CIR7 2015 B_CIR7 reprint.qxd

HOW TO START A

COOPERATIVE

Rural Development

Business and Cooperative Programs

Cooperative Information Report 7

United States

Department of

Agriculture

PREFACE

This guide outlines the process of organizing a cooperative business and pro-

vides information on the potential steps involved and some important aspects

of cooperative development.

A cooperative business is brieﬂy described, including its structure and basic

principles. Twelve steps involved in most cooperative development projects

are introduced and explained. Important considerations—such as practitioner

principles, pitfalls to avoid, cooperative capitalization, legal aspects of coopera-

tive development, and general rules for success—are presented. This informa-

tion should provide a reader with a comprehensive understanding of the coop-

erative development process.

While this report focuses on agricultural cooperative development, it also con-

tains information that is pertinent to non-agricultural applications. The coopera-

tive business structure, shown to be successful in agriculture, has also been

useful in helping others obtain beneﬁts or provide needed services in areas

such as housing, utilities, ﬁnance, healthcare, homecare, childcare, grocery

retailing, manufacturing, business support services, and more.

How To Start a Cooperative

Cooperative Information Report 7

James J. Wadsworth completed this revision of How to Start a Cooperative. Its

last complete revision was in September 1996 by Galen Rapp and Gerald Ely.

Margaret Bau, a cooperative development specialist in the USDA Wisconsin

State Rural Development Office, assisted with this revision.

Publications and information are also available on the USDA Cooperative

Programs website: http://www.rd.usda.gov/programs-services/cooperatives

For more information, email: [email protected]

September 1996

Revised March 2015

CONTENTS

Introduction 1

What Is a Cooperative Business? 1

Distinctive Features 1

Why Cooperatives Are Organized 2

Who Sparks the Development of a Cooperative? 5

Organizing Steps of Cooperative Formation 6

Phase I: Identify Economic Need 6

Step 1: Determine the Economic Need 6

Step 2: Hold an Exploratory Meeting 7

Phase II: Deliberate 9

Step 3: Conduct a Member-Use Analysis and Initial Market Analysis 9

Step 4: Conduct a Feasibility Study 11

Step 5: Prepare a Business Plan 11

Phase III: Implement 12

Step 6: Draft and Complete Legal Papers 12

Step 7: Hold First Meeting of Cooperative 12

Phase IV: Execute 13

Step 8: Convene First Meeting of New Board of Directors 13

Step 9: Hold a Membership Drive 14

Step 10: Acquire Capital 14

Step 11: Hire a Manager 15

Step 12: Acquire Equipment and Facilities, Begin Operations 16

Important Cooperative Development Considerations 16

Part 1— Practitioner Principles and Pitfalls 16

The Madison Principles 16

Pitfalls To Avoid 17

Part 2—Capitalizing the Cooperative 18

The Member Investment 18

Capitalization Methods 18

Part 3—Legal Aspects of Cooperative Development 20

Articles of Incorporation 21

Bylaws 21

Membership Application 21

Marketing and Purchasing Agreements 22

Revolving Fund Certificates 22

Part 4—General Rules for Success 22

Use Advisors and Committees Effectively 22

Keep Members Informed and Involved 22

Maintain Good Board to Manager Relations 23

Conduct Businesslike Meetings 23

Follow Sound Business Practices 24

Forge Links With Other Cooperatives 24

Conclusion 24

Appendix A International Cooperative Alliance: Cooperative Identity, Values & Principles 25

CONTENTS

iii

Appendix B Example Potential Member Survey 26

Appendix C Example Steering Committee Member-Meeting Agenda Outline 29

Appendix D Sample Pre-Membership Agreement 30

Appendix E Sample Waiver of Meeting of Board of Directors 31

Appendix F Sample Pro Forma Cash Flow Statement 32

Appendix G Sample Pro Forma Income Statements 33

Appendix H Sample Pro Forma Balance Sheets 34

Appendix I Sample Pro Forma Ration Analysis 35

Appendix J Sample Projected Source and Use of Funds Statement 36

Appendix K Sample Schedule of Fixed Asset Costs and Depreciation 37

Appendix L Sample Schedule of Financing Needs and Sources 37

Appendix M Sample Format of Cooperative Articles of Incorporation 38

Appendix N Sample Outline of Cooperative Bylaws 39

Appendix O Sample Membership Certificate 40

Appendix P Sample Member Application Marketing Contract 41

References 43

The U.S. Department of Agriculture (USDA) prohibits discrimination against its customers, employees, and appli-

cants for employment on the bases of race, color, national origin, age, disability, sex, gender identity, religion,

reprisal, and where applicable, political beliefs, marital status, familial or parental status, sexual orientation, or all

or part of an individual's income is derived from any public assistance program, or protected genetic information

in employment or in any program or activity conducted or funded by the Department. (Not all prohibited bases

will apply to all programs and/or employment activities.)

To File an Employment Complaint

If you wish to file an employment complaint, you must contact your agency's EEO Counselor (PDF) within 45

days of the date of the alleged discriminatory act, event, or in the case of a personnel action. Additional informa-

tion can be found online at http://www.ascr.usda.gov/complaint_filing_file.html.

To File a Program Complaint

If you wish to file a Civil Rights program complaint of discrimination, complete the USDA Program

Discrimination Complaint Form (PDF), found online at http://www.ascr.usda.gov/complaint_filing_cust.html, or

at any USDA office, or call (866) 632-9992 to request the form. You may also write a letter containing all of the

information requested in the form. Send your completed complaint form or letter to us by mail at U.S. Department

of Agriculture, Director, Office of Adjudication, 1400 Independence Avenue, S.W., Washington, D.C. 20250-9410,

by fax (202) 690-7442 or email at [email protected].

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Individuals who are deaf, hard of hearing or have speech disabilities and you wish to file either an EEO or pro-

gram complaint please contact USDA through the Federal Relay Service at (800) 877-8339 or (800) 845-6136 (in

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For any other information dealing with Supplemental Nutrition Assistance Program (SNAP) issues, persons

should either contact the USDA SNAP Hotline Number at (800) 221-5689, which is also in Spanish or call the State

Information/Hotline Numbers.

All Other Inquiries

For any other information not pertaining to civil rights, please refer to the listing of the USDA Agencies and

Offices for specific agency information.

INTRODUCTION

Cooperatives are unique businesses that operate in

nearly every market segment of the economy. They are

unique in that they are owned and controlled by mem-

bers and operate to economically benefit those same

members. In most circumstances, they are started by

people seeking to fulfill an economic or service need.

This guide is intended to help people who develop a

cooperative or who simply want to learn about the

process of starting a cooperative. It is also intended as

an educational resource for co-op development practi-

tioners. It provides basic information on cooperatives,

their structure and principles, why they are organized,

the steps involved in the development process, and

other pertinent information.

WHAT IS A COOPERATIVE BUSINESS?

A cooperative is a business owned and controlled by

the people who use its services. They finance and

operate the business for their mutual benefit. By work-

ing together, they can reach an objective that would be

unattainable if acting alone.

A cooperative can help members increase their

income or enhance their living standards by providing

important services. A cooperative can help members

gain marketing power and provide quality supplies or

services otherwise unavailable or prohibitively expen-

sive.

DISTINCTIVE FEATURES

In many respects, cooperatives resemble other busi-

nesses. They have similar physical facilities, perform

similar functions, and must follow sound business

practices. They usually incorporate under State laws

and require bylaws and other necessary legal papers.

Owners of cooperatives (members) elect a board of

directors to represent their interests. The board sets

policy and hires a manager to run the cooperative’s

day-to-day business.

Even though cooperatives are similar to many other

businesses, they are distinctively different. The differ-

ences are explicitly identified in the cooperative’s pur-

pose, ownership, control, and distribution of benefits.

Cooperatives follow three principles that define or

identify their distinctive characteristics:

• user-owned,

HOW TO

START A

COOPERATIVE

• user-controlled, and

• user-benefited.

The user-owned principle means the people who own

and finance the cooperative are those who use it. “Use”

usually means buying supplies, marketing products, or

using services of the cooperative business.

Members finance the cooperative and its operations

through different methods: (1) by a direct contribution

through membership equity or purchase of stock; (2) by

an agreement to withhold a portion of net earnings

(profit); or (3) by assessments based on units of product

sold or purchased.

For instance, a member might be assessed a fee for

every unit (box, bushel, etc.) marketed through the

cooperative. These assessments are generally referred to

as per-unit retains.

The user-controlled principle (also called democratic

control) means that those who use the cooperative also

control it by electing a board of directors and voting on

major organizational issues. This is generally done on a

one-member, one-vote basis, although some coopera-

tives use proportional voting based on use of the coop-

erative (hence, a member who markets 10,000 bushels

of a crop through the cooperative would have a greater

vote than one who markets 1,000 bushels).

The user-benefited principle says that the coopera-

tive’s sole purpose is to provide and distribute benefits

to members on the basis of their use. Members unite in

a cooperative to receive services otherwise not avail-

able, to purchase quality supplies, to increase market

access, or for other mutually beneficial reasons.

Members also benefit from distribution of net earnings

or profit based on their use of the cooperative.

To operate under these distinctive principles, an

important practice—particularly for new coopera-

tives—is to conduct continuing member education. This

is especially critical for attracting and recruiting new

members. It is also necessary because the cooperative’s

membership continually changes. Older members

retire and new ones join.

Keeping owners informed is an important practice

for any business, but vital in a cooperative for at least

three reasons:

1. The democratic control principle, exercised

through majority rule, requires that the entire owner-

ship (members) be informed and involved to ensure

that sound decisions are made;

2. Members must indicate their needs and accept the

accompanying financial responsibilities before the

cooperative can fulfill those needs; and

3. Some people are not familiar with the cooperative

form of business. The educational system in the United

States contains little, if any, information about coopera-

tives. So, the cooperative itself must become the educa-

tional institution.

There are also unique business practices that coopera-

tives follow. These practices include patronage refund

systems, limited return on equity capital, and coopera-

tion among cooperatives (see USDA CIR 55: Co-ops 101,

under References).

Worldwide, cooperatives of all kinds recognize the

International Cooperative Alliance (ICA) statements on

cooperative identity, values, and principles. The ICA

lists seven principles by which cooperatives operate

(see Appendix A).

WHY COOPERATIVES ARE ORGANIZED

People organize cooperatives in response to a specific

problem or opportunity. They develop them to improve

their income or to provide a needed service.

Cooperatives are formed as serious businesses that may

undertake one or more of the functions of marketing,

purchasing, or servicing.

If developed for conducting marketing activities,

cooperatives work to:

• Improve bargaining power— by combining the vol-

ume of members, cooperatives leverage their position

when dealing with other businesses.

• Reduce costs—volume purchasing reduces the pur-

chase price of needed supplies. Earnings of the coop-

erative returned to individual members lower their

net costs.

