A cooperative is a unique form of business known as user-owned, user-benefited, and user-controlled. Benefits from the cooperative are returned to the members based on their use of the cooperative during the year. A cooperative is democratically controlled by its members through a one-member, one-vote policy. Members own the cooperative through their financial investment in the business.

There are numerous types of cooperatives that cover many industry sectors. Examples include food, agriculture, and natural resources, housing, electric, credit unions, artisan, purchasing, marketing, and child care cooperatives to name a few. Find out more in About Co-ops.

A co-op operates on a not-for-profit basis. They operate to make a profit just like any other for-profit business except that the excess profits in a cooperative are returned to the members in the form of patronage refunds.

Cooperatives pay taxes on real estate, personal property, sales, employment, utilities, etc. just like all other businesses. Cooperatives are single taxed like all other businesses except for C-corporations, which are double-taxed at the entity and the stockholder levels. The single tax treatment is not specific to the cooperative structure, but the taxation of the patronage refunds is unique. The net margin (income-expenses) is NOT considered taxable income because it is returned to the patrons. The net margins are returned as patronage refunds and are taxed at the patron level in all situations.

Patronage refunds are payments that a cooperative patron receives at the end of the year based on his/her use of the cooperative. These refunds come from the net savings of the cooperative. The patron pays income taxes on these refunds.

Cooperatives are unique to other corporations because they have three distinguishing principles: user-owner, user-controlled, and user-benefited. The user-owned principle signifies that the users are the ones who are financing the cooperative by transacting business. User-controlled means that the Board of Directors is elected by the members of the cooperative and serves as the link between the membership and the manager. User-benefited indicates that the members are the ones profiting from the cooperative because patronage refunds are returned to the members based on the amount of business they conducted with the cooperative. The uniqueness of cooperatives is that the customers, owners, patrons, and members could be the same person.

Anyone can be a member of a cooperative as long as the qualifications for membership are met. Each cooperative has qualifications that must be met to become a member of their cooperative and these are contained in their bylaws.

You should join a cooperative because you find their services or products valuable to you as an individual. Other reasons individuals or businesses join cooperatives include:

• increase income
• increase bargaining power
• obtain products or services otherwise unavailable
• expand new and existing market opportunities
• improve product or service quality
• lower operating costs

The first thing is to identify a small group of like-minded people who share a common vision for how a cooperative could improve their economic and social well being. Often the small group becomes the steering committee if the cooperative moves into the development stage.

This small group needs to carefully articulate what services the cooperative could provide. Once this has been determined, then the broader group of possible members must be identified and contacted.

Successful cooperative formation is dependent on a core group of members who can work both individually and together. The size and composition of this leadership group vary with each cooperative, but getting the “right” people at the table, in the beginning, can greatly enhance decision-making.

In addition, technical advisors and other support people should be identified as early as possible. This group could include advisors from business support agencies and private consultants. Invite them to attend meetings of the small group. Try to get them engaged as early as possible.

ICDC works with all cooperative ventures. Let us explore the opportunities with your group. Fill out our information form to get the process started.

The Indiana Cooperative Development Center is one of 30+ organizations receiving the Rural Cooperative Development Grant from USDA Rural Development. The grant will be used for technical assistance for new start-up co-ops; webinars, workshops, conferences; and advocacy work to the public and elected officials about the co-op business model.

We also offer an easy way for individuals and businesses to make donations to our organization. ICDC is a 501(c)3 organization, and all donations received help us expand our services.