, leaders must demonstrate a combination of expertise, enthusiasm, practicality, dedication, and determination to see that the project is completed.

Exploratory Meeting (pdf) "What an initial meeting should look like and consist of, along with information on forming a steering committee"

Sequence of Events Outline

1) Invite leading potential member-users to meet and discuss issues.

2) Identify the economic need a cooperative might fill.

3) Conduct an exploratory meeting with potential member-users. If the group votes to continue, select a steering committee.

4) Survey prospective members to determine the potential use of a cooperative.

5) Discuss survey results at a second general meeting of all potential members and vote on whether to proceed.

6) Conduct a needs or use cost analysis.

7) Discuss results of the cost analysis at a third general meeting. Vote by secret ballot on whether to proceed.

8) Conduct a feasibility analysis and develop a business plan.

9) Present results of the feasibility analysis at the fourth general meeting. If participants agree to proceed, decide whether to keep or change the steering committee members

10) Prepare legal papers and incorporate.

11) Call a meeting of charter members and all potential members to review and adopt the proposed bylaws. Elect a board of directors.

12) Convene the first meeting of the board and elect officers. Assign responsibilities to implement the business plan.

13) Conduct a membership drive.

14) Acquire capital and develop a loan application package. 

15) Hire the manager. 

16) Acquire facilities. 

17) Begin operations.

Research Next Steps:
  1. What is a Cooperative
  2. Cooperative Service Areas
  3. Entity Options

General Rules for Success

Several basic rules for successful formation of a cooperative apply to more than one step of the process and to continuing operations. Some rules are unique to the cooperative form of business. They include effective use of advisers and committees, keeping members informed and involved, maintaining good board/manager relations, following sound business practices, conducting businesslike meetings, and forging links with other cooperatives.

Top Reasons Cooperatives Succeed

1) Use Advisers and Committees Effectively

image of meetingOrganizing human resources and effectively using their expertise, along with maximum participation by potential members is central to any successful business and crucial to the success of the cooperative.

For additional information: Use Advisors & Committees Effectively pdf

2) Keep Members Informed and Involved

Member responsibilities start with the conception of the cooperative and remain throughout its life to assure successful organization, sound management, and operation.Members' participation in affairs of their cooperative increases their feeling of ownership and responsibility for its success.

For additional information: Keep Members Informed & Involved pdf

3) Maintain Good Board-Manager Relations

The differing responsibilities of the board of directors and the manager must be clearly understood and carried out.
For additional information: Maintain Good Board-Manager Relations pdf

Responsibilities of Board & Manager in Cooperative

Board of Directors

  • Responsible for performance & conduct of cooperative
  • Set policies, goals, objectives
  • Employ & Evaluate general manager's abilities
  • Provide adequate financing for cooperative
  • Adopt long-term strategic plans
  • Preserve coop character
  • Establish accurate account system & Adopt annual operating budget
  • Appoint outside firm for annual audit & Control total operation
  • Authorize distribution of coop net earnings & redemption of member equities

General Manager (Chief Executive Officer)

  • Employ, train, discharge employees
  • Manage or direct daily business activities
  • Carry out policies set by board
  • Set goals & short-term plans
  • Organize & coordinate internal activities
  • Keep complete records & accounts
  • Develop annual operating budget
  • Provide board with periodic reports

Factors to consider on overlap/division between board & manager:

Board Responsibilitiesimage of a meeting

  • Make long term decisions
  • Introduce ideas
  • Decide on policies
  • Run broad, primary activities
  • Hires manager

Manager Responsibilities

  • Make short term decisions
  • Implement ideas
  • Decide on cooperative functions
  • Run short-run operations
  • Hires staff
4) Conduct Businesslike Meetings

A cooperative is a business so its meetings should be conducted in a businesslike manner.
A good meeting results in carrying out several successive steps:

  1. Planning ahead
  2. Involving members
  3. Following a published agenda
  4. Following through on meeting actions

For additional information: Conduct Businesslike Meetings pdf 

5) Follow Sound Business Practices

The major challenge to cooperative members, the board of directors, and operating management occurs after business operations begin because many of the startup responsibilities continue after the cooperative begins operating.

These responsibilities include:

  1. Complete & accurate documentation of income & expenses
  2. Exact member records
  3. Periodic operating statements & balance sheets
  4. Annual full reports
  5. Annual independent audits
  6. Future Planning

For additional information: Follow Sound Business Practices pdf

6) Forge Links With Other Cooperatives

An early exercise to determine whether to start a new cooperative is to investigate the alternative of linking with an existing cooperative that could expand its service territory. Even if starting a new cooperative is the best course of action, the search for beneficial links with other cooperatives should continue.