• Obtain market access—value is added to products by

processing or offering larger quantities of an assured

type and quality to attract more buyers.

• Improve product or service quality—when a coopera-

tive is in a market, the quality of products or services

is often improved because of enhanced competition.

If developed for conducting purchasing and servicing

activities, cooperatives:

• Obtain products or services otherwise unavailable—

cooperatives often provide products or services

where the level of demand would not likely attract

private businesses.

• Reduce costs/increase income—reducing the coopera-

tive’s operating costs through the cooperation of

many members increases their earnings.

A study by the University of Wisconsin Center for

Cooperatives found that there are more than 29,000

cooperatives of all types in the United States. These

cooperatives have 350.8 million members (many people

belong to more than one cooperative), assets of $3.1 tril-

lion, and revenue of $514.6 billion.

The study divides the cooperatives into four major

type categories: commercial sales and marketing; social

and public services; financial services; and utilities.

Further breakdowns among these categories show

numerous types of cooperatives that provide benefits to

their members, including: farm supply and marketing,

bio-fuels, grocery, arts and crafts, healthcare, childcare,

housing, transportation, education, credit unions, farm

credit, mutual insurance, rural electric, rural telephone,

water, and other types in retail, service, and cooperative

finance. (See University of Wisconsin Center for

Cooperatives Research on the Economic Impact of

Cooperatives, under References).

The cooperative business model should be explored

whenever a group of people have identified a specific

need that isn’t being met by other businesses in the

marketplace, and/or when they know that it is unlikely

that another business will meet that need. Deciding

whether to form a cooperative is not easy. However, by

understanding the process, people can become more

involved in activities that will ultimately clarify

whether a cooperative will be a good fit for the need

they face.

WHO SPARKS THE DEVELOPMENT OF A

COOPERATIVE?

A compelling need and a few community leaders can

spark the drive to form a cooperative. Usually, these

leaders have identified an economic need or service

they believe a cooperative can meet. They also know

others who have similar interests and shared values.

These leaders can be small business owners, manu-

facturers, growers, artisans, or any citizens who lack (or

are losing): a market for their products, satisfactory

sources of production supplies, or services related to

their occupation. Or, they may wish to secure some

other needed service or reduce their current costs.

Depending on the situation, a new cooperative may

be welcomed with enthusiasm or may be met with vig-

orous opposition, especially from a likely competitor.

If opposed, leaders must be prepared to react to vari-

ous strategies of competitors, such as: price changes to

retain potential cooperative members’ business; better

contract terms or canceled contracts; attempts to influ-

ence lenders against providing credit; and even publici-

ty, misstatements, and rumors attacking the cooperative

business concept.

Regardless of the business climate for the proposed

cooperative, leaders must demonstrate a combination of

expertise, enthusiasm, practicality, dedication, and

determination to see that the project is correctly under-

taken and objectively assessed.

The next section provides the steps typically followed

in developing a cooperative. These should be closely

studied.

ORGANIZING STEPS OF

COOPERATIVE FORMATION

Starting a cooperative is a complex, time-consuming

project. This guide provides a 12-step approach. In

some cases, the steps may be followed in a different

order than listed here. Nonetheless, it is important that

organizers fully understand the potential steps.

Ensuring that the development process is comprehen-

sive is critical to creating a successful cooperative busi-

ness, or deciding against one, if that’s what the assess-

ment recommends.

Figure 1 is an outline of the sequence of events lead-

ing to the formation of a cooperative. The table is bro-

ken down into four development phases: (1) Identify

economic need, (2) Deliberate, (3) Implement, and (4)

Execute. Within each of these phases, there are

events/steps that take place. The 12 steps include some

sub-steps.

PHASE I: IDENTIFY ECONOMIC NEED

The first two steps in cooperative development corre-

spond to identifying the economic need that the pro-

posed cooperative would fulfill. First, the group that

sparked the cooperative idea must explicitly state the

economic need and then hold an exploratory meeting of

potential members. This meeting should serve to fur-

ther flesh-out whether there is a consensus for the eco-

nomic need, and if so, then provide the forum for the

formation of a steering committee to lead the develop-

ment process and fully explore how well a cooperative

might meet the identified economic need.

STEP 1: DETERMINE THE ECONOMIC NEED

The cooperative development process begins with a

small group of prospective members—those sparking

the cooperative idea—meeting to discuss the economic

need and the potential of a cooperative to meet that

need.

Discussion topics at this meeting should include:

• What information about the perceived need is readily

available?

• Could a cooperative effort address this need?

• What information about cooperatives is available?

• Who should be invited to a meeting of potential

users?

• How should potential users be contacted?

• Where can an experienced co-op development advi-

sor to help be found?

If a cooperative is deemed to offer a solution, a larger

meeting of interested potential users should be

planned. This is the exploratory meeting.

STEP 2: HOLD AN EXPLORATORY MEETING

Call a meeting of potential user-members to decide if

interest is sufficient to support a cooperative. In other

words, are there enough people who have the same eco-

nomic need that is not being met? Announce the meet-

ing date, time, and place via newspaper, social media

Internet sites, radio, telephone, at other meetings, by

letter, or word of mouth. Invite an outside advisor if

one has been found and contacted.

The leadership group should develop an agenda and

select a presiding officer who can conduct a business

meeting. Also, the advisor (if one has been selected) can

act as chair or facilitator and help answer questions.

Primary agenda items might include the following

questions/topics:

• What is the need? Do all the people present concur

that the current market does not meet this need?

• Would a cooperative be the best solution to this

need?

• Cooperative principles, terminology, and brief dis-

cussion on how they operate;

• Advantages and disadvantages of a cooperative;

• General scope of the project and preliminary esti-

mates of capital needed; and

• Various forms of member-user commitment needed.

One approach is to have one member of the leader-

ship group discuss the need and another summarize

how the proposed cooperative might solve it. In addi-

tion, an invited representative from a successful cooper-

ative might explain its operations, member practices,

advantages, and limitations.

Allow plenty of time for discussion. Prospective

members should be encouraged to express their views

and ask questions. All issues raised should be

addressed, although answers may be delayed until later

meetings, when more information becomes available.

At this meeting, it’s a good idea to hand out reports

or bulletins about cooperatives to those in attendance.

Answers to some of the frequently asked questions may

be found in an array of cooperative bulletins published

by USDA Rural Development (see References). Such

questions might include:

• What is a cooperative and how is it different from

other businesses?

• Who controls a cooperative? How is it governed?

• What responsibilities to the cooperative do members

have?

• Can’t we just find a grant to fund this?

• What does economic participation mean?

• What are net margins and net earnings?

• What are patronage refunds and retained patronage

refunds?

• Can cooperative membership be restricted?

• What is the risk investment (equity) and why is it

needed?

• How much will members’ initial investment (equity

capital) be?

• Will members’ investment (equity) requirement be

determined by volume or by number of members?

• Can members simply cosign a bank note instead of

providing a cash investment (equity)? What are the

risks involved in cosigning?

• How much money can members lose if the coopera-

tive fails?

• Can members sell their stock and other investments

(equities) and get out of the cooperative whenever

they want? Can they sell it to whomever they want?

• What are marketing or purchasing agreements and

why are they needed? How long do they last? If

members can’t meet the terms of the agreement, do

they have to pay a penalty?

These and many more questions about how coopera-

tives operate may be on the minds of potential mem-

bers, especially if they have not had any prior experi-

ence with cooperatives. Providing accurate answers and

making available sufficient materials on cooperatives

are extremely important for building confidence in, and

excitement around, the proposed cooperative business.

If the group of prospective members decides that a

cooperative will meet their needs and it wants to con-

tinue toward creation of a cooperative, then the atten-

dees can be asked to make a token investment in the

concept. This money may be used to cover planning

expenses and it also provides an indication of the sin-

cerity of the participant’s interest. Also, at this time, a

steering committee should be formed as a sub-step of

this second step.

Select a Steering Committee. A steering committee

helps to streamline and expedite the development

FIGURE 1: SEQUENCE OF EVENTS IN COOPERATIVE DEVELOPMENT

Events/Steps

Identify economic need*

1. Determine the

economic need.

Leaders meet to discuss issues and to determine the

economic need that a cooperative might meet.

If a real economic need is

identified, continue the process.

2. Hold an exploratory

meeting.

Sub-step: select a

steering committee

Hold a meeting of potential member-users to decide if

interest is sufficient to support a cooperative.

Steering committee members should have a strong

interest in the cooperative and sound business judgment.

If group votes to continue,

collect a token investment and

discuss steering committee.

Select people who are leaders

and excited about the

potential cooperative.

Conduct a

member-use analysis

and initial market

analysis.

Sub-step: hold a

second member

exploratory meeting.

Survey the potential member-users to explore prospective

members’ needs, anticipated business volume, location

and business or service characteristics of prospective

members, opinions of prospective members.

Discuss the survey results and preliminary cost analysis with

potential member-users, discuss all related issues.

Analyze survey results; steering

committee votes whether to

proceed; if yes, it conducts a

preliminary market analysis.

Group votes whether to

continue. If yes, the steering

committee goes forward with

feasibility analysis.

Conduct a

feasibility study.

Sub-step: hold a third

member exploratory

meeting.

A comprehensive feasibility analysis, conducted by an

experienced practitioner, will help the steering committee

determine if the proposed cooperative is feasible, based

on well-determined assumptions, researched information,

and the member-use and initial market analysis. A

feasibility study provides insights into the industry.

The steering committee presents the feasibility study

analysis findings to potential members and provides the

committee’s recommendation whether to proceed.

Steering committee reviews and

prepares for presenting study to

potential member-users.

Group discusses the

recommendation and

decides whether to proceed.

5. Prepare a business

plan.

The steering committee should arrange for the

completion of an in-depth business plan prepared by a

professional familiar with cooperative organization. The

feasibility study will act as a foundation from which to

base the plan. A business plan provides specifics of how

the business will operate within the market.

Business plans act as an

organizational map for the new

cooperative to follow as it begins

operations.

(continued next page)

Deliberate

Description

Action

process. This committee will lead the effort to conduct a

member-use analysis, feasibility study, and business

plan (if the process goes that far). At the exploratory

meetings with potential members, committee members

will present information and findings, lead the discus-

sions, answer questions, and provide feedback when

appropriate.

Members of this committee should have a keen inter-

est in assessing the potential of a cooperative, be well

respected within the community, and have sound busi-

ness judgment. Steering committee members often

become the initial organizers and members of the coop-

erative’s first board of directors.

The committee’s first function is to select officers.

Next, it should consider the required steps in the devel-

opment process and establish an estimated timeline for

conducting those steps. Figure 2 provides a diagram of

the steps that most cooperative development steering

committees need to take. The committee should estab-

lish “finish-by” dates for each of these steps. The dia-

gram shows the decision nodes that determine if fur-

ther steps will be forthcoming.

