Local food system development organizes many different parts and players into what hopefully is one manageable whole. What form of legal structure each of these parts (as well as the whole) takes will vary, depending on their objectives, financial positioning, and advice of legal counsel. Consequently, producers, aggregators, distributors, and buyers could each be organized as either a sole proprietorship, partnership, LLC, non-profit corporation, for profit corporation, or in the case of consumers, not at all.

One type of legal structure that has been around for generations and is often overlooked, however, is the cooperative (Introduction to Cooperatives). Even though you often don’t see it mentioned in Business and Law School textbooks as a form of legal structure, coops are global with over one billion members. One in four Americans belongs to a coop and may not know it. Cooperative structures include such regional and national businesses as rural electrics, rural telephones, credit unions, and mutual insurance companies.

The cooperative is a legal structure that typically offers a lower cost entry to ownership as well as stronger bargaining power because of the number of owners involved. Cooperatives can take many forms, including the producer cooperative, the worker cooperative, the consumer cooperative, and the multistakeholder cooperative (Types of Cooperatives). Meat, dairy, fruit or vegetable producers may consider forming a producer cooperative to share the costs of particular services, including marketing and sales. Pilot multistakeholder cooperatives have recently been formed and are testing the feasibility of businesses involved in the aggregation and distribution of locally-grown food, including the Sandhills Farm to Table Cooperative and the Fifth Season Cooperative. Consumers interested in increasing their purchasing power for and access to locally grown food are forming consumer-owned food cooperatives. Some of these stores are also multistakeholder cooperatives, with classes for both worker owners and consumer owners (Weaver Street Market).

A cooperative offers the advantage of a stronger bargaining position and division of labor because of the concept of multiple owners. However, it is not without its drawbacks, including the amount of work it may take to manage by consensus and the difficulty to reward member investment and performance equitably. Because of the number of people and personalities involved, it is important to establish buy-in to the cooperative principles (Cooperative Principles) at the start.

Introduction to Cooperatives

When you hear the word “co-op,” what comes to mind? The small, bohemian-style, natural food corner store that gained popularity in the 60s and 70s, or the larger, organic and locally-sourced grocery that is springing up around higher-end neighborhoods now? The fact is that a “co-op” or “cooperative” can be either of the above, and a whole lot more.

A cooperative is a statutorily-created legal structure of business ownership. Just like a corporation or a limited liability company or any of the other myriad forms of business structures, cooperatives must be organized, registered, and operated according to the laws of the state where they are formed. A cooperative may or may not have “cooperative” in its name, but if you see the word “cooperative,” that business must have a cooperative structure.

People form cooperatives to address a need that is not being met by the market. The best historical examples of this are the rural electric and telephone cooperatives. When utility companies first located their pipes and towers, they chose densely populated areas because of the high concentration of potential customers of their services. This critical mass did not exist in rural areas, so farm communities and small towns were the last to receive service, if at all. Eventually, the people who lived in these areas became impatient with the privately-owned utility companies. They formed their own utility companies by pooling their resources and becoming member-owners. In North Carolina the rural electric or telephone cooperative is called a “member corporation.”

As a form of business structure, a cooperative must follow sound business practices in order to be profitable, attract and retain customers, and stay in business. Producing and/or selling quality goods and services are just as important to a cooperative as they are to any other form of business. What distinguishes a cooperative, however, are the concepts of “need,” (How Need Plays a Big Role) “member ownership,” (How Members are Owners) and “democratic control.” (Democratic Control)

How Need Plays a Big Role

The industrialization of America led to a big rise in cooperative formations. Because the Mid-west was slower to populate than either of the coasts, private concerns were less likely to reap profits there without charging more for these new goods and services. Consequently, in order to have the goods and services available in other parts of the country at affordable prices, people in the Mid-west had to figure out a way to make or get them for themselves. From gas stations (Cenex) to mutual insurance companies (Nationwide) to lending institutions (credit unions and Farm Credit), the cooperative arose as an alternative provider of these new goods and services, which in many cases were less costly and more accessible to its member-owner-customers.

When thinking about forming a new cooperative, a key question to ask yourself is whether a true need exists for the goods or services the cooperative will provide. If the market is already providing these goods and services at reasonable prices, the cooperative will struggle to (1) recruit enough members needed to capitalize, or (2) keep its members as customers.

How Members are Owners

A primary difference between cooperatives and corporations is the direct link between ownership and benefit in cooperatives. Corporations are owned by shareholders, who may or may not also be customers or “users” of the goods and services provided by the corporations they own. Cooperatives, on the other hand, are owned by the people (or businesses) who purchase their goods, use their services, or in the case of worker cooperatives, work there. This ownership structure does not contemplate the notion of absentee ownership. Choosing to become a member of a cooperative means choosing to experience business ownership, with all of the business risks, good and bad, which accompany that status.

Democratic Control

Another hallmark of the cooperative is the principle of democratic control. In corporations, money votes. In other words, whoever has purchased the most shares of that corporation, gets the most votes and ultimate control of the corporation. In cooperatives, people vote. The concept of “one voice, one vote” typically governs the voting in a cooperative (although some cooperatives may use proportional voting based on the members’ use of the cooperative) and may be foreign to many people. That is why education and training of cooperative members is critical to a cooperative’s operations and success. Those members who do not put the cooperative’s concerns above their own self-interests should be dismissed from the membership. A good guide to what is expected of cooperative members are the 7 Cooperative Principles (Cooperative Principles). These are typically identified in the cooperative’s bylaws, but may also be found in the cooperative’s member application and agreement. Each cooperative will also have its own set of rules and regulations which the entire membership will vote on.