  • Alliances with regional cooperatives or other businesses may be valuable sources for supplies, marketing outlets, and related services.
  • Membership in State and National cooperative associations can keep the new cooperative abreast of what others around the country are doing.

These associations can be sources of:

  1. Education & training programs
  2. Legislative & public relations support activities
  3. Help identifying sources of special expertise
Some material adapted from USDA Rural Development publications on cooperative development

Avoiding Potential Pitfalls

New organizations are most vulnerable in their early formative years. Here are some tips for new cooperatives to avoid potential pitfalls.

Top Reasons Cooperatives Don't Succeed

1. Lack of clearly identified mission

  • A new cooperative should not be formed just for the sake of forming one. The potential member-user must identify a clear mission statement with definite goals and objectives.

2. Inadequate Planningimage of planning meeting

  • Detailed plans for reaching defined goals and the mission are important. In-depth surveys of the potential member-user needs, coupled with business feasibility studies, are necessary.
  • Stop the organizational process if there is not sufficient interest in the cooperative by potential member-users or if it is not a sound business venture. The human cost in time and organization expense may be better used elsewhere.

3. Failure to use experienced advisers and consultants

  • Most persons interested in becoming member-users of a new cooperative have not had cooperative business development experience. Using resources persons experienced in cooperative development can save a lot of wasted motion and expense.

4. Lack of member leadership

  • Calling on the services of experienced resource persons can not replace leadership from the organizing group. Decisions must come from the potential member-user group and its selected leadership.
  • Professional resource persons should never be in decision making positions.

5. Lack of member commitment

  • To be successful, the new cooperative must have the broad-based support of the potential member-users.
  • The support of lenders, attorneys, accountants, cooperative specialists, and a few leaders will not make the cooperative a business success.

6. Lack of competent management

  • Most cooperative members are busy operating and managing their own businesses and lack experience in cooperative management.
  • The directors hire experienced and qualified management to increase the changes for business success.

7. Failure to identify and minimize risks

  • The risk in starting a new business can be reduced if identified early in the organizational process. Careful study of the competition, Federal, State, and local Government regulations, industry trends, environmental issues, and alternative business practices helps to reduce risk.

8. Poor assumptions

  • Often, potential member-users and cooperative leaders overestimate the volume of business and underestimate the costs of operations. Anticipated business success that ends in failure places the organizers in a "bad light."
  • Quality business assumptions tempered with a dose of pessimism often proves to be judicious.

9. Lack of financing

  • Regardless of the amount of time spent in financial projection, most new businesses are under financed. Inefficiencies in start-up operations, competition, complying with regulations, and delays often are the causes.
  • Often, the first months of business operations and even the first years are not profitable, so adequate financing is important to survive this period.

10. Inadequate communications

  • Keeping the membership, suppliers, and financiers informed is critical during the organization and early life of the cooperative.  Lack of or incorrect information can create apathy or suspicion.
  • The directors and management must decide to whom, and how, communications are to be directed.

Considerable time and effort are spent in starting a new cooperative. Avoiding the pitfalls experienced by others helps to increase your effort to be successful.

Some material adapted from USDA Rural Development publications on cooperative development

Reasons Why You Might Want to Start a Co-op:
  • Cooperatives exist to meet their members’ needs. Their focus is on service to members, not on bringing a return to investors.
  • Cooperatives have access to special treatment under US Tax Code that provides them with advantages not typically available to investor-owned corporations.
  • Cooperatives are owned and controlled by their members. They help keep resources in the members’ community and are guided by members’ values.
  • Decisions made democratically by the membership provide a strong direction that is supported across the organization.
  • Profits are returned to members so members benefit from the business they do with the cooperative.
  • Cooperatives contribute to the economic stability of their communities.
  • Distribute the benefits of real ownership based on time and use, not just the amount of money someone can invest.
Reasons Why You Might Want to Think Twice Before Starting a Co-op
  • Cooperatives may experience greater difficulty gaining access to capital because of the limitations imposed on non-participating investors, who may expect a seat on the board or specific apportionment of profits in ways that the cooperative structure makes difficult or even impossible.
  • Cooperatives need to invest time and money in supporting their democratic process, such as educating members about key issues, holding meetings, and responding to member concerns, all of which can be expensive and time consuming.
  • There may be legal limits to the scope of operations or membership for a cooperative if formed under a particular body of cooperative law (although this is typically a minor impediment, because a business is generally able to function as a cooperative without relying on a cooperative statute).
  • Cooperatives are only as good as their members ask them to be. When members stop investing time and energy, cooperatives can reduce the benefits they provide to their members.
  • Worker cooperatives in particular may struggle to engage their worker-owners and keep them engaged, because not everyone who works wants to be a co-owner of a business.
From Cultivate.Coop