Throughout the cooperative’s development, the steer-

ing committee should enlist an experienced advisor or

practitioner to help with the necessary analysis during

some of the steps. This specialized help should come

from someone familiar with the intricacies of the coop-

erative-development process.

PHASE II: DELIBERATE

The steering committee takes the development pro-

ject all the way through Phase II, which consists of

Steps 3, 4, and 5. An experienced advisor/practitioner is

often used for some of the activities in these steps.

FIGURE 1: SEQUENCE OF EVENTS IN COOPERATIVE DEVELOPMENT continued

Events/Steps

Implement

6. Employ legal

counsel to draft and

complete legal

papers

Sub-step: hold fourth

member exploratory

meeting.

The articles of incorporation state the purpose of the

cooperative business and give the cooperative a distinct

legal standing. The bylaws state how the cooperative will

conduct business and must be consistent with both State

statutes and the articles of incorporation.

All the work and recommendations of the steering

committee are reviewed, including changes to

the business plan and the legal documents.

Provide legal counsel with all

pertinent information about the

cooperative and work with them

to develop all legal documents

necessary.

Hold another vote whether to

legally form the cooperative. If

affirmed, file the articles of

incorporation.

7. Hold first meeting

of the cooperative.

This meeting is for approving the bylaws, discussing the

proposed business plan, and electing the first board of

directors.

It is important to have a

good turnout of members at

this meeting.

Execute

8. Convene first

board of directors

meeting.

At this meeting the new directors will elect officers per

the bylaws, appoint committees, and discuss steps for

carrying out the business plan. Other important

business might include use of debt capital, membership

drives, and development of manager qualifications..

The new board needs to hold

an orderly meeting with a well-

defined agenda.

9. Hold a

membership drive.

A membership drive is held when a new cooperative

needs more members than those who had taken part

in early meetings and shown commitment.

Arrange informational meetings

with prospective members.

Communicate the vision and

goals of the new cooperative.

10.

Acquire capital.

Members must invest or pledge

sufficient capital to demonstrate

commitment to the

cooperative.

11.

Hire a manager.

The board of directors must hire a qualified manager who

will be responsible for the day-to-day operations of the

cooperative.

Form a search committee,

review recommendations,

interview candidates.

12. Acquire

equipment and

facilities, begin

operations.

The manager and board together determine what

facilities and equipment are needed and then acquires

(or rents) them. The manager hires employees to

operate the cooperative.

Follow the guidelines laid out in

the business plan.

Description

The board of directors arranges for adequate capital.

Capital may be raised by members purchasing stock

(equity) and borrowing funds (debt) from a lending

institution. Projected cash-flow analysis and financial

statements from the business plan help determine capital

needs.

Action

STEP 3. CONDUCT A MEMBER-USE ANALYSIS AND

INITIAL MARKET ANALYSIS

The steering committee must learn all it can about the

cooperative’s potential members and what the coopera-

tive might do for them. It also needs to gain a more

indepth understanding of the marketplace the coopera-

tive will operate in.

Member-use analysis. To analyze potential member

use of a cooperative, a survey should be conducted of

prospective members. The survey should explore four

areas:

1. Members’ needs—the cooperative is formed and

operated for the sole purpose of meeting members’

needs. What are those needs? Where are members locat-

ed? How experienced and capable are members? What

is their familiarity with, and use of, other cooperatives?

What is their willingness to join, finance, and use a new

cooperative?

2. Anticipated business volume—the cooperative

must have some assurance of sufficient volume to oper-

ate as a business and to plan for facilities and needed

equipment. What are potential members’ recent volume

(production or purchasing) for the most recent, or a

typical, year? What proportion of that volume will

Once the steering commiƩee is formed, it carries out these development steps and acƟons:

DeliberaƟon phase:

yes

ImplementaƟon phase:

yes

New board of directors takes over from steering commiƩee.

OŌen, the signatories to the arƟcles of incorporaƟon serve as the interim board.

Conduct a member-use and iniƟal market analysis.

Present Įndings of the member-use and iniƟal market

analysis at an exploratory meeƟng of potenƟal members

and answer

uesƟons and lead discussion.

Present results of feasibility analysis and the commiƩee’s

recommendaƟon at an exploratory meeting of potenƟal

members.

Find outside advisor(s) to conduct a comprehensive

feasibility analysis.

Decision

whether to

conƟnue

Prepare a business plan for the new cooperaƟve using the

feasibility study as a foundaƟon.

Consult legal counsel to properly prepare the arƟcles of

incorporaƟon and bylaws.

Explain arƟcles of incorporaƟon at a member meeƟng and

hold vote to legally form co-op. If aĸrmed, Įle arƟcles.

Hold Įrst meeƟng of cooperaƟve to adopt bylaws, elect

board of directors, and discuss the developed business

plan to gain some feedback.

Decision

whether to

conƟnue

Decision

whether to

conƟnue

RejecƟon:

Stop Process

FIGURE 2: STEERING COMMITTEE STEPS AND ACTIONS

members’ market/buy through the cooperative?

3. Location and business or service characteristics of

prospective members—where, how, and when the

cooperative delivers its services is a prime considera-

tion. Will the possible locations and methods of con-

ducting business be well received by members? What

variety of services will be offered, and what will mem-

bers want?

4. Opinions of members—member participation in

decisionmaking activities and sense of cooperative spir-

it are important for success. How do members feel

about cooperatives and participating in one? Will they

be excited about ownership and control?

Survey questions should be designed to gain infor-

mation about these four areas. Formal survey tech-

niques are best. The advisor usually drafts the survey

questionnaire for the steering committee to review.

Appendix B provides an example of a potential-mem-

ber survey.

While the survey is being prepared, the steering com-

mittee should develop a list of potentially interested

members. When the survey is completed and approved,

the committee interviews potential members. In some

cases, the survey may be given out at a meeting to be

filled out by the potential members, or it may be mailed

to them so they can fill it out at their convenience.

Mailing the survey is likely best when there are a large

number of potential members that the steering commit-

tee wants to reach. However, face-to-face interviews

usually yield more thorough information and are thus

best, if feasible.

For face-to-face interviews, steering committee mem-

bers might travel with the advisor(s) to locate potential

users or otherwise invite potential members to identi-

fied meeting locations. If confidentiality is important,

the advisor should conduct the survey. The advisor

should be prepared to discuss and answer questions

about the proposed cooperative venture for the poten-

tial members.

Estimates of both membership and volume should be

conservative. Not all persons interested will join initial-

ly, and some may wait to join later. Unfortunately, not

all who join will make full use of the cooperative’s ser-

vices.

Once all the surveys are completed and collected, the

advisor objectively analyzes the responses, prepares a

report of the results, and presents it to the steering com-

mittee. The committee will then fully discuss the

results, looking at the potential members’ interest in

joining the proposed cooperative, anticipated business

volume, willingness to commit product (or use the

cooperative for purchasing), and ability and willingness

to provide capital. Depending on results, the steering

committee then decides whether to proceed with the

project. Following a decision to proceed, an initial mar-

ket analysis is conducted to determine if the proposed

cooperative has a feasible economic role in the market-

place.

Initial market analysis—this analysis, conducted

prior to a more formal feasibility study, will identify

how well the proposed cooperative’s activities, given

the economic need already identified earlier, will fit

into the marketplace. Conducting this assessment will

also help focus any additional services that the coopera-

tive may be able to provide as a benefit to members.

This preliminary marketplace assessment doesn’t

need to be extensive, but it needs to identify suitable

markets, given the economic need(s) to be fulfilled. It

should also identify how the cooperative will fit in

those markets, sources of supplies that will be needed,

and likely service providers (and their requirements).

Here are a few methods for gaining this important

information:

• Use previous market research and industry common

knowledge.

• Do a survey of market, supply, or service providers.

Contact users of the services, and potential buyers or

suppliers, to learn about their experiences. Determine

what their requirements are, and see if they can pro-

vide cost estimates.

• Ask State and/or Federal offices (such as USDA Rural

Development offices, Extension Service, or communi-

ty action agencies), universities, cooperative centers,

commodity organizations, or private consulting firms

to provide pertinent market information they have

access to. Enlist them to conduct necessary research

(e.g., provide useful data), if possible.

• Contact engineers, equipment dealers, real estate

agents, and others to see if some cost estimates on

establishing and operating the proposed coopera-

tive’s physical facilities can be obtained.

The advisor/practitioner analyzes information com-

piled and cost estimates gained and works with the

steering committee to determine the best potential mar-

kets, supply sources, and service providers that fit the

proposed cooperative’s mission.

Once the analysis is completed, discussed, and

approved by the steering committee, the second mem-

ber exploratory meeting is called.

Hold a Second Member Exploratory Meeting. The

steering committee should develop and follow a formal

agenda for every potential-member meeting it holds as

it goes forward. An example agenda is in Appendix C.

During this second meeting, the results from the

member-use and initial-market analyses are presented.

These results should be thoroughly discussed, and

potential members should feel free to offer ideas and

information.

After the analyses are reviewed, results are discussed

and, if accepted, the group should vote by secret ballot

on whether to continue the organizational process. By

now, the steering committee and advisor should have a

good idea of the minimum volume of business, number

of members, and amount of financing (and financial

commitment by members) needed to justify starting the

cooperative. Where support is questionable, the token

investment made by potential members should be

refunded.

Potential members should sign a pre-membership

agreement (for the components of a pre-membership

agreement, see Appendix D). This agreement helps

determine the extent of serious interest in the proposed

cooperative. The signer agrees to join, patronize, and

furnish a specific amount of initial “risk capital.”

Initial investment by members should be in propor-

tion to their intended use of the cooperative. However,

establish a minimal amount—perhaps 10 percent of

potential risk capital (equity) needed to operate. This

goal should be met before continuing organizational

efforts.

Potential members should be given a written state-

ment about how their investment will be used and pro-

cures for returning unused funds if the project is termi-

nated or the individual later decides not to join. The

money should be deposited in an interest-bearing

account and records kept of investments and expendi-

tures. Generally, this money is used for organizational

costs, such as supplies, postage, phone bills, and attor-

ney fees.

STEP 4. CONDUCT A FEASIBILITY STUDY

A comprehensive feasibility analysis, conducted by

an experienced practitioner, will help the steering com-

mittee determine if the proposed cooperative is feasible,

based on well-determined assumptions, researched

information, and the member-use and initial market

analysis. This study determines management, market-

ing, technical, economic, and financial feasibility and

presents the entire concept in one document. It will pro-

vide the foundation of the business plan if a decision to

proceed is made.

The emerging picture of the size and scope of the

cooperative now permits the practitioner and the steer-

ing committee to develop basic operating and organiza-

tional assumptions. These assumptions must be taken

seriously. Assumptions often include factors such as the

technology used (the facilities, equipment, production

process, etc.), financing (capital needs, volume, cost of

goods, wages, etc.), marketing (prices, competition,

etc.), and so on.

