10 Pros and Cons of Cooperatives

Cooperatives, also known as coops, are autonomous associations of individuals who voluntarily unite to meet their common social, cultural and economic needs, interests and aspirations through a democratically controlled and jointly owned business. They can come as different non-profit community companies and organizations, such as a consumer cooperative, which are managed and owned by people using their services; a worker cooperative, which is run by the people who work in it; a housing cooperative, which is run by the people who live in it; or a hybrid, such as a worker/consumer cooperative or credit union; a multi-stakeholder cooperative, which brings together civil society to deliver community needs; or a second and third-tier cooperative, with members being other cooperatives. Today, it is said that billions of people are already members of these associations.

While many people like cooperatives for the good things that they bring, there are also people who do not support, arguing a set of drawbacks that comes with them. To build a well-informed opinion about this subject, you can take a look at their pros and cons.

List of Pros of Cooperatives

1. They instill an atmosphere of cooperation.
Advocates of cooperatives emphasize the overall social and psychological influence brought about by the worker-control parameters in these associations. This factor is believed to help transform the adversarial relationships that are common in most classical firms into an atmosphere of cooperation. Considering the idea of a cooperative, once members start to identify their individual and collective efforts with the organization’s improved performance, cooperative problem solving also starts to take place. This more communicative workplace will result in improvements in production processes, thanks to a good flow of information across the floor. Also, it leads to a heightened satisfaction spreading throughout its members, which can help with lowering worker turnover and absenteeism.

2. They are democratic.
One of the greatest perks of having the cooperative model in business is the democratic approach to ownership. With it, the needs of members will be met, without one owner dominating the process of decision-making, which can be appealing to clients who want to become members themselves. Moreover, the structure of this model means that it is very stable, so members can come and go without having to seriously impact the business.

3. They provide great economic benefits to members.
Generally, each type of cooperative comes with broadly defined economic advantages. For members of consumer cooperatives, they are entitled to receive patronage dividends, which are distributed from net earnings and determined by the amount the members spent on their products since the payout of the last period. Also, members who work within the cooperative are qualified to get substantial merchandize discounts. For property-owning members of residential cooperatives, they will serve as stockholders, so they will receive benefits from the incurring interest and maintenance costs.

4. They can make for engaged employees and customers.
When employees are given a greater stake in their business’s outcomes, they would be more engaged and would perform better. Whatever their roles in the business, they are given the right to take part in making decisions, which will be better informed if employees have a role to play in the management process. Customers will also be more likely to continue patronizing the business if they are members having a stake in its future.

5. They enjoy less taxation.
Basically, members will be taxed once on their income from the cooperative itself, instead of being taxed separately on an individual and corporate level. As for for-profit cooperatives, they are given special treatment with regards to federal taxation. While they are generally taxed as normal companies, they can reduce tax exposure by issuing patronage dividends, which are basically refunds that are issued to people purchasing their goods or services.

List of Cons of Cooperatives

1. They have less capital incentives, which do not appeal to big investors.
Finance can become an issue for cooperatives, as there will be less incentive for big investors to take part. While it is appealing for smaller investors to know that a greater contribution does not lead to greater shares, it is less attractive to the big players. Moreover, cooperatives can face difficulties in receiving loans from financial institutions, such as banks, which is why the cooperative business model may only work better for a business with a lower start-up cost.

2. They face interrelated investment disadvantages.
Cooperative proponents acknowledge, specifically, two investment disadvantages in cooperatives. First, there is the tendency of experiencing intra-firm financing or underinvestment, which occurs with the problem of disparity between a member’s expected profit share and the amount he could earn from investing outside the firm. The second drawback, which is somehow still related to underinvestment, is the apprehension of non-member financiers to lend to the cooperatives. Since these lenders would risk their money within an organization over which they have little control, they would be reluctant to lend funds. On the other hand, members would also be reluctant to borrow on terms that exceed their going interest rates.

3. They would allow generic marketing.
When marketing through a cooperative, you might lose control of your unique brand, especially when it performs advertising for all members. Also, you might get lumped in with other businesses or competitors that you do not want to be associated with in the perceptions of your customers.

4. They will see slow decision-making processes.
With centralization of power, decision-makers can quickly respond to issues as they emerge, but under a cooperative model, all owners would weigh in on the decision-making process, which will take more time. In cases where decisions must be made fast, cooperatives might not be effective.

5. They share pricing with competition.
When purchasing through a cooperative, you will be sharing the same prices with your competitors. This means that you will not have an edge over competition, as this type of organization levels the playing field between competitors, no matter how big or small they are.

In the end, while cooperatives work for some, they are not feasible for everyone. They can be a good choice if you want to start a business, but need more peer support or financing, but they should be avoided if you want more control over the direction of your business.