Co-ops: A Tool for Small Business Recovery

Many small businesses have been hurt or even destroyed by the COVID-19 pandemic. Owners may have lost their business and their funds. One of the legal tools that can help some owners recover is the business cooperative, or “co-op.”

Co-ops are organizations in which people or businesses band together to help themselves. Usually the co-op seeks to complete a task or function better or less expensively or with more control over the process, than members could accomplish individually. Our business and social communities have countless examples of co-ops. Here are a few:

• Childcare Co-op: Parents in a neighborhood share responsibility for daycare. A group of parents may take turns watching over each other’s children. In a group of 10 or 20 parents, each parent would care for about 10 – 20 or so children one weekday every two to four weeks. This might enable all the parents to maintain a job, and yet have little daily child care expense.

• Food Co-op: A group of people in a community might divide and share responsibility for collecting, preparing and serving low cost meals to each other. The co-op might be centered at a location with a kitchen and dining area. If the co-op works, soon it might even offer meals to others at low cost, to generate additional revenue for operations.

• Worker or Production Co-op: Workers in any field might get together to produce goods or services that can be offered and sold to others to generate revenue. One of the earliest and most influential co-ops known as the Rochdale Society, was a group of 28 tradespeople who banded together, scraped together one British pound per person, and began a store selling food items they could not otherwise afford.

• Advertising Co-ops: Groups of business, particularly franchisees in a geographic area or independent distributors of a branded product, share costs of mass media advertising. By collaborating, they get more communicative impact at lower cost per participant.

Businesses facing challenges due to the pandemic as well as people who lost a business or lost a job and lack funds to restart, might consider whether it is possible with like-situated businesses or like-minded business associates, co-workers, or acquaintances to restart in the form of a co-op.

Co-ops have a long history. They are generally guided by some basic principles. According to the National Cooperative Business Association, some of those basic principles are:

• Voluntary and Open Membership: Anyone having a need and meeting the co-op’s basic requirements is welcome to join. Co-ops do not discriminate based on gender, social, racial, political or religious factors.

• Independence: Co-ops are autonomous, self-help organizations.

• Democratic Control: Members decide who will be the co-op’s leaders and how it will be run, on a one-member one-vote basis.

• Economic Participation: All members invest and participate in the co-op. The financial investment is usually modest, and members do not receive a significant return on any financial investment. Members benefit based on patronage, how much of the co-op’s designated activity they engage in with the co-op. If the co-op generates extra funds in excess of what is needed to operate, they are distributed based on each member’s patronage of the co-op.

• Education and Training: Cooperatives provide education, training and information so members can contribute to the organization’s success.

• Cooperation Among Cooperatives: Co-ops work with and support other co-ops.

• Community: Co-ops are community minded and work to develop and benefit their communities.

Today some of the largest business organizations in the United States are cooperatives. Agricultural products are processed, water and power are generated, and telephone communications are transmitted or managed by huge cooperatives.

Many readers will recognize the names Ace Hardware, REI sporting goods stores, Land O’Lakes dairy products, Sunkist brand citrus, Ocean Spray cranberry products, FTD Florists, Northwest Mutual Life Insurance, the Associated Press, and almost every local credit union. These organizations are co-ops.

Their missions are not to generate a profit as such, but to benefit their members. Generally, if they have profits, they return them to the members based on patronage. They generally ascribe to the above principles. For businesses, joining together as a co-op can provide economies and bargaining power for consolidating space, collectively providing services, or contracting to buy supplies or merchandise or services.

A co-op can negotiate better terms with suppliers of goods or services like insurance, advertising, product storage or myriad other services and business needs. For manufacturers and producers, a co-op may enable a group of companies to consolidate and better manage some distribution functions. Independent restaurants might collaborate to consolidate purchasing, leasing of facilities, delivery service or other operations.

By joining together with other knowledgeable persons similarly situated, those damaged by the scourge of the pandemic may be able to achieve a fresh start in business by pooling their collective knowledge and financial resources.  

A co-op organization may be an appropriate and particularly useful business model in the era of COVID-19.

David Gurnick and Steven L. Feldman are Shareholders in our Business Litigation Practice Group.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.