For indepth information on developing a feasibility

study for a cooperative development project, see Vital

Steps: A Cooperative Feasibility Study Guide (USDA

Rural Development, Service Report 58) under

References. This guide defines what a feasibility study

is, explains why they are necessary and their limita-

tions. It also lists lender considerations, defines the first

steps of a feasibility study, and provides the key actions

in completing a comprehensive study. The key actions

include: (1) Deciding who will conduct the study; (2)

Developing project assumptions; (3) Determining com-

ponents to include in the study (i.e., executive summa-

ry, introduction, industry background, marketing, oper-

ational and technical characteristics, financial

statements and projections, and summary and recom-

mendations); (4) Accepting or rejecting the study; and

(5) Group decisions going forward after accepting a

study.

As stated earlier, the information gained from the ini-

tial market analysis is useful in the development of the

feasibility study. Of course, the feasibility study will

often go into much greater detail than the market analy-

sis.

The feasibility study should include all the informa-

tion available for making a decision as to whether—

given the best of assumptions, data, and other pertinent

information—the cooperative will succeed. It should

include sensitivity analysis (i.e., changing assumption

values to assess different numerical projections) to

examine the impact of different business scenarios. It

should also provide sound financial projections (pro

forma cash flow, balance and income statements) and

list all the resources (human, capital, physical) that will

be needed for the cooperative to thrive.

A major portion of the feasibility analysis will include

the capitalization of the cooperative. Part 2 of the

Important Cooperative Development Considerations

section of this report provides information on ways

cooperatives are capitalized—including common stock

and preferred stock, if the cooperative is organized as a

stock cooperative—membership certificates and capital

certificates if it is non-stock, and sources of debt capital

if the cooperative will need to borrow funds to operate.

It also provides information on the concept of member

investment, which is critically important in a coopera-

tive. Fledgling cooperatives often pursue grants to help

with initial capitalization needs. Caution should be

exercised in depending on grants. While grant funding

may be used to enhance the new cooperative’s capital,

members must also invest in their cooperative. Member

investment is a vital component for achieving sustain-

ability and autonomy. Cooperatives with little or no

member investment often fail.

Hold a Third Member Exploratory Meeting. The

steering committee calls the third member exploratory

meeting to fully present the results of the comprehen-

sive feasibility study to potential members and pro-

vides the committee’s recommendation on whether to

proceed with the cooperative. The committee (the advi-

sor often helps) answers questions on the feasibility

study. If the group votes to proceed with forming the

new cooperative, the process moves to Step 5.

STEP 5. PREPARE A BUSINESS PLAN

The steering committee, using the feasibility study as

a foundation, should arrange for the completion of an

indepth business plan for the new cooperative. A busi-

ness plan is for actual cooperative implementation. It

serves as a blueprint not only for the implementation,

but also for what actions the cooperative will take dur-

ing its operations. The business plan usually contains

less emphasis on scenarios than did the feasibility

study. Typically, it highlights only the scenario selected

by the steering committee and advisor/practitioner. The

business plan needs to focus on the actions necessary to

launch the cooperative.

Standard business plans include such details as key

management personnel to hire, employee positions to

fill, business location (and needed facilities and equip-

ment), the financial “package” to be implemented,

product flow operations, customer relations, etc. It may

also include steps to create a dynamic and involved

membership, as well as the accounting, business, and

cooperative practices that will be implemented.

PHASE III—IMPLEMENT

After completing Step 5, the cooperative becomes a

reality in Steps 6 and 7. Now legal papers are created

and formal cooperative meetings take place, including

the first meeting of the new cooperative. (Note: incor-

poration, part of Step 6, is something that is often com-

pleted earlier in the process for some cooperative start-

ups. For instance, groups forming food cooperatives are

often advised to incorporate right after the potential

members make their initial token investment.)

STEP 6. DRAFT AND COMPLETE LEGAL PAPERS

The steering committee should become acquainted

with legal aspects of cooperatives by studying laws

applicable to them and businesses generally. Every

State has one or more laws authorizing the formation of

cooperative corporations, although a number of them

are restricted to agricultural producers. The committee

needs to study the laws in the State where the coopera-

tive will be incorporated to ensure that the right proce-

dures are followed. Legal counsel, experienced in coop-

erative law, should be employed to assist in the process.

The two main legal documents the cooperative needs

to draft are the articles of incorporation and the bylaws.

The articles of incorporation state the purpose and

scope of the cooperative and give the cooperative a dis-

tinct legal standing. The bylaws state how the coopera-

tive will conduct business and must be consistent with

both the State statutes and the articles of incorporation.

Other legal documents that the cooperative may need

include the membership application, membership or

stock certificate, marketing/purchasing agreements,

meeting notices, and waivers of notice. (See USDA CIR

40, Sample Legal Documents of Cooperatives under

References.)

Part 3 of the Important Cooperative Development

Considerations section provides greater information

and detail on legal considerations and documents.

Hold Fourth Member Exploratory Meeting. Hold

another exploratory meeting of potential members to

review all of the work and recommendations, to date,

that the steering committee has presented. Discuss any

changes to the original business plan, as well as the

preparation of the necessary legal documents. The arti-

cles of incorporation and bylaws should be explained

and discussed.

Support for the cooperative should again be evaluat-

ed by holding a vote on whether or not to form the

cooperative. If the decision to form is affirmed, the

incorporators should file the articles of incorporation.

STEP 7. HOLD FIRST MEETING OF THE NEW

COOPERATIVE

After the cooperative has been incorporated, the new

cooperative needs to hold its first official meeting. At

this meeting, the bylaws need to be approved and the

board of directors elected.

According to most statutes under which cooperatives

are organized, articles and bylaws must be adopted by

a majority vote of the members or stockholders. For

convenience in organizing, only the persons named in

the articles of incorporation, called the charter mem-

bers, must vote to adopt the bylaws. These individuals

are regarded as members, or stockholders, as soon as

the articles of incorporation are filed. A good practice,

however, is to invite everyone who has signed a pre-

membership agreement to this meeting to ratify the

bylaws.

A temporary presiding officer conducts this first

meeting and reports that the articles of incorporation

have been filed. A draft of the proposed bylaws is pre-

sented, discussed, and adopted as read or amended.

Further action is usually needed to accept those

members or stockholders who have subscribed for stock

or agreed to become members (signed the premember-

ship agreement) but are not named in the articles of

incorporation.

If members of the first board of directors have not

been named in the articles of incorporation, they need

to be elected at this meeting.

Here are some suggestions for selecting the first

board of directors:

• develop a panel of candidates for the board by calling

for nominations;

• nominate only members as candidates;

• nominate at least one candidate for each position,

possibly more; and

• vote by secret ballot.

Steering committee members are often board candi-

dates, but other members may also be nominated. A

vote for the board of directors by the members present

is then held by secret ballot.

After the election, the new board addresses the mem-

bership by briefly discussing the next steps for the

cooperative as identified in the business plan.

PHASE IV—EXECUTE

Steps 8 through 12 are the execution steps –they get

the cooperative up and running. These are concrete

“action steps” that bring the cooperative into opera-

tional existence.

STEP 8. CONVENE FIRST MEETING OF THE NEW BOARD

OF DIRECTORS

Once the bylaws have been adopted, the board of

directors should meet as soon as possible to avoid hav-

ing to send out legal notices of a meeting to directors.

At this meeting, directors approve various resolutions

designed to make the cooperative an operational busi-

ness and ready to serve members. If this meeting is to

be held immediately, the board will need to sign a

“Waiver of Notice of First Meeting of Board of

Directors” (see Appendix E for a sample of a waiver).

Another option is to include a phrase such as this in the

bylaws: appearance at a meeting will constitute a waiv-

er of notice, except when a director attends the meeting

and objects to the transaction of business because the

meeting was not lawfully convened.

3fficers of the board are elected, and directors are

assigned to individual or committee assignments to

implement the business plan. Other members may also

be assigned to committees, but at least one board mem-

ber should be on each committee for leadership and to

enhance communications. Target dates are established

for important events such as groundbreaking, construc-

tion completion, dedication or open house, and full

capacity operations.

The board needs to act immediately to implement

key actions in the business plan. Some of these activities

might be:

• conduct a membership drive;

• adopt a form of membership application or stock

subscription;

• adopt the forms of contractual agreements;

• acquire business liability and board insurance;

• acquire capital;

• select a bank in which to deposit funds (if one hasn’t

been already chosen);

• initiate steps to hire a manager;

• authorize officers or employees to handle cooperative

funds and issue checks;

• design and install an accounting system;

• provide for bookkeeping and auditing services;

• print the articles of incorporation, bylaws, and other

member documents for distribution to all members;

• secure bonds for officers and employees in accor-

dance with bylaws; and

• pick a business location and seek bids for facilities

and equipment.

The board should hold additional training meetings

for directors to hone their knowledge on topics such as

legal liability, cooperative finance, management rela-

tionship and supervision, and member relations. An

outside expert can be brought in to discuss these topics.

Educational topics for the entire membership should

include member responsibilities, cooperative operating

policies, and tax treatment of patronage refunds. A

membership review meeting can be held for this pur-

pose, or newsletters and other informational materials

can be distributed that discuss members’ role and

responsibilities in the cooperative.

STEP 9. HOLD A MEMBERSHIP DRIVE

A new cooperative must have enough members to

start operations and justify its existence. Additional

members may be needed to financially strengthen the

association or increase its volume.

Cooperatives that provide supplies and services nor-

mally have an open membership. Those that process

and market, bargain for price, have contractual agree-

ments, or offer limited services, may have a selective

membership policy. Members should feel a responsibili-

ty to recommend other possible members who they

believe to be qualified users of the cooperative. That’s

why it’s important for members to understand what

their cooperative is, how it operates, its benefits, and its

limitations.

People join cooperatives primarily for economic bene-

fits—better services and increased income. Most people

will appreciate being told about the advantages of

cooperative membership. If those benefits are not evi-

dent, few prospects will join; even if they do, they prob-

ably won’t regularly patronize the cooperative.

The cooperative should arrange and promote infor-

mational meetings with prospective members. In some

cases, these prospects will have to be specifically invit-

ed. At these meetings, the board of directors should

communicate the vision and goals of the new coopera-

tive and key aspects of the business plan that are likely

to be of interest. Information about what a cooperative

is should be provided if it is felt that some in atten-

dance may not have a solid understanding of coopera-

tives. All questions, both general and specific, should

be answered forthrightly and transparently.

New members are then usually asked to join by pur-

chasing stock or paying membership equity and signing

an application. The applicant should get a receipt for

funds collected. The cooperative must follow up with

membership and stock certificates and related material.

Accurate accounting of money is an extremely sensi-

tive issue. The cooperative should retain an indepen-

dent accounting firm to assist in recording funds prior

to any sale of stock or the collection of substantial

amounts of money.

