If you’re a mission-driven entrepreneur, you may have heard of co-ops or cooperative corporations. If you want to create a co-op, this is what you need to know:
A co-op is a corporation that is created for the benefit of its members.
That means a co-op can be created for a specific group or for a specific purpose. Two of the most common types of co-ops are worker co-ops and consumer co-ops. As their namesakes indicate, worker co-ops are formed for the benefit of their workers and consumer co-ops are formed for the benefit of their consumers.
An example of a worker co-op is rainbow grocery in San Francisco. Because it is a worker co-op, the workers in Rainbow Grocery have an ownership stake in the store and collectively make decisions on how Rainbow Grocery is run. If you do not work at Rainbow Grocery, you cannot be a member.
An example of a consumer co-op is REI, which is likely the largest consumer co-op in the United States. In order to become a member of an REI co-op, an REI customer pays a $20 fee. This fee entitles the customer--now member--to vote in REI’s affairs and also to receive an annual patronage dividend based on the value of his or her purchases for the year.
A co-op is owned and controlled by its members.
In a typical corporation, a shareholder’s voting rights is determined by the number of shares that he or she owns. The more shares a shareholder has, the more control he or she can exert. In a co-op, each voting member is only entitled to a single vote, making the co-op a democratically owned corporation. This ensures that no one member has a louder voice than another simply because one may have more financial means than the other.
Members in a co-op are rewarded for their efforts in the form of a patronage dividend.
If a co-op makes a profit, they can return it to their members in the form of a patronage dividend. This is calculated based on the member’s contributions to the co-op. In a consumer co-op, this is calculated based on the amount of money a member spends at the co-op. For example, REI gives a patronage dividend of 10% annually.
Proprietary interests in a co-op may be different than voting interests.
Although co-op members all have one vote, they can have different proprietary interests. For example, a member who has purchased one share of the co-op may receive fewer dividends than a member who has purchased one hundred shares of the co-op. This is because dividends are proprietary interests.
Investors in a co-op have no control in the co-op’s affairs.
Investors in a co-op, who do not qualify as members, have very limited voting rights and can only vote in matters that directly affect their ownership in the co-op, such as mergers, sale of the company’s major assets, restructuring, or dissolution. For founders that fear that capital investors will control their company, a co-op structure would prevent this from happening. However, certain investors may avoid investing in a co-op due to this lack of control.
A co-op can raise up to $1,000 in California without any filing requirements.
Generally, a company raising money must register or qualify their offering, unless it qualifies for an exemption. This can mean hundreds of hours of drafting and filing documents, and working with regulators before a single word is uttered about raising money. The co-op exemption allows a company to raise up to $1,000 from each voting member without any filing and the company can publicly advertise that they are raising money.
If you’re a mission-driven entrepreneur that wants to create a company to benefit a specific group of people, ensure that those people own and control the company, and raise start-up capital from the very people you are looking to help, then a co-op might be right for you.
This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.