Starting a Cooperative

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.

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

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

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1) Use Advisers and Committees Effectively

Organizing 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 Responsibilities

• 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

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 Planning

• 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

Legal Considerations

What is a Cooperative Legal Considerations - Handout
Organizing committee members should become acquainted with legal aspects of cooperatives by studying laws applicable to them and businesses generally. Every State has one or more laws authorizing the formation of cooperative corporations, although a number of them are restricted to agricultural producers. Copies may be obtained from an attorney, the Secretary of State, or State Corporation Commissioner.

Legal Papers: Perhaps the most important process, other than determining the business feasibility, is drafting articles of incorporation and bylaws. Other legal documents include: Membership application, Membership or stock certificate, Revolving fund certificate, Marketing/purchasing agreements, & Meeting notices and waivers of notice

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Several Federal laws are especially important for cooperatives. The Capper-Volstead Act of 1922, sometimes called the "Magna Charta" of farmer marketing cooperatives, recognizes the rights of producers to act together in handling, processing, and marketing their production without violating antitrust law. Producers may also form marketing agencies in common. But even though cooperatives have this organizational protection, their operations are subject to the same antitrust laws as other businesses.

The Farm Credit Act of 1971 defines a cooperative that is eligible to borrow from the banks for cooperatives in the Farm Credit System and the conditions the cooperative must meet. The National Consumer Cooperative Bank Act created a similar financial institution, the National Cooperative Bank, to serve nonfarm cooperatives. The Internal Revenue Code describes the tax treatment of cooperatives and their patrons and tax reporting requirements.

1) Articles of Incorporation

Incorporation is usually the best method of organizing. Each State has special enabling laws under which cooperatives may incorporate. It may be preferable to incorporate under the State's general corporation enabling act, but structure bylaws to operate as a cooperative. Incorporation gives the cooperative a distinct legal standing. Members generally are not personally liable for the debts of an incorporated organization beyond the amount of their investment. The articles indicate the nature of the cooperative business. The articles should specify rather broad operating authority when incorporating even though services may be limited at the beginning.
These articles usually contain:

• Name of the cooperative
• Principal place of business
• Purposes & powers of the association
• Proposed duration of the association
• Name and street address (must be located in Nebraska) of the registered office and agent
• Names and addresses of the incorporators (Nebrsaka law requires ten incorporators for stock cooperatives)
• Information about the capital structure
• Information on distribution of assets upon disolution

In Nebraska, filing the articles of incorporation with the Secretary of State activates the cooperative corporation. After the organizing committee approves the articles, the attorney files for the corporation charter and includes the recording fees. Once chartered by the State, the cooperative should promptly adopt bylaws.

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2) Bylaws

State how the cooperative will conduct business and must be consistent with both State statutes and the articles of incorporation. The committee prepares the articles and bylaws with the help of an attorney so provisions comply with laws of the State in which the cooperative is incorporated. The committee's role also is to assure the bylaw provisions will not conflict with operating procedures.

Bylaws usually have: Membership requirements lists rights & responsibilities of members Grounds & procedures for member expulsion How to call & conduct membership meetings Methods of voting how directors & officers are elected or removed their number, duties, terms of office, & compensation Time & place of director meetings Dates of the fiscal year Requirement to conduct business on a cooperative basis

Bylaws usually have: How net margins will be distributed Process for redemption of members' equity A consent provision that members will include face value of written notices of allocation & per-unit retain certificates as income in the year they are received Distribution of non-patronage income Handling of losses Treating nonmember business Dissolution of the cooperative Indemnification of directors Process for amending the bylaws

Also covered is how the board is structured to represent the membership, given geographical distribution and size of the membership and the scope of business and function of the cooperative. Directors may be selected to represent districts based on membership density, to reflect commodities or services to be handled, or some other basis that provides equitable representation. The organizing committee's recommended management structure should include the basis for director representation, voting methods, and board officers, and their terms.

For marketing cooperatives that lack a marketing agreement, the bylaws specify the extent of members' obligation to market through the cooperative. They outline the terms and conditions under which the products will be marketed and accounting procedures.

3) Nebraska Banking and Finance Cooperative Exemption

Under Nebraska law, a cooperative’s activities of soliciting for sale and selling its stock and memberships may be exempt from the registration and other requirements of the Nebraska Securities Act, provided that the cooperative first files the appropriate notice and related documents with the Nebraska Department of Banking and Finance. Once an exemption is established at the state level and as long as the cooperative’s activities fall within an exemption from the federal securities laws, the cooperative is ready to solicit members.

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4) Membership Application

The application, signed by the member and approved by the board of directors, is the legal proof that a patron is a member. A cooperative should have a completed membership application on file from every member. Membership and the amount of business done with members and nonmembers are important factors for certain antitrust and taxation provisions.

This form has five main parts:

1. Applicant's statement asking to become a member of the cooperative
2. Signature of the applicant
3. Statement of cooperative acceptance of applicant
4. Signatures of the president and secretary
5. Statement of the duty and intent of the member

A membership certificate may be issued to each member as evidence of entitlement to all of the rights, benefits, and privileges of the association.

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5) Marketing and Purchasing Agreements

An agreement ensures sufficient control over products or services to be delivered so the cooperative can function. This is especially helpful in the first few years of operation when the cooperative is establishing its reputation as a responsible and successful business. Marketing and purchasing agreements have helped some cooperatives get needed outside financial help. In some cases, cooperatives that use contractual agreements must file them with the State Government.

In the marketing agreement the association agrees to:

• Accept specified products of stated or better quality
• Market them to the best of its ability
• Return to members all marketing proceeds less deductions for expenses & continuing capital needs
• A similar contract with members can be structured for service and supply cooperatives.

This continuing or self-renewing agreement should specify that after it has been in force for some initial period, it should continue indefinitely unless the member (or the cooperative) states in writing a desire to cancel or modify it. A cancellation request must be made during a specified annual period as noted in the contract.

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6) Revolving Fund Certificates

When a cooperative retains funds from business with or for patrons as capital investments, it issues a written patronage refund certificate or a similar document to the member as a receipt for capital investments that will eventually be revolved or redeemed. Meanwhile, the retain is used to finance the business. Member investments may be deductions based on per-unit of product handled or services used, reinvested patronage refunds, or original capital subscriptions (if a nonstock cooperative).

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7) Charter Member Meeting

According to most statutes under which cooperatives are organized, articles and bylaws must be adopted by a majority vote of the members or stockholders. For convenience in organizing, only the persons named in the articles of incorporation, called the charter members, must vote to adopt the bylaws. These persons are regarded as members, or stockholders, as soon as the articles of incorporation are filed. A good practice, however, is to invite everyone who has signed a pre-membership agreement to the meeting to ratify the bylaws.

A temporary presiding officer conducts this first meeting and reports that the articles of incorporation, have been filed. A draft of the proposed bylaws is presented, discussed, and adopted as read or amended. Further action is usually needed to accept those members or stockholders who have subscribed for stock or agreed to become members but are not named in the articles of Incorporation. Under some statutes, however, the incorporators can adopt the bylaws as incorporators rather than as members or stockholders. If members of the first board of directors have not been named in the articles of incorporation, they should be elected at this meeting.

Here are some suggestions for selecting the first board of directors:

• Use a nominating committee to develop a panel of candidates for the board
• Select only members as candidates
• Nominate two candidates for each position
• Vote by secret ballot

Sources:

Securities Act of Nebraska - Chapter 8, Article 11
Raising Small Business Capital in Nebraska Through Securities Sale
CIR 7 How to Start a CooperativeCIR 62 Cooperative Directors: Asking Necessary Questions

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