STEP 10. ACQUIRE CAPITAL

Starting a new cooperative can create a need for sub-

stantial capital. A problem develops when trying to

operate with limited membership equity capital and

sizable total capital requirements to launch, or expand,

a business. Therefore, member equity must be carefully

weighed against projected cooperative capital needs.

The board of directors is responsible for arranging ade-

quate capital.

While the best source of financing for a cooperative is

from members, financing a new cooperative with mem-

ber equity alone is usually impossible. Therefore, addi-

tional sources for funds are needed. Local area banks

are good possibilities. Others include CoBank, the coop-

erative banks of the Farm Credit System, NCB (former-

ly National Cooperative Bank), USDA Rural

Development (for guaranteed loans or other loans), and

Federal or State governmental funds. Another option

may be to sell preferred stock to members and others in

the community.

The more financing members provide, the less the

cooperative will need to borrow or attain from other

sources. Usually, cooperatives sell common or preferred

stock to members to raise capital. The common stock is

usually tied to voting rights, but there are several types

of stock plans. For example, class A stock could be des-

ignated as voting stock and limited to one share per

member, while class B stock could be non-voting stock

that members could purchase based on their anticipat-

ed volume of business with the cooperative.

Preferred stock can also be sold to members and out-

side investors. Although owners of preferred stock have

no, or very limited, voting rights, this stock carries less

risk than common stock. Members, as well as other peo-

ple in the community, may want to further support the

new cooperative through the purchase of preferred

stock.

The steering committee and the advisor should con-

servatively estimate the amount of capital raised from

preferred stock sales. Some States limit dividends that

can be paid on both common and preferred stock,

thereby making preferred stock unattractive to outside

investors. Stock sale programs should be carefully

reviewed by an attorney to ensure conformance with

State and Federal laws and to consider whether they

have a place in the capital structure of the new coopera-

tive.

(Part 2 of the Important Cooperative Development

Considerations section of this report covers the meth-

ods for acquiring capital and the classification of finan-

cial instruments.)

STEP 11. HIRE A MANAGER

Selecting and hiring the manager is one of the most

critical tasks for the board of directors. The success of

the cooperative depends more on the manager than any

other individual. The manager directs day-to-day oper-

ations, hires and fires employees, and allocates

resources for greatest efficiency and effectiveness.

The steering committee begins the task of manager

selection by developing a position description. A sup-

plemental statement should describe the responsibili-

ties of the manager and the roles and responsibilities

this person will have with the board of directors of the

cooperative.

Long and varied lists of desired qualities to seek in a

manager have been compiled, but three areas of focus

are suggested—education, experience, and ability to

work with people. Manager candidates need to be

judged in these areas: commodity or product expertise,

business and basic financial acumen, knowledge of

cooperatives (because of their unique characteristics),

leadership abilities, and “people skills.”

Finding a manager with both education and experi-

ence with cooperatives is important for several reasons.

Unlike investor-owned corporations, a cooperative

manager should not participate in cooperative owner-

ship. Career decisions could conflict with ownership

interests. Cooperatives do not offer managers stock

options or profit sharing, although some cooperatives

have incentive plans. The candidate needs to under-

stand the special nature of the cooperative’s patrons

because they are both customers and owners. This dual

relationship adds a unique dimension to a candidate’s

requirements to work with people.

Good managers are hard to find, especially for coop-

eratives. The best source is often other cooperatives.

Leads may be obtained by contacting the managers of

other cooperatives, directors of State or regional cooper-

ative councils, national cooperative organizations, the

advisors who helped form the cooperative, and

employment agencies. Advertise the opening in publi-

cations that likely have a cooperative- and industry-

related readership.

STEP 12. ACQUIRE EQUIPMENT AND FACILITIES, BEGIN

OPERATIONS

Acquiring a business site, facilities, machinery, equip-

ment and other supplies is a job that takes foresight,

analysis, judgment, and timing. The new cooperative’s

business plan is the blueprint. The newly selected man-

ager should participate in these discussions.

Facilities should be located conveniently for members

and facilitate the establishment of good distribution

links with suppliers, markets, and other business ser-

vices.

Directors need to study facility requirements thor-

oughly. Their decisions will influence the cooperative’s

operations for many years. It’s important to avoid using

so much capital for fixed facilities and startup that

other budgeted items and/or cash flow are jeopardized.

A useful planning tool is an acquisition schedule and

budget. To develop this, list items in the logical order

they should be acquired, based on need, delivery time,

loan requirements, funds available, and other factors.

The data from the schedule should be built into the

cash-flow projection for the startup period. Changes to

this plan should be analyzed before enactment.

IMPORTANT COOPERATIVE DEVELOPMENT

CONSIDERATIONS

This section provides information in four parts. The

first part provides some principles for development

practitioners to follow and pitfalls that can undermine a

cooperative formation. The second part is about mem-

ber investment in a cooperative business and methods

of cooperative capitalization; the third is the legal

aspects of cooperative development consisting of the

important legal documents that come into play, and the

fourth part concludes with some general rules for suc-

cess in cooperative development.

PART 1—PRACTITIONER PRINCIPLES AND PITFALLS

Professionals and others involved in cooperative

development should follow tried and true principles

throughout the process and know of the pitfalls to

avoid for the best possible outcome in forming a coop-

erative.

THE MADISON PRINCIPLES

Cooperation Works!

(http://www.cooperationworks.coop), a network of

cooperative developers, created the Madison Principles

in Madison, WI., in 1995. These 12 principles are profes-

sional standards for cooperative developers and are a

creed to follow in any cooperative development project.

1. Declare Conflicts of Interest: Cooperative develop-

ers subscribe to the highest level of ethics and shall

declare any conflict of interest, real or perceived, so that

they can be a credible source of objective feedback and

an articulate advocate of the project as needed.

2. Develop Co-ops Using Proven Models: There are

essential development steps that must be taken in a crit-

ical path to success.

3. Facilitate the Goals of the Steering Committee: An

enthusiastic group of local, trustworthy leaders is a pre-

requisite for providing technical assistance. The effec-

tive cooperative developer nurtures that leadership by

helping them shape a vision that will unite members

and provide ongoing training.

4. Use a Market-Driven Approach: Cooperatives

only work when they are market driven; the coopera-

tive developer works to ensure that accurate market

projections precede other development steps.

5. Acknowledge the Importance of Member

Involvement: Member control through a democratic

process is essential for success. Success also depends on

the commitment of the members’ time, financial

resources and loyalty to the cooperative.

6. Seek Tangible Benefits: There must be tangible

benefits for members.

7. Steer Toward Revenue Generation: The coopera-

tive’s products and services must generate sufficient

revenue so the effort can be financially self-sustaining.

Provisions must be made to share any surplus equi-

tably.

8. Honor Diversity: Each cooperative responds to its

unique economic, social and cultural context; as a con-

sequence, each cooperative is different.

9. Make Co-op to Co-op Connections: Cooperative

developers link emerging cooperatives with estab-

lished cooperatives to facilitate mutual communication

and learning.

10.Promote Social and Economic Empowerment:

Cooperatives are tools for development and promote

social empowerment and economic goals.

11.Understand That Cooperatives Work

Everywhere: Applied appropriately, cooperatives have

value to all population groups and for all businesses

and services in the public and private sectors.

12.Our Vision of the Cooperative Community Is

Global: Opportunities for human cooperation exist

throughout the world. Cooperative development tran-

scends national boundaries.

PITFALLS TO AVOID

Cooperative development projects and newly

formed cooperative organizations are often vulnerable

to certain pitfalls. The following list contains some of

the inadequacies that may arise to derail a project.

1. Lack of clearly identified mission. A new cooper-

ative shouldn’t be formed just for the sake of forming

one. The cooperative must develop a clear mission

statement with defined goals, based on the economic

need.

2. Inadequate planning. Detailed plans for reaching

the mission and goals are extremely important.

Indepth surveys that identify member-user needs, cou-

pled with a feasibility study, are necessary. Stop the

organizational process if there is not sufficient interest

in the cooperative by potential member-users, or if the

feasibility study indicates that is would not be a sound

business venture. The human cost in time and organi-

zational expense will then be saved. If the process pro-

ceeds, be sure to develop and follow a realistic and

comprehensive business plan.

3. Failure to use experienced advisors and consul-

tants. Most people interested in becoming member-

users of a new cooperative haven’t had cooperative

business development experience. Using advisors

experienced in cooperative development can save

wasted effort and expense.

4. Lack of member leadership. Calling on the ser-

vices of experienced advisors will not replace the need

for leadership from the organizational group.

Decisions must come from the potential member-user

group and its selected leadership on the steering com-

mittee. Professional advisors should never part of

decisionmaking.

5. Lack of member commitment. To be successful,

the new cooperative must have the broad-based sup-

port of the potential member-users. The support of

lenders, attorneys, accountants, cooperative specialists,

and a few leaders won’t make the cooperative a busi-

ness success. It must have commitment from a critical

mass of members who will support and use the coop-

erative.

6. Lack of competent management. Most coopera-

tive members are busy operating and managing their

own businesses or have fulltime jobs and lack experi-

ence in cooperative management. The directors must

hire experienced, qualified management to increase

the chances of business success.

7. Failure to identify and minimize risks. The risk of

starting a new business can be reduced if identified

early in the organizational process. Careful study of

the competition, Federal, State, and local government

regulations, industry trends, environmental issues,

and alternative practices helps to reduce risk.

8. Poor assumptions. Often, potential member-users

and cooperative leaders overestimate the volume of

business and underestimate the costs of operations.

Anticipated business success must be based on sound

and conservative assumptions. A dose of pessimism

often proves to be judicious.

9. Lack of financing. Regardless of the amount of

time spent on financial projections, most new busi-

nesses are underfinanced. Inefficiencies in startup

operations, competition, complying with regulations,

and delays often cause financial shortfalls. Often, the

first months of business operations, and even the first

years, are not profitable, so adequate financing is

important to survive this period.

10.Inadequate communications. Keeping the mem-

bership, suppliers, and financiers informed is critical

during the organization and early life of the coopera-

tive. Lack of correct information can create apathy or

suspicion. The directors and management must decide

to whom, and how, communications are to be directed.

In addition, member-users not familiar to cooperatives

must be fully educated in how cooperatives function

and how their benefits will accrue.

Considerable time and effort are spent in starting a

new cooperative. Knowing and avoiding the potential

pitfalls, and completing all the necessary steps for

development as identified for the project, helps to

increase the odds of success for a new cooperative.

PART 2—CAPITALIZING THE COOPERATIVE

THE MEMBER INVESTMENT

Investing risk capital in a cooperative is a basic

member responsibility. The initial investment required

(equity capital) from each member will be determined

by the projected cost of facilities, estimated business

volume, cash-flow requirements, projected number of

members, and their use of the business.

