Starting a cooperative

Cooperatives are generally regarded as a specialized form of corporation (as are credit unions, which are legally structured as depositor-owned financial service co-ops but subject to special regulation because of their banking-associated functions). Cooperatives exist to meet members' needs rather than deliver profits to outside investors and are therefore a form of voluntary self-help by a community looking to address its own problems in lieu of seeking broader public (state) support. This fundamental difference in mission is recognized by the US Tax Code, which affords special tax treatment to cooperatives that choose to use it.

Generally, a group of people committed to starting a co-op forms a steering committee to guide the process of creating Articles of Incorporation, bylaws, mission and vision statements, member agreements, business and marketing plans, financial documents, etc., as well as to oversee an equity drive and the election by members of the first board of directors (or equivalent governing body).

The first step any group should take on the road to becoming a co-op is for all the prospective members to educate themselves about what a co-op is and is not. People exploring cooperatives may decide that they are ideally suited for a intended purpose or that a different type of association is a better fit for their goals. People exploring cooperation can benefit from a national network of co-op development centers as well as cooperative development funds with a regional or national focus, which offer substantial technical assistance as well as loans to start-up groups. Anyone interested in starting a grocery or food cooperative would likely be interested in the free manual for consumer-owned food stores available on the Web site of the Cooperative Grocers Information Network, while those interested in a worker-owned cooperative can find assistance from the US Federation of Worker Cooperatives ^[1] and the Democracy at Work Institute. Cooperatives of all sorts in the US are typically associated with the National Cooperative Business Association, which represents the United States in the International Cooperative Alliance.

Legal Structure

See also: Forms of incorporation.

There are two main paths to becoming a coop:

Incorporate under a co-op statute in any state OR Incorporate as a corporation and adopt cooperative by-laws.
Limited Liability Corporations (LLCs), if they operate cooperatively and have cooperative by-laws, can technically be cooperatives.

Some states - such as Massachusetts, Maine, Connecticut, Vermont, and New York - have specific incorporation statutes for Worker cooperatives, which has several advantageous over incorporating as a LLC that operates a worker co-op. ^[2]

Like most types of business, cooperatives may incorporate in the state in which they do business or in another state that offers favorable treatment in terms of legal or financial standing. Most US states have statutes that allow businesses to explicitly form as cooperatives. Not all states have such statutes, and those that do may vary considerably with regards to the specific restrictions and permissions that they impose. It may not be possible to gain recognition for an out-of-state cooperative in a state whose own statute is particularly restrictive, so it is important to understand in advance what requirements may exist in states and locales where a cooperative intends to operate. Whether this represents a problem depends in large part on the intended scope of operations; a grocery cooperative is unlikely to find reason to expand on a regional basis, while a worker cooperative situated near a state border might predict taking on work in another state as well as the one in which it originally forms.

Non-Cooperative Structures

Because not every state has a cooperative statute, and also because the requirements of these statutes can vary widely from state to state, it is not uncommon for cooperatives to form using structures typically associated with for-profit businesses, particularly limited liability companies (LLCs). Model legislation adopted broadly across the United States, relaxed formality in governance, and flexible Federal tax treatment through "check the box" regulations make it feasible for aspiring cooperators to use the LLC structure as the basis for a cooperative enterprise whose particulars are addressed in an Operating Agreement rather than imposed by state law. The special tax treatment afforded to cooperatives is based on how an organization is operated and not restricted to statutory cooperative structures. Alternatively, cooperators may prefer to retain the default tax treatment of the LLC as a partnership: partners are not employees, which may have implications for members who are not legally authorized employment in the United States.

Benefit corporations may also be used as the basis for cooperatives in states where these have been established, along with other forms of specialized business structure that may exist on a per-state basis. As with statutory cooperatives, people choosing unusual structures should be aware that there may be challenges associated with expanding across state lines if they form organizations not widely recognized within the US. The degree to which a legal structure diverges from the cooperative model also determines how much attention the members must pay to cooperative aspects of organization and operations when drafting governing documents.

The Co-op Development Process

The following are core features of a typical (though not universal) cooperative development process.

