What is a worker cooperative

Before we launch into the nitty-gritty of starting a co-op, it's important to get some basic terms straight. In a business world where cooperative structures are still relatively rare, some of the concepts and structures can be unfamiliar and confusing. Let's clear that up!

A cooperative is a business owned and controlled by the people who use its services. Unlike a typical business, which returns profits to the owners based on how much the owners have invested in the business, a cooperative rewards its owners based on how much they use the cooperative. And unlike a business where owners have different amounts of power based on how much money they have invested, a cooperative is governed on a democratic basis, with one vote per person regardless of investment. (See the Seven Cooperative Principles at http://www.ica.coop/coop/principles.html for a detailed, more formal definition.)

There are three main kinds of cooperatives. You may be familiar with producer cooperatives—most are big rural agricultural co-ops like Organic Valley, Sunkist and Ocean Spray—in which independent producers join together to process or market or distribute their products collectively. The job of the co-op is to process or market or distribute its members' products, and any profit it makes in doing so is returned (as patronage refunds) to the producer members, in proportion to how much they used (“patronized”) the co-op. The producer members usually elect a Board of Directors which governs the co-op and hires the workers who operate it.

Or you may be thinking of consumer cooperatives—retailers like food co-ops or REI, or credit unions, or housing co-ops—where the members are the consumers of the goods or services provided by the co-op. The job of the co-op is to procure high-quality goods or services and sell them to the consumers at a low price. Profits are returned to the consumer members as patronage refunds (in proportion to how much they bought), and the consumer members elect a Board of Directors which governs the co-op for them.

But this guide is about worker cooperatives: businesses owned and controlled by the people who work in them. The worker-members own the business and return its profits to themselves based on how much they work for the co-op. They control the co-op, perhaps by electing a Board of Directors which makes policy and hires managers to organize their work. This hierarchical structure is common in medium and large worker co-ops, just like the other co-op sectors. But small worker co-ops are usually run collectively.

A collective is a group of people who make decisions by practicing direct democracy. Instead of using representative democracy in electing a Board of Directors to make decisions and policy for them, a collective simply meets and makes decisions directly. Collectives may make decisions by majority rule, or by consensus, or by some other method. They generally operate with very little hierarchy. While most collectives are not worker co-ops (because they do things other than operate a business, or they're not worker-owned), and many worker co-ops are not collectives (because they exercise their worker control through representatives and levels of hierarchy instead of directly), it is very common for small worker co-ops to also be collectives. A cooperative is a form of ownership and governance. A collective is a form of management.

Are worker cooperatives for-profit, nonprofit, or not-for-profit? These terms can have multiple meanings that cause great confusion, which is one reason we sometimes use the word “surplus” instead of “profit” in the worker co-op sector. It's certainly true that worker co-ops aim to operate healthy businesses, which means gaining revenue, paying all their expenses, and still having something left over (their surplus). But for-profit usually refers to an enterprise owned by one or more investors who employ other people to operate their business, the goal being to make a profit (for the owners) on their investment. If profit means this extra money a business is required to make to reward its investors (who don't work for the business), it's true that a co-op does not make profit, because it has no outside owners. On the other hand, nonprofit usually refers to an enterprise that aims to provide educational, charitable and other services and must reinvest any surplus in own operations to meet special state or federal requirements for tax-exemption and other benefits. It's rare for worker cooperatives to have completely charitable missions, and the requirement of worker ownership doesn't match up well against nonprofit organizations, which strictly speaking have no owners. Using these definitions, a worker cooperative is neither for-profit nor nonprofit. But it's easy to imagine a worker cooperative somewhere in the middle of these two categories: on one hand aiming to generate a surplus by operating a commercial enterprise; on the other hand returning that surplus to its worker-owners or re-investing it rather than delivering it to outside investor-owners. For this reason co-ops do sometimes describe themselves as not-for profit.

Are worker cooperatives a special kind of legal entity? Again the terms have multiple meanings, which vary widely from state to state. The ingredients that you need to make a worker cooperative (worker ownership, democratic worker control, surplus distributed according to patronage, etc.) can be encoded into the governing documents of just about any traditional legal entity: a partnership, a Limited Liability Company (or Limited Liability Partnership), or a standard C corporation. You can even approximate (if not rigorously match) the requirements with a nonprofit organization or a sole proprietorship. However, some US states have statutes on the books—essentially a hybrid of partnership, for-profit corporation, and nonprofit corporation law—which describe a special kind of cooperative corporation specifically required to be structured according to some of these cooperative concepts, and which may get favorable tax treatment, the right to use the word “Cooperative” in their name, and other benefits as a result. Some worker co-ops choose to incorporate under these provisions of state law. Others don't.

So when someone asks “Are you a worker cooperative?”, they may mean “Is your business worker-owned and worker-controlled, following the cooperative principles?” or they may mean “Is your business incorporated under special state cooperative corporate law?”. Hey, they may even mean “Is your business a collective?”. Especially when you're starting a new business, it's important to make sure everyone at the table is talking about the same thing.