Members’ initial risk capital investment should be

large enough for them to realize they have a financial

stake in the business to protect. If the investment

requirement is based on volume, rather than the num-

ber of members, the investment should be in proportion

to their expected use. Those who wish to contribute

more than their share may purchase preferred stock, or

capital certificates that earn fixed dividends, but carry

no additional voting privileges. Members may also pro-

vide short-term debt capital in the form of certificates of

investment or member loans.

Members provide additional amounts of risk (equity)

capital as they use their cooperative. One method is

through per-unit retains. The cooperative deducts from

transactions an amount based on the value or quantity

of services provided or products marketed. Another

method is to retain part of the cooperative’s net earn-

ings at the end of each business year. Under both of

these methods, the risk capital (equity) investments are

credited to members’ equity account in the coopera-

tive’s accounting system.

Like other businesses, cooperatives must build finan-

cial reserves. These can be used both to carry them

through times when operating expenses exceed income

and for growth of the business. Sometimes, part of

these reserves is dedicated to a specific purpose, such

as covering uncollectible accounts (bad debts). Another

portion may be set aside to fund a new facility or the

startup of a new member service.

Accumulated reserves relieve the pressure on the

cooperative to borrow money or reduce important ser-

vices during tough times. And they reduce the likeli-

hood the cooperative will have to ask the members for a

direct investment of additional risk capital to meet

unexpected needs.

When planning for the capitalization of the new

cooperative, the steering committee and advisor esti-

mate the amount of reserves that will be needed and

the best method of obtaining this capital. State law

should be checked for rules on reserve levels or meth-

ods of accumulation.

Membership equity or payment for a share of stock is

usually retained by the cooperative, at least until the

membership is terminated. However, another element

to planning capitalization entails a strategy for revolv-

ing member equity capital (related to business done

with the cooperative), retained patronage refunds, and

per-unit retains back to members. When the coopera-

tive’s equity is sufficient to meet its needs, a portion of

each year’s income should be used to redeem the oldest

patronage-based equity.

This equity is replaced by funds retained from the

current year’s patrons. The schedule for revolving equi-

ty is set by the board of directors. A systematic equity-

redemption program keeps the cooperative financed by

current users, in proportion to their use of the coopera-

tive.

CAPITALIZATION METHODS

Capitalization is the amount and source of money

needed to start and operate the cooperative. Indeed, a

key part of the feasibility study will be fully determin-

ing the cooperative’s capital needs and sources to meet

those needs. The cooperative’s capital structure needs to

be determined, including these considerations: (1) Will

it be a stock or non-stock cooperative? (2) How much

member investment is necessary (estimate)? and (3)

What is the amount of borrowed (debt) money needed,

and where will it be sourced?

While many State incorporation statutes permit orga-

nizing as either a stock or non-stock cooperative, a

number limit them to agricultural producers. In a stock

cooperative, members are issued stock certificates as

evidence of their membership and capital investment.

More than one type of stock may be issued.

Common Stock—Stock cooperatives issue shares of

common stock to document membership and voting

rights. Common stock may be divided into classes. Each

class may have different par values and carry different

voting privileges. Usually, cooperatives don’t pay inter-

est on common stock.

Preferred Stock—Preferred, non-voting stock may be

issued to both non-members and members for addition-

al capital investment. This stock may be divided into

classes. Each has different par value and/or other condi-

tions. Interest paid on preferred stock may be limited

by State or Federal statute or redemption determined

by the board of directors. If the cooperative is changing

structure or going out of business, preferred stock is

paid before the common stock.

Member Loans—Some cooperative startups make use

of an additional member investment, a member loan,

for raising equity. The individual member and coopera-

tive set mutually agreed upon terms and a loan is then

made to the cooperative by the member. However,

member loans are less flexible than preferred stock, and

they must be prepaid prior to preferred and common

stock in the event of dissolution.

Membership Certificates—If the cooperative is orga-

nized as a non-stock organization, a membership cer-

tificate is usually issued. This certificate is issued when

membership equity is paid and establishes voting rights

in the cooperative. The amount of capital collected from

membership equity is usually considered as incidental

to capitalizing of the cooperative. Membership certifi-

cates are generally non-interest bear-

ing. To obtain more capital, in this

case, the cooperative will also issue

capital certificates.

Capital Certificates—Capital certifi-

cates of a non-stock cooperative are

the equivalent of preferred stock

issued by a stock cooperative. They

are sold in various denominations,

may bear interest, and may or may not

have a due date. They convey no vot-

ing privileges and may be owned by

non-members.

The combination of membership

fees, sale of capital certificates, and

capital certificates issued for retained

patronage are all sources of risk capi-

tal (equity) for non-stock cooperatives.

Note that certificates issued for

retained patronage may carry a due

date to implement systematic rotation.

Debt Capital and Sources—How

much debt capital the cooperative can,

or should, borrow depends on the

how much risk (equity) capital mem-

bers initially invest, cash flow, quality

of management, and the degree of risk

acceptable to members. Members

should contribute at least half of the

equity capital needed. But, it usually

takes several years of operations to

reach this goal. Also, the type and

scale of the cooperative will determine

how soon members will reach the 50-

percent goal.

Long-term credit is the usual way of

acquiring part of the money to finance

land, buildings, and equipment. The

period of the fixed-asset loan depends

on a number of factors, but it is usual-

ly related to the facility’s projected life.

The steering committee should

explore various sources of long-term

loans and recommend the source that can supply the

financing best suited to the proposed cooperative.

Among sources of facility loans are USDA Rural

Development, CoBank, NCB, commercial banks, credit

unions, and insurance companies. Other financial

arrangements may be available that are temporary or

unique to the new cooperative venture.

Operating capital may be obtained through short-

term loans (1 year or less) and/or a line of credit after

the cooperative becomes established. A new coopera-

tive, however, can obtain only part of its operating

funds from short-term loans. Member equity must

make up the balance.

Sources of short-term credit include credit unions,

commercial banks, banks for cooperatives in the Farm

Credit System, and NCB. The committee should explore

all sources and recommend the lender that best meets

the requirements of the proposed cooperative.

Commercial banks, particularly those in the area

where the cooperative will operate, are an important

source for loans. Personnel of these banks already are

familiar with the economy in the area and probably

know many of the cooperative’s prospective members.

These banks also offer a variety of banking services the

cooperative will need once it begins operations. New

cooperatives often get loans or loan guarantees from

government agencies.

Farm Credit System banks, particularly CoBank, that

are nationally chartered are a major source of credit for

newly organized and established agricultural and rural

utility cooperatives and their members. Farm Credit

System banks make loans to cooperatives to purchase

fixed assets and for operations. Individual farmers bor-

row funds to purchase land and to finance farm opera-

tions. The system is used also to finance members’ share

of equity capital for a new or expanding marketing,

purchasing, or service cooperative.

NCB is another source for loans and startup financ-

ing. It primarily finances non-agricultural cooperatives,

including consumer, worker, retailer-owned, health,

housing, and other types of cooperatives, both urban

and in rural communities.

Preparing a Loan Application—Cooperative leaders

need to carefully develop the loan application to make a

good first impression on the potential lender. Lenders

will insist on seeing certain key documents before con-

sidering a loan request. Special expertise is important in

helping prepare these documents, including that of an

economist, marketing specialist, attorney, certified pub-

lic accountant, and perhaps others with expertise relat-

ed to the proposed cooperative’s business.

The lender will carefully review the business plan of

the proposed cooperative. It will want to know the pro-

jected volume of business and seasonal changes in it,

current market conditions, and how the cooperative

will fit into that market. The lender will also want to see

evidence for the proposed facility and equipment

needs, the projected cash flow, operational aspects, etc.

Cash flow will be a focal point as it provides the lender

with a continuous, month-by-month cash income and

expense prediction. Lenders are particularly concerned

with the net ending cash balance, which provides evi-

dence that the cooperative will have sufficient funds to

operate, pay bills, and repay loans, especially during

adverse market swings. Most lenders want 3-year pro-

jections. (See Appendixes F through J for examples of

cash flow, income, balance sheet, ratio analysis, and

sources and uses of funds, statements.)

The lender will carefully examine the projected oper-

ating statement and balance sheet. The income state-

ment provides a projected picture of operations for 1 or

more years. It contains information on sources of

income and expenses. The key figure is the “bottom

line,” which indicates whether net margins (profits) are

anticipated. A monthly operating statement provides

information to lenders and assists the board in making

major policy and management decisions.

The balance sheet will project the future value of the

cooperative and indicate its solvency and ability to sat-

isfy creditors’ claims when due. It lists the cooperative’s

assets, liabilities, and net worth.

To provide the lender with further condensed infor-

mation, a schedule of Fixed Assets Costs and

Depreciation (see Appendix K for a sample) should be

developed. A condensed listing quickly conveys what

the cooperative needs to purchase or lease. To assure

the lender that depreciation has been accurately noted,

it is also desirable to outline in table form the classes of

assets, cost, life expectancy of equipment, and annual

depreciation.

Another helpful document for lenders is a Financing

Needs and Sources Schedule (see Appendix L for a

sample schedule). This listing will save the lender time

in assembling the various pieces of data for analysis. It

should show major items for which loans and member

equity will be spent. These items are extracted from the

projected cash-flow data.

PART 3—LEGAL ASPECTS OF COOPERATIVE

DEVELOPMENT

Several Federal laws are especially important for

cooperatives. The Capper-Volstead Act of 1922, some-

times called the “Magna Carta” of farmer marketing

cooperatives, recognizes the rights of producers to act

together in handling, processing, and marketing their

production without violating antitrust law. Producers

may also form a marketing agency in common. But

even though cooperatives have this organizational pro-

tection, their operations are subject to the same antitrust

laws as other businesses. (See USDA CIR 35,

Understanding Capper-Volstead, under References.)

The Farm Credit Act of 1971 defines a cooperative

that is eligible to borrow from the banks for coopera-

tives in the Farm Credit System and the conditions the

cooperative must meet. The National Consumer

Cooperative Bank Act created a similar financial institu-

tion, the National Cooperative Bank (now called NCB),

to serve non-farm cooperatives.

The Internal Revenue Code describes the tax treat-

ment of cooperatives and their patrons and tax report-

ing requirements. (See USDA CIR 44, Parts 1-5, Income

Tax Treatment of Cooperatives, under References.)

ARTICLES OF INCORPORATION

Incorporation is usually the best method of organiz-

ing. Each State has special enabling laws under which

cooperatives may incorporate. It may be preferable to

incorporate under the State’s general corporation

enabling act, but structure its bylaws to operate as a

cooperative.

Incorporation gives the cooperative a distinct legal

standing. Members generally are not personally liable

for the debts of an incorporated organization beyond

the amount of their investment. The articles indicate the

nature of the cooperative business and should specify

rather broad operating authority when incorporating,

even though services may be limited at the beginning.

