Frequently Asked Questions
What is a cooperative?
While co-ops are like any other business in many respects, they are unique in several important ways:
Co-ops are owned and democratically controlled by their members. They exist to benefit the people who use the co-op’s services, rather than to generate profits for outside investors. Co-op members elect their board of directors from within the membership.
Co-ops return surplus revenues to members, based on how much business they conduct with the co-op. While co-ops strive to return earnings to members, this can’t be done efficiently on a transaction-by-transaction basis. After the fiscal year is over, a co-op distributes a portion of its earnings (a “patronage dividend”) to members, based on how much business each patron did with the cooperative during the year. The amount may be determined by the number of hours worked in a worker-cooperative; the amount purchased in a consumer cooperative; or the amount sold in a producer cooperative.
While co-ops are businesses that must remain profitable, their primary mission is to serve their members with the services and/or products the members need. Members unite in a co-op to access products and services at competitive prices, gain access to markets, enhance their bargaining power, and more.
Is a cooperative a non-profit organization?
A cooperative is not a non-profit in the way that most people typically think of them - non-profit corporations with 501(c)(3) federal tax exemption. 501(c)(3)s must, by definition, not provide financial benefits to specific people. Cooperatives are typically organized specifically to benefit members, in part by distributing profits to them, so they generally do not qualify for 501(c)(3) status.
However, cooperative organizational structures and principles of democratic governance can be incorporated into 501(c)(3) non-profits. An additional twist is that New Mexico Cooperative Associations (a particular legal entity) are referred to in state law as a type of non-profit organization because there is a limitation on profits that can be distributed to investors, and surplus/net savings is distributed to members of the cooperative on the basis of their participation, rather than financial investment, in the form of “patronage” refunds.
Can only small organizations be cooperatives?
Cooperatives can have anywhere from three (depending on who you ask) to millions of members. There is no limitation on size. Some cooperatives, particularly those formed as LLCs, prefer to stay small if members plan to collectively or jointly manage their affairs. Others prefer to grow as much as possible in order to serve as many members as possible and develop enough revenue to pay management staff.
Are there disadvantages, from a tax point of view, to being a member of a cooperative?
There is no particular disadvantage from a tax point of view. As a member, you may receive a patronage dividend. For most cooperatives, that dividend income will generally be taxed as ordinary dividend income but deductions and adjustments may possibly reduce your tax liability.
How can you possibly make decisions as a group and still be successful?
Democratic decision-making is key to success because those who are most affected by the decisions - the members - have an opportunity to make their voice heard. The right to participation in decision-making encourages members to make an investment of their time, money or other resources. Cooperatives have various different decision-making structures. In collectively managed cooperatives committees often lend efficiency and structure to decision making. This method can lead to success because members make decisions based on their interests and expertise. In larger cooperatives, the Board of Directors makes most of the decisions while members may vote on certain major decisions and elect Board members from the membership.
What does it mean to incorporate as a cooperative (in the legal sense)?
If your cooperative wants to incorporate (form a legal entity) in the State of New Mexico and use "cooperative" in its name, and/or if you want to file taxes with the IRS as a cooperative to benefit from the associated tax deductions, you must:
1) Incorporate as a “New Mexico Cooperative Association” or a “Marketing Cooperative Association”,
or
2) Form another legal entity, like a corporation or an LLC, and operate "on a cooperative basis.” This means your organization must have the following its articles/bylaws:
one member, one vote;
distribution of surplus/net savings (profits) on the basis of patronage or member's participation in the cooperative; and
a limit on any returns paid on "interest-dividends" to non-member investors to 15%.