Usually need a minimum of 40 hours of board meetings (or core group meetings); the process often lasts 12-18 months
Answer questions about Members, Needs, Vision, Values, and Strategy
Create founding board
Invest dollars for pre-development
Conduct feasibility study
Incorporate and adopt by-laws
Create business plan
Sign membership agreements
Make equity investments
Get financing
Hire manager
Open for business

The Stages of a Cooperative Development Process

Stage One: Exploration (Typically 3-6 months)

Explore your new business idea.

Subject	You will need to...	By the end of this stage you’ll have…
Organizational Development	Form an Organizing or Steering Committee with people who represent the cooperative’s potential members. Identify your mission and core values.	A committed group of people who agree on what they want this business to sell to whom.
Business Development	Define your key business concept – What products and services might the co-op supply that could make a significant economic difference in the lives of its members? Create a project development plan and budget. Conduct Market Research to determine the need for your cooperative’s products and services and complete your feasibility analysis to see if you have a viable business idea.	Market research that shows there is a large enough market and sufficient product to sell that the cooperative will be financially viable and make a significant economic contribution to its members; A clear plan and budget for each stage of development
Member Development	Share information with potential members about your business idea.	Growing interest from potential cooperative members.
Fund-raising	Secure funds for Stage One and begin fundraising for Stage Two.	Funds raised to cover the cost of development for Stage One and some of Stage Two.

Stage Two: Business Planning (Typically 3-6 months)

Figure out how to make your business idea a reality.

Subject	You will need to...	By the end of this stage you’ll have…
Organizational Development	Set up your Founding Board, incorporate your cooperative, and adopt Bylaws that describe how you will work together.	A legally incorporated cooperative with a seated board.
Business Development	Create a Business Plan and Marketing Plan that describes how you will launch your business, what it will cost, and where you’ll get the money. Raise money (equity) from members and get a loan to launch your business.	A Business Plan and Marketing Plan showing how the cooperative will be launched.
Members	Recruit members for your cooperative.	Enough members and money to launch your cooperative.
Fund-raising	Secure development funds for Stages Two and Three.	Funds raised to cover the cost of development for Stage Two:

Stage Three: Cooperative Launch (Typically 2-6 months)

Get the business set up and ready to open.

Subject	You will need to...	By the end of this stage you’ll have…
Organizational Development	(If applicable) Set up office and hire staff.	An office set up and staffed.
Business Development	Contract for and market products and services. Pre-sell members and/or customers products and services.	Initial products and services ready to offer; Customers signed up for products and services.
Members	Orient new members to their roles and responsibilities.	Members educated about their rights and responsibilities as co-op members.

Stage Four: In Business

Small Business Tax

Open the doors and start providing goods and services.

Subject	You will need to...	By the end of this stage you’ll have…
Organizational Development	Provide staff and management education and engage in strategic planning.	A viable business, up and running, bringing economic benefit to its members and functioning in a democratic, responsible manner.
Business Development	Provide products and services in response to member needs; engage in sales and marketing and ongoing business development.
Members	Engage in member and board education.

Steps to Starting a Cooperative

Main article: Steps to starting a cooperative.

There are seven main steps to starting a cooperative. Click the above link for more information on each.

STEP 1: Gathering Information
STEP 2: Get Organized
STEP 3: Research Feasibility
STEP 4: Review Findings
STEP 5: Membership Drive
STEP 6: Planning and Financing
STEP 7: Begin Operations

Questions to Ask Before Creating Legal Documents

These are questions to answer before you consult with an attorney to help you design your legal documents - such as bylaws, Articles of Incorporation, and Membership Agreements.^[3] Not all questions are universally applicable to every co-op, so check to see if these questions are relevant to your situation.

Building Shared Vision, Mission, Values and Strategy

Who are the members of this cooperative? What needs of theirs is the cooperative designed to meet?
List the assumptions you hold.
Identify the blocks for moving forward.
List the core values/principles that guide the cooperative.
How do you want the world to be different because the cooperative exists?
What is the vision you hold for this cooperative?
What do you want the cooperative to accomplish? What is its mission?
Who will serve as the start-up board of directors, overseeing the development activities?