These articles of incorporation usually contain the

name of the cooperative, principal place of business,

purposes and powers of the association, proposed

duration of the association, names of the incorporators

(in most States), information about the capital structure,

and how assets will be distributed upon dissolution. In

some States, the names of the first officers of the associ-

ation must be included. (See Appendix M for a sample

format of cooperative articles of incorporation.)

Filing the articles of incorporation (usually with the

State’s secretary of state) activates the cooperative cor-

poration. After the organizing committee approves the

articles, the attorney files for the corporation charter

and pays the recording fees. Once chartered by the

State, the cooperative should promptly adopt bylaws.

BYLAWS

Bylaws state how the cooperative will conduct busi-

ness and must be consistent with both State statutes

and the articles of incorporation. Bylaws are like the

owners’ manual of the cooperative business. Bylaws are

not filed with the State, but are considered legally bind-

ing among members.

Bylaws usually have:

• membership requirements and a list of the rights and

responsibilities of members;

• grounds and procedures for member expulsion;

• procedures for how to call and conduct meetings;

methods of voting; processes for electing or remov-

ing directors and officers, and number, duties, terms

of office, and compensation;

• time and place of director meetings;

• dates of the fiscal year;

• requirement to conduct business on a cooperative

basis;

• process for how net margins will be distributed;

• process for redemption of members’ equity;

• a consent provision that members will include the

face value of written notices of allocation and per-

unit retain certificates as income in the year they are

received;

• distribution process for non-patronage income;

• procedures for handling of losses;

• guidelines for how non-member business will be

treated;

• process for dissolution of the cooperative;

• provisions for indemnification of directors; and

• the process for amending bylaws.

Also covered is how the board is structured to repre-

sent the membership, given geographical distribution

and size of the membership and the scope of business

and function of the cooperative. Directors may be

selected to represent districts based on membership

density, to reflect commodities or services to be han-

dled, or some other basis that provides equitable repre-

sentation. The steering committee’s recommended man-

agement structure should include the basis for director

representation, voting methods, and board officers and

their terms.

For marketing cooperatives that lack a marketing

agreement, the bylaws specify the extent of members’

obligation to market through the cooperative. They out-

line the terms and conditions under which the products

will be marketed and accounting procedures.

The steering committee prepares the articles and

bylaws with the help of an attorney to ensure that pro-

visions comply with the laws of the State in which the

cooperative is incorporated. The committee’s role is to

ensure the bylaw provisions will not conflict with oper-

ating procedures. (See Appendix N for a sample outline

of cooperative bylaws.)

MEMBERSHIP APPLICATION

The membership application form usually has five

main parts: applicant’s statement asking to become a

member of the cooperative; signature of the applicant;

statement of cooperative acceptance of applicant; signa-

tures of the president and secretary, and a statement of

the duty and intent of the member.

The application, signed by the member and approved

by the board of directors, is the legal proof that the

patron is a member. A cooperative should have a com-

pleted membership application on file from every mem-

ber. Membership and amount of business done with

members and non-members are important factors for

certain antitrust and taxation provisions.

A membership certificate may be issued to each

member as evidence of entitlement to all of the rights,

benefits, and privileges of the association (see

Appendix O for a sample membership certificate).

MARKETING AND PURCHASING AGREEMENTS

Marketing and purchasing agreements ensure that

the cooperative has sufficient control over products or

services to keep the cooperative viable. This is especial-

ly helpful in the first few years of operation when the

cooperative is establishing its reputation as a responsi-

ble business. Marketing and purchasing agreements

have also helped some cooperatives get needed outside

financial help.

In some cases, cooperatives that use contractual

agreements must file them with the State government.

In a marketing agreement, the association agrees to

accept specified products of stated or better quality, to

market them to the best of its ability, and to return to

members all marketing proceeds, less deductions for

expenses and continuing capital needs. A similar con-

tract with members can be structured for service and

supply cooperatives.

Marketing agreements are continuing, or self-renew-

ing, agreements that usually specify that after it has

been in force for some initial period, it should continue

indefinitely unless the member (or the cooperative)

states in writing a desire to cancel or modify it. A can-

cellation request must be made during a specified

annual period, as noted in the contract. (See Appendix

P for a sample membership/marketing agreement.)

REVOLVING FUND CERTIFICATES

When a cooperative retains funds from business with,

or for, patrons as capital investments, it issues a written

patronage refund certificate (or similar document) to

the member as a receipt for capital investments that will

be eventually revolved or redeemed. Meanwhile, the

retain is used to finance the business. Member invest-

ments may be deductions based on per-unit of product

handled or services used, reinvested patronage refunds,

or original capital subscriptions, if a non-stock coopera-

tive.

PART 4. GENERAL RULES FOR SUCCESS

Several basic rules for successful development of a

cooperative apply to the process itself and the continu-

ing operations of the new cooperative. Some rules are

unique to the cooperative form of business. They

include effective use of advisors and committees, keep-

ing members informed and involved, maintaining good

board/manager relations, following sound business

practices, conducting businesslike meetings, and forg-

ing links with other cooperatives.

USE COMMITTEES EFFECTIVELY

Organizing human resources and effectively using

their expertise is central to any successful business.

Maximum participation by members is crucial to the

success of the cooperative.

The first committee is the steering committee.

Selecting potential members with experience with coop-

eratives and/or development is important in setting up

the general steering committee. Finding true specialists

may not be possible among the leaders interested in

being on the committee. However, there are likely peo-

ple who have an interest or experience in certain areas

that enable them to better understand the “language” of

technical advisors or of complex cooperative concepts,

and they should be sought to serve.

Subcommittees can be used in the cooperative forma-

tion process, especially if there is a large group of inter-

ested members. Areas for subcommittees to focus on

might include: membership, facilities, site selection,

finance, legal documents, and communications. In some

cases, one or more of these areas can be combined.

Committees are also useful in the ongoing manage-

ment of the cooperative. Temporary or permanent com-

mittees might include advisory groups for youth and

young member activities, education and training, long-

term planning, commodities and services, member and

public relations, board recruitment, annual review of

the manager, and legislative affairs. Only the board of

directors can name a committee, and all committees

serve at the discretion of the board.

KEEP MEMBERS INFORMED AND INVOLVED

Member responsibilities start with the conception of

the cooperative and remain vital throughout the life of

the business. Member loyalty and commitment are criti-

cal to creating a successful cooperative. Communication

is key to developing this loyalty and commitment.

The communication and education functions need to

be an integral activity of the management team. They

require the assistance, knowledge, and involvement of

the cooperative staff and member leadership groups.

Effective communications and education programs

require financial support and must be backed by specif-

ic board and management policies.

When members are involved and informed about the

cooperative, they measure their needs in terms of dol-

lars and are more willing to invest in and patronize the

cooperative. Members should be intimately familiar

with the cooperative and assume a positive, broad role

in its management and direction. Important member

responsibilities:

• understand its purpose, objectives, benefits, limita-

tions, operations, finances, and long-term plans;

• read and understand the articles of incorporation and

bylaws;

• know that laws limit their rights or powers and those

of their board of directors;

• understand that bylaws or policies of the elected

directors may further limit their operations by estab-

lishing member obligations, regulations, and quality

controls exceeding those prescribed by legal statutes

and provide equity (risk) capital for the cooperative

business;

• understand that education on cooperative principles

and practices, as well as related issues, is a lifelong

membership expectation; and

• understand that both profits and losses belong to

members.

In summary, members’ participation in affairs of their

cooperative increases their feeling of ownership and

responsibility for its success.

MAINTAIN GOOD BOARD-TO-MANAGER RELATIONS

The differing responsibilities of the board of directors

and the manager must be clearly understood and car-

ried out.

Directors represent members and are legally respon-

sible for the performance and conduct of the coopera-

tive. All corporate powers of the cooperative, other than

those specifically conferred on members, are vested in

its directors and outlined in the bylaws and in State and

Federal legal statutes.

Directors’ three major responsibilities are to set poli-

cies (see USDA CIR 39 Sample Policies for

Cooperatives, under References), employ and evaluate

the general manager, and provide sound oversight on

the financial foundation of the cooperative.

The board also has some specific responsibilities such

as:

• functioning as trustees for the members in safeguard-

ing their assets in the cooperative;

• setting goals, objectives, and general policies;

• adopting long-range strategic plans;

• employing a competent manager and evaluating per-

formance;

• preserving the cooperative character of the organiza-

tion;

• establishing an accurate accounting system;

• adopting an annual operating budget;

• appointing an outside firm to perform an annual

audit;

• controlling the total operation; and

• authorizing the distribution of cooperative net earn-

ings and redemption of members’ equities.

The board, in turn, delegates responsibility for daily

operations to a hired general manager or chief execu-

tive officer. The general manager hires or discharges

employees, including department heads.

Responsibilities of hired management include:

• managing or directing daily business activities;

• carrying out policies set by the board;

• setting goals and making short-term plans that coin-

cide with the board’s long-range plan;

• employing, training, and discharging employees;

• organizing and coordinating internal activities in

compliance with cooperative goals and objectives and

board policies;

• keeping complete accounts and records;

• developing an annual budget; and

• providing the board with periodic reports.

Questions often arise as to the division of responsibil-

ities between the board and hired management—some-

times they overlap and an exact division of responsibili-

ty is difficult to make. Some factors to consider are: the

time period—long-term decisions are the responsibility

of the board of directors while management makes

short-term decisions; “idea decisions” are usually intro-

duced by the board and actual decisions implemented

by management; decisions involving policy are the

responsibility of the board, and cooperative functions

are handled by management; broad primary control

activities usually concern the board, while secondary

controls pertaining to short-run operations are the

responsibility of management. When it comes to

staffing , the board hires the manager who, in turn,

selects the staff of the cooperative and also supervises

that staff.

Use of policy and procedure manuals and job

descriptions along with frank discussions of questions

when they arise can help maintain an understanding of

the division of responsibility.

CONDUCT BUSINESSLIKE MEETINGS

A cooperative’s meetings must be well planned and

conducted in a businesslike manner.

Policy should be established for determining a rea-

sonable quorum for membership and board meetings.

A quorum is the minimum percentage of members

required to be present to conduct official business.

Quorum requirements are sometimes written into State

statutes, but should be discussed in the bylaws. As

membership expands, the percentage quorum increases

the actual number needed. Setting the quorum too high

increases the risk of not getting enough member partici-

pants to deal with business matters needing attention.

Parliamentary procedure is appropriate for orderly

democratic group action. It enables the chair to lead a

group smoothly and efficiently in determining the

wishes of the majority while protecting the rights of the

minority.

A good meeting just doesn’t happen. It is achieved by

carrying out several successive steps:

• planning ahead;

• involving directors/members;

• following a published agenda; and

• following through on meeting actions.

FOLLOW SOUND BUSINESS PRACTICES

The major challenge to cooperative members, the

board of directors, and management occurs after busi-

ness operations begin. To get a good start, the coopera-

tive needs to develop and install a systematic account-

ing system, properly organize and employ human and

financial resources, prepare financial reports—includ-

ing operating and capital improvement budgets—and

conduct short- and long-range planning, among other

business duties.

