University of Wisconsin Center for Cooperatives
STEPS IN FORMING A COOPERATIVE
The defining characteristic of a cooperative is that it is a business owned and controlled by the people who use its services. Four additional features that characterize co-ops are: service at cost, benefits proportional to use, democratic control, and limited return on equity.
Co-ops are different from for-profit businesses which are owned by one or more investors whose intent is to make a profit by selling goods and services to other businesses and individuals. Co-ops are also distinct from non-profit organizations which are intended to provide educational, charitable and other services and must reinvest any profits they make in their own operations or donate them to other non-profits or to government agencies.
Cooperatives can be divided into four main categories. Producer cooperatives are formed by farmers, craftspeople and other producers to purchase supplies or services and to market products. People form consumer cooperatives to buy groceries, financial services (e.g. credit unions) and other goods and services. Employee-owned cooperatives are owned by the people who work for the co-ops. For example, many cab companies in the United States are employee-owned. Business cooperatives are owned by for-profit businesses, cooperatives or non-profit organizations. Examples include wholesalers owned by retail hardware stores or fast food franchisees.
Some businesses operate in a similar manner to cooperatives but are incorporated as for-profit businesses or non-profits. For example, many businesses have employee stock ownership plans (ESOPs), in which workers own a piece of the business. Many non-profit child care centers are controlled by parents and community representatives and operate in a "cooperative" manner.
There are seven main steps in forming a cooperative or a "cooperative-like" organization.
1. Establish a steering committee
In some cases, a group of people who share an idea for a cooperative forms a steering committee and develops a plan and a timetable for researching and developing a co-op. In other cases, an initial organizing group convenes a meeting of potential co-op members to test out the level of interest in the co-op idea. A steering committee is formed from participants in this meeting. The level of interest can be further tested by asking for an initial installment on a membership fee from those who are seriously interested in the co-op.
2. Conduct a feasibility study
The steering committee either conducts a feasibility study itself or hires a consultant to carry out the study. The purpose of a feasibility study is to examine critical opportunities and obstacles that might make or break the formation of the cooperative. These critical issues include the number and interest level of potential members; market issues (Can the co-op get better prices, better quality or better services than potential members currently get through other means?); operating costs; and availability of financing. If insurmountable obstacles are discovered in the feasibility study, the development of the cooperative can be abandoned or shelved before too much time or money has been expended.
In some cases, local or state governments or foundations may provide financial or technical assistance in carrying out a feasibility study. Initial payments by potential co-op members may also be used to help cover the cost of a feasibility study.
3. Draft Articles of Incorporation and Bylaws
In order to conduct business, a cooperative has to be incorporated under the appropriate state statute. Most states have statutes specifically for cooperatives; others have more general corporate statutes. The steering committee should select legal counsel to draft or review the articles of incorporation and bylaws. The articles of incorporation describe the kind and scope of the cooperative's business and must be filed with the secretary of state. The bylaws state how the cooperative will conduct business. A co-op can start out with very basic bylaws and refine them after the business plan has been developed.
It may seem odd to incorporate a co-op before the steering committee is even sure that all the necessary pieces are there to get the co-op launched. Why not wait until the business plan is completed and the decision to launch the cooperative has been made? The recommendation to incorporate early on is based on several considerations: Is the co-op planning to collect funds from potential members prior to completion of the business plan? Are there grant and loan programs to which the steering committee is interested in applying that require the co-op to be incorporated? Are some of the steering committee members concerned about legal liability issues that would be lessened if the co-op were incorporated? If none of these issues are of concern to the steering committee, incorporation can be deferred until after the business plan is completed.
4. Prepare a business plan
If the feasibility study results are favorable, the steering committee carries out or commissions a detailed business plan. The business plan is a more in-depth version of the feasibility study. It serves two primary purposes: to provide a blueprint for the development and initial operation of the co-op and to provide supporting documentation for potential members, financial institutions and other investors.
A typical outline of a business plan includes an executive summary, a description of the company, a market analysis, research and development related to the company's product or service, a marketing and sales plan, a description of the organizational structure and key personnel, and financial data.
5. Secure financing
Cooperatives vary greatly in the amount of capital they need to get up and running. The business plan should include the amount and type of financing needed by the co-op and a strategy for getting it. The steering committee and its advisors are responsible for implementing this strategy. Virtually all co-ops require some level of member financing, usually in the form of stock purchases or membership fees. Member financing not only provides equity for the co-op, it also provides a financial base that makes other investors, particularly banks, feel more secure in investing their funds in the co-op.
In addition to member equity, most co-ops need to borrow money to get started and to maintain their operations. Loans can come from banks and other financial institutions (including several national banks for cooperatives that have federal charters specifically to provide such loans). Other loan sources are local, state and federal government programs, and various private for-profit and non-profit organizations.
6. Recruit members
Although member recruitment is listed as the sixth step in forming a co-op, laying the groundwork for the co-op's membership base needs to begin when the steering committee first meets. Many co-ops in the process of being formed hold several meetings for potential members, conduct surveys of them, mail organizing updates to them, and collect initial down payments on membership fees. All of these activities provide a good indication of the level of interest in, and commitment to, the co-op. Thus, when the time comes to actually "ante up" and join, potential members will be ready to act without a lot of last minute promotion and education.
When the steering committee feels that enough members have joined the co-op, the first general membership meeting is convened. At this meeting, the members vote on the co-op's bylaws and elect a board of directors for the co-op. This meeting marks the transition from a steering committee or interim board of directors and an interim set of bylaws to a formally elected board and formally approved bylaws.
7. Recruit personnel
The recruitment of personnel is listed as the last step in the co-op formation process because the co-op is not a definite "go" until the necessary financing has been lined up. However, some co-op start-ups identify key potential personnel much earlier in the process, for example in the feasibility study or business planning stages. One or more key persons can be hired as consultants at an early stage with the mutual intent that they will work for the co-op once it is formally established. This approach also has the effect of making investors feel more comfortable about financing the co-op because proposed management staff have been identified. For some lenders, competent management is the most important thing they look at in making a loan decision.
The seven steps in forming a co-op listed above are intended to provide a general overview to the co-op organizing process. The start-up of each co-op is unique so the steps outlined here should not be used as a rigid blueprint, but rather as a basic introduction.
It is often useful to seek out professional assistance in forming a cooperative. Cooperative developers, legal counsel, and financial experts can save a steering committee time and help it to avoid costly mistakes.
The staff of Cooperative Development Services provides initial free consultation to people interested in forming a co-op. We help clients to identify public and private sources of technical and financial assistance. We also provide assistance with all phases of the co-op development process on a fee-for-service basis. Contact Mary Myers, E.G. Nadeau, or Steve Wolfe at our Madison, WI office (608-258-4396) or Bill Gessner at our Twin Cities office (612-823-4509).