Cooperative Principles

Cooperatives are typically governed by seven principles:

1. Open and voluntary membership – This means that so long as you are willing to accept the responsibilities of membership (which are outlined in the Cooperative’s Bylaws and/or Member Agreements), you may become a member of the cooperative, without regard to race, gender, religious beliefs, national origin, age, disability, or political affiliation.
2. Democratic control – As stated above, this means that the cooperative is controlled by its members, who take an active role in its operation. Typically, representatives from the membership are elected to the Board of Directors.
3. Members contribute equitably to the capital of the cooperative – This means that the financial or “sweat equity” contributed by the members will benefit the cooperative first. Members should expect to see only a small return from their investment, putting most of any “surplus” back into the operation of the cooperative, as agreed to by the majority of the members, or in proportion to each member’s “use” of the cooperative.
4. Autonomy and Independence – This principle reinforces the democratic member control principle. In other words, the cooperative will not enter into any agreements with any other organization or government without the knowledge and authority of its members.
5. Education, Training, and Information – This principle supports member education so that the member owners make informed choices when determining the operation and direction of the cooperative.
6. Cooperation among Cooperatives – This principle advances cooperative behavior among and with other cooperatives. In other words, cooperatives do not compete with one another but work together towards a common goal.
7. Concern for Community – This last principle is what grounds cooperatives in their communities. Because cooperatives are owned by their members, there is less risk of off-shoring or outsourcing and more concern for the regional economy of which they are a part.

Types of Cooperatives

Cooperatives take many forms, depending on their purpose, and fall generally into one of four categories:

• Consumer Cooperative – A consumer cooperative is a cooperative owned by the people who buy its goods or use its services. Examples of consumer cooperatives include neighborhood food coops, retailers (REI), mutual insurance companies, and credit unions. Another type of consumer cooperative is the retail or purchasing cooperative, sometimes called a shared services cooperative, which consists of independently-owned retail businesses who band together for better purchasing and bargaining power. Examples of this type of cooperative include Best Western Hotels, True Value and ACE Hardware Stores, and Carpet One.
• Producer Cooperative – A producer cooperative is comprised of independent producer-owners who band together for a variety of purposes. These purposes may include equipment purchases, shared managers and sales people, marketing and advertising, processing facilities, and distribution networks. Welch’s, Ocean Spray, Land o’ Lakes, and Blue Diamond are large nationally known agricultural producer cooperatives, but artists, crafts, and other types of production businesses are also well-suited to form a producer cooperative.
• Worker Cooperative – A worker cooperative is owned and operated by some or all of its workers. Generally smaller types of businesses are best-suited for the worker cooperative structure, but some worker cooperatives can become quite large and compete effectively on a global scale. The most well-known worker cooperatives are members of the Mondragon family of cooperatives in the Basque Region of Spain. Worker cooperatives can also be an alternative model for succession planning, particularly for smaller business concerns. Opportunity Threads in Morganton is a worker cooperative that operates a cut and sew factory. Tangerine Clean in Durham is a worker cooperative in the home cleaning business.
• Multistakeholder Cooperative – The multistakeholder cooperative is a hybrid of one or more of the above forms of cooperatives. Weaver Street Market in Carrboro and Hillsborough is a multistakeholder cooperative with both consumer and worker owners. The Sandhills Farm to Table Cooperative in Southern Pines is a multistakeholder cooperative, multi-farm CSA, with consumer, producer, and worker owner classes.

Forming a Cooperative

Forming a cooperative is not easy work, and its complexity in operation may scare some people away from the idea. It’s much easier to wait for someone else to fill a need the market is not addressing or to work for someone else who may or may not have your best interests in mind. If you do decide to pursue a cooperative as a possible legal structure, it is best to hire a professional to guide you through the organizing steps. The US Department of Agriculture lists the following Sequence of Events in cooperative development:

1.  Invite leading potential member-users to meet and discuss issues. Identify the economic need a cooperative might fill.
2. Conduct an exploratory meeting with potential member-users. If the group votes to continue, select a steering committee.
3. Survey prospective members to determine the potential use of a cooperative.
4. Discuss survey results at a second general meeting of all potential members and vote on whether to proceed.
5. Conduct a needs or use cost analysis.
6. Discuss results of the cost analysis at a third general meeting. Vote by secret ballot on whether to proceed.
7. Conduct a feasibility analysis and develop a business plan.
8. Present results of the feasibility analysis at the fourth general meeting. If participants agree to proceed, decide whether to keep or change the steering committee members.
9. Prepare legal papers and incorporate.
10. Call a meeting of charter members and all potential members to review and adopt the proposed bylaws. Elect a board of directors.
11. Convene the first meeting of the board and elect officers. Assign responsibilities to implement the business plan.
12. Conduct a membership drive.
13. Acquire capital and develop a loan application package.
14. Hire the manager.
15. Acquire facilities.
16. Begin operations.

As with any business startup, it is important to surround yourself with advisers who are familiar with cooperative formation, including the legal, economic, and financial aspects. Business and cooperative specialists in North Carolina include staff at USDA Rural Development as well as NC State University’s Plants for Human Health Institute. It is also important to retain legal counsel knowledgeable about cooperative formation because of the various state and federal laws that apply to cooperatives. An attorney is also needed when making capitalization plans, conducting a member drive, borrowing money, and reviewing or writing any agreements. Carolina Common Enterprise is a non-profit cooperative development center with two attorneys on staff who specialize in cooperative formation and development.

For additional resources:

• Cooperatives Community of Practice
  eXtension Community of Practice sharing  articles, webinars, teaching materials and other resources on cooperatives.

Primary Contact:
Becky L. Bowen, J.D.
Program Manager, Cultivate NC™
North Carolina Cooperative Extension
North Carolina State University
919- 628-4317
blbowen@ncsu.edu