Beyond complete and accurate documentation of

income and expenses, a cooperative must keep exact

member records. Such records need to account for

members’ initial and subsequent investments and mem-

ber purchasing, marketing, and/or services used. This

information determines patronage allocations from net

earnings. Members also need these records for their

own personal accounts, particularly for income tax pur-

poses.

The management staff prepares periodic operating

statements and balance sheets to inform the board and

members how the cooperative is performing and its

financial condition. A full report is typically issued

annually, with abbreviated monthly or quarterly reports

for board use. Reports should be compiled often

enough for the board so that it can monitor business

activities, take appropriate actions, and keep members

informed on how their cooperative is progressing. An

annual, independent audit of the cooperative’s financial

condition, including a look at the business and account-

ing procedures and how the cooperative has conformed

with tax and other legal requirements, should be per-

formed.

Once the cooperative is organized and operating,

members need to consider how they want it to grow.

This requires both short- and long-range strategic plan-

ning. Long-range planning, which looks 3-5 years

ahead, usually gets inadequate attention. But this is

becoming more important because of rapid technologi-

cal, economic, and social changes. Planning involves

developing a vision and mission statement, assessing

likely future business trends and the external and inter-

nal business environments, defining desired goals and

objectives, and developing a course of action to reach

them.

FORGE LINKS WITH OTHER COOPERATIVES

New cooperatives should search for potential benefi-

cial links with existing cooperatives as a strategy for

strengthening their operations. Alliances with other

cooperatives may be valuable sources for supplies, mar-

keting outlets, and related services. Membership in

State and national cooperative associations can keep the

new cooperative abreast of what others around the

country are doing. These associations can be sources of

education and training and legislative and public rela-

tions support, and can help identify sources of special

expertise.

CONCLUSION

Developing a cooperative is not an easy endeavor. It

takes more than just the completion of the steps out-

lined in this report. A cooperative must have at its core

a very real economic need it will meet. The process of

assessing the potential of a cooperative to fulfill that

need must include strong local leadership, use of

skilled advisors/development practitioners, full trans-

parency and sound judgment, and a critical mass of

potential members for sufficient business volume. Also

needed is a thorough understanding of what a coopera-

tive is and how it functions, a realistic market analysis,

a comprehensive feasibility study, and a realistic busi-

ness plan. Full capitalization with sufficient member

investment, proper legal documents, a committed and

transparent elected board of directors, skilled manage-

ment, and proper facilities and equipment will also be

critical to success.

APPENDIX A

Definition: A cooperative is an autonomous association of persons united voluntarily to meet their com-

mon economic, social, and cultural needs and aspirations through a jointly-owned and democratically-con-

trolled enterprise.

Values: Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity

and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of hon-

esty, openness, social responsibility and caring for others.

Principles: The cooperative principles are guidelines by which cooperatives put their values into practice.

1. Voluntary and Open Membership. Cooperatives are voluntary organizations, open to all persons able

to use their services and willing to accept the responsibilities of membership, without gender, social, racial,

political or religious discrimination.

2. Democratic Member Control. Cooperatives are democratic organizations controlled by their members,

who actively participate in setting their policies and making decisions. Men and women serving as elected

representatives are accountable to the membership. Cooperatives are organized in a democratic manner;

members have equal voting rights (one member, one vote).

3. Member Economic Participation. Members contribute equitably to, and democratically control, the

capital of their cooperative. At least part of that capital is usually the common property of the co-operative.

Members usually receive limited compensation, if any, on capital subscribed as a condition of member-

ship. Members allocate surpluses for any or all of the following purposes: developing their co-operative,

possibly by setting up reserves, part of which at least would be indivisible; benefiting members in propor-

tion to their transactions with the cooperative; and supporting other activities approved by the member-

ship.

4. Autonomy and Independence. Cooperatives are autonomous, self-help organizations controlled by

their members. If they enter into agreements with other organizations, including governments, or raise

capital from external sources, they do so on terms that ensure democratic control by their members and

maintain their cooperative autonomy.

5. Education, Training and Information. Cooperatives provide education and training for their members,

elected representatives, managers, and employees so they can contribute effectively to the development

of their cooperatives. They inform the general public—particularly young people and opinion leaders—

about the nature and benefits of cooperation.

6. Cooperation among Cooperatives. Cooperatives serve their members most effectively and strengthen

the cooperative movement by working together through local, national, regional and international struc-

tures.

7. Concern for Community. Cooperatives work for the sustainable development of their communities

through policies approved by their members.

INTERNATIONAL COOPERATIVE ALLIANCE: COOPERATIVE

IDENTITY, VALUES AND PRINCIPLES

(http://ica.coop/en/what-co-op/co-operative-identity-values-principles)

APPENDIX B

SAMPLE MEMBER–USER QUESTIONNAIRE

Prepare an introductory letter to accompany the survey and state the purpose.

Stress that the data will be kept confidential and used only for the stated purpose.

PRODUCER SURVEY: XYZ VEGETABLE COOPERATIVE

While you are not required to respond, your help is needed to provide data for a

new vegetable marketing cooperative. All answers will be treated confidentially.

1. Contact person for the farm ______________________________________

Address _____________________________________ Phone _________

2. Farm location—see attached map – County ______________ Grid No. ___

3. How much of your vegetable acreage is irrigated? ___________ acres.

4. Give type and capacity for any of the following facilities and equipment you

own.

type and capacity

Cooling facilities ______________________________________________

Packing equipment ____________________________________________

Refrigerated truck _____________________________________________

Nonrefrigerated truck __________________________________________

(over 1 ton) _________________________________________________

Mechanical harvester __________________________________________

5. Check the following supplies or services you are interested in obtaining from

the proposed cooperative if a competitive fee is established.

_____ Packing containers

_____ Vegetable marketing

_____ Vegetable packing

_____ Seeds

_____ Plants

_____ Other (specify)

6. Are you willing to follow the proposed cooperative’s recommendations on

varieties to plant and cultural and harvesting practices?

Yes ___ No ___

7. Banks generally require cooperative owners to raise 35 to 50 percent of the

needed capital. Assuming the cooperative appears feasible, are you willing

to make an initial cash investment in it in proportion to your intended use?

Yes ___ No ___

What is the maximum amount you are willing to invest?

8. Per-unit retains are a capital investment that is deducted from patron's sales

proceeds in proportion to the volume of products they market through the

cooperative. Are you willing to finance the cooperative with per-unit retains?

Yes ___ No ___

APPENDIX B

Continued

9. A delayed producer payment is one way of reducing equity for operating capital.

Are you willing to accept a delayed crop payment in lieu of a larger initial cash

equity investment?

Yes ___ No ___

If yes, for how long? ___ days

10. In a pool, producers are grouped by type and grade over a selected period of

time (week, month, or season). Producers are paid the average price the

cooperative receives for the pooled products less packing and marketing fees.

Are you willing to market your vegetables on a pooled basis?

Yes ___ No ___

11. Are you willing to sign a marketing agreement to sell all or a fixed quantity

(acreage) of your vegetables through the proposed cooperative?

Yes ___ No ___

12. Where do you plan to market your vegetables in the current year (by percent-

age of production)?

a. Roadside stands ___ percent

b. Farmers’ markets ___ percent

c. Other markets (specify) ____________________ ___ percent

13. Please record production and marketing data in the accompanying table.

Crop Months usually

harvested

Major markets

this year*

2 years prior 1 year prior This year Next year In 2 years 2 years prior 1 year prior Acreage you

plan to sell

through

cooperative

next year

Acreage you

plan to contract

with

cooperative

next year

Asparagus

Broccoli

Cabbage

Cauliflower

Eggplant

Greens

Peppers

String beans

Summer squash

Sweet corn

Tomatoes

Winter squash

*A—roadside stands, B-farmer’s markets, C—Other markets (as detailed in question 12)

(Vegetable cooperative example. If another type of cooperative, tailor table to reflect member potential use of cooperative.)

Harvested or to be planted Volume sold

Continued next page

APPENDIX B

Continued

14.

Do you feel a cooperative is needed to help you with marketing your veg-

eta

bles?

_______________________________________________________

Very much ___ Some ___ Not at all ___

15. How well do you understand cooperatives, how they are structured, how

they are controlled and governed, and how they operate? Very well ___

Some ___ Not at all ___

16. Would you be willing to help with the development of a cooperative

designed to meet your needs in marketing vegetables? Yes ___ Maybe

___ No ___

17. What skills do you have that could be useful in the study of a potential

vegetable marketing cooperative?

___________________________________________________________

18. Can the steering committee use your name in its contact with other poten-

tial members of the proposed cooperative? Yes ___ No ____

19. Provide any thoughts you have about studying the idea of a new coopera-

tive.

___________________________________________________________

Thank you!

APPENDIX C

EXAMPLE STEERING COMMITTEE MEMBER-MEETING AGENDA OUTLINE

I. Call meeting to order

II. Introductions (who is involved, steering committee members, and other key

people leading effort)

III. Review on how the project started

IV. Recap on how far along project is and what has happened so far

V. What this meeting needs to accomplish

VI. Activity reports (call on steering committee members to provide reports on their

activities if necessary)

VII. Review study findings (producer survey, initial market analysis, feasibility study,

business plan, etc.)

A. Summary of key findings

B. Detailed report of most important components of study

C. What the findings mean

D. Answer questions from participants

E. Further discussion on study

VIII. Steering committee recommendation

IX. Hold vote on whether to adopt recommendation

X. Next steps

XI. Final discussion/thoughts

XII. Adjourn

APPENDIX D

PRE-MEMBERSHIP AGREEMENT COMPONENTS

A pre-membership agreement assesses the potential membership commit-

ment. It usually includes these components.

1. Statement of purposes for which new cooperative is to be formed.

2. Description of steering committee and its organizational powers.

3. Statement of what the new cooperative’s bylaws will provide when formed.

4. Notice that steering committee may call meetings of prospective members.

5. Duties of steering committee to keep records and make accounting to coop-

erative when formed.

6. Subscription agreement for membership certiﬁcate or stock.

7. Agreement to sign marketing agreement if cooperative is to have one.

8. Agreement to become a member of the cooperative if formed.

APPENDIX E

SAMPLE OF WAIVER OF NOTICE OF FIRST MEETING OF BOARD OF

DIRECTORS

Waiver of Notice of First Meeting of Board of Directors

We, the undersigned, being all the directors of

______________________________________________________________

(Name of association)

_____________________________________________________________ ,

(Town) (State)

hereby waive notice of a meeting of such directors at ___________o’clock

am./pm. on _______ the _______ day of ______________ , 20__ , at

_____________________________ in ___________________ , __________

(Place of meeting) (Town) (State)

for the purpose of electing officers of the association to serve during the ensuing

year, adopting the form of marketing contract, and hereunto subscribