Cooperatives FAQ
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Definition of Cooperative Business: A cooperative is a business owned and operated by a group of people for their mutual benefit. A producers cooperative is typically a group of growers who come together to process or distribute collectively. A consumer coop is a group of people or businesses purchasing collectively. A workers cooperative is owned by the employees. Generally, a cooperative is a business owned and controlled equally by the people who use its services or by the people who work there.
What is a cooperative?
What types of cooperatives are there?
Is a cooperative a nonprofit?
Does a cooperative pay taxes?
What are patronage dividends?
What are the advantages of a cooperative vs. other business forms?
What are the steps to forming a cooperative?
With whom should you form your co-op?
How can the Laulima Center help?
What is a cooperative?
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.
What types of cooperatives are there?
Worker cooperatives, consumer cooperatives, agricultural cooperatives, and credit unions are some of the types of cooperatives formed in Hawai‘i. They can be formed in almost any sector of the economy, from food systems to renewable energy, from health to education, from arts to finance. The State of Hawai‘i registers agricultural, consumer, and housing cooperatives. Co-ops are most successful when formed around a compelling economic need.
Is a cooperative a nonprofit?
No. Cooperatives are not 501c(3)s which usually offer services to the public and are primarily grant & donor funded. A cooperative operates 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. Some cooperatives operate at cost to fill a missing need in the marketplace.
Does a cooperative pay taxes?
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 minus expenses) is NOT considered taxable income of the cooperative; it is returned to the patrons and taxed as part of the individual patron’s (or member’s) income.
What are patronage dividends?
Patronage dividends are the share in profits that a cooperative member receives at the end of the year based on their percentage of use of the cooperative. These refunds come from the net profits of the cooperative. The member pays income taxes on these earnings.
What are the advantages of a cooperative vs. other business forms?
Individuals can come together to fill a need that they couldn't afford to do alone or didn't have the expertise to do. They can provide a good or service that no one else in the marketplace is providing. The people own their cooperative, so all profits are returned to them. This allows groups to shorten the value chain and remove some middle men. They offer some legal protection as you can only be sued to the extent you've invested in the cooperative itself. There is a tax advantage in that you are taxed once.
What are the steps to forming cooperative?
1. Hold an exploratory meeting with others who have a similar interest and determine whether you have common needs and the desire to address those needs as a group.
2. Select a steering committee to guide the group through the formation process.
3. Conduct a survey of potential members.
4. Analyze markets for your goods or services.
5. Prepare a business plan.
6. Incorporate the business.
7. Conduct a membership drive; elect a board.
8. Capitalize the business thru member equity, loans, and grants.
9. Hire management and employees, and acquire facilities and equipment.
10. Begin operations.
With whom should you form your co-op?
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 successfully work both individually and together. The size and composition of this leadership group varies 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.
How can the Laulima Center help?
The Laulima Center offers the following services, including referrals to partners and professionals, to assist forming and existing cooperatives:
Cooperative Business Education
Group Facilitation & Organization
Strategic Project Planning
Feasibility Assessment
Business Planning
Market Analysis
Grant Writing & Capitalization Strategies
Legal Document Assistance
Professional Referrals
Board & Member Trainings
Conflict Resolution