Membership

Who is eligible for membership?
What equity will members contribute?
Will members each have one vote? Or will there be weighed voting?
Are there financial obligations for voting?
Are all members treated the same? Or are there classes of members?
How can a member terminate his/her membership? How can the coop terminate a member’s membership?

Board

Who is eligible to serve on the board?
What are their duties?
How many seats should there be?
Will you have board member from outside the organization?
How long will a board member serve?
How are board members elected? Removed?
Are they paid? Are expenses reimbursed?
How will vacancies be filled?
How often will the board meet? What quorum is required? What meeting notice is required?
Will there be standing committees of the board? If yes, what are they and what are the functions?
Will there be officers? If yes, what offices, terms, duties, selection process?

Capital Structure

What will your capital structure be? (Will you issue shares of stock? Membership/Common? Preferred? How many? At what value?)
What are the rights and responsibilities of each stockholder?
Will shares earn dividends?
What will the redemption procedure be?

Patronage Dividends

What is the basis for distributing patronage dividends to members?

Membership Meetings

How often will members meet? Who can call a special meeting? What notice is required? What quorum is required?
What issues will members decide?
How can members vote? By proxy, by mail, electronically?
How will the by-laws be amended?

Membership Agreements

What will members receive?
What will members agree to give?
How will money change hands?
How will quality be evaluated?
How will the agreement be enforced?
How will the agreement be terminated/renewed?

Keys to Successful Cooperative Development

General Guidelines for Success

Keep your focus
Keep members informed and involved
Build strong member leadership and commitment
Set realistic goals and assumptions
Conduct businesslike meetings
Follow sound business practices
Base decisions on market research rather than opinions
Create a comprehensive business plan
Use advisors and committees effectively

The project starts with

A compelling need
A strong champion
A clear vision
A good business idea

The founding board has

Business acumen
A diversity of skills
Integrity
Interested in the most viable business possible
Commitment to the project
The ability to govern the co-op

Project planning includes

Thorough market understanding
Honest market research
Effective business plan
Due diligence
Exit strategy
A conscious transition from development to operation
Forge links with other cooperatives
Identify and minimize risks
Maintain honest, open communications
Invest in member, board and staff education
Hire competent management
Raise sufficient capital
Establish a realistic market entry strategy
Make sure you have enough product to sell to a large enough market to make money

Founding members are

Committed to the project
Motivated by a common vision
Flexible thinkers

From a financial perspective, the project has

Adequate capitalization
Early member financial commitment
Financial feasibility
A commitment to use money wisely
Adequate financial resources

The project has

Strong management
Bylaws that spell it out
Fortuitous timing
Adequate human resources
The ability to learn from failure
A commitment to continuous communication with members, board, management and consultants
A commitment to education and training
Quick buy-in and the ability to build on success
A skilled co-op development facilitator

Further Resources

For Worker Cooperatives

Democracy in the Workplace: All About Worker Co-ops half-hour documentary made in 1999, available on Google video.

In Good Company: The Guide to Cooperative Employee Ownership 70+ page publication available from Northcountry Cooperative Development Fund.
Putting Democracy to Work, 2nd Edition by Frank T. Adams and Gary B. Hansen. Out of print, but available throught the International Cooperative Alliance's (ICA)'s website and Amazon.Com
Illustrated Guide to the Internal Capital Accounts System also available through the ICA's website.
A Collection of worker cooperative startup guides via American Worker Cooperative.
http://american.coop/startup

References

↑ http://www.usworker.coop
↑ Adams, Frank T., and Gary B. Hansen. Putting Democracy to Work: a Practical Guide for Starting and Managing Worker-owned Businesses. San Francisco: Berrett-Koehler, 1992. Print. Page 225.
↑ "How to Start a Co-op" packet. http://www.cdi.coop/CDIcompletestart-uppkt2010.pdf

[1] ttp://www.usworker.coop

[2] Adams, Frank T., and Gary B. Hansen. Putting Democracy to Work: a Practical Guide for Starting and Managing Worker-owned Businesses. San Francisco: Berrett-Koehler, 1992. Print. Page 225.

[3] "How to Start a Co-op" packet. http://www.cdi.coop/CDIcompletestart-uppkt2010.pdf

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