Cooperatives 101

A cooperative is generally described as a business that is organized, owned and democratically controlled by the people who use its products and services, and whose earnings are distributed on the basis of use of the cooperative rather than level of investment.  A distinct feature of a cooperative organization is that the role of owners and patrons / users are closely connected.

The main advantages of Cooperatives are:

Ø  Cooperatives have many of the same advantages of investor-owned corporations such as limited liability of owners and perpetual existence of the cooperative.

Ø  Cooperatives are allowed to deduct patronage refunds to members out of before-tax income.

Ø  Control of the business can be kept in the hands of those who use the business.

Ø  Profit distribution may be allocated in shares or cash.

The main disadvantages of Cooperatives are:

Ø  It may be difficult to raise funds for a Cooperative.

Ø  Cooperatives may not provide incentives for members to contribute additional capital.

Ø  Extensive Record Keeping and more complex tax and registrations filing is required.

Ø  Longer decision making process with more possibility of conflict between members.

Cooperatives are used much less than corporations and trusts, however they do have their place.  Cooperatives are very typically large businesses.  If you have questions on structuring your business or investments don’t hesitate to contact us.

On my next blog, we’ll take a look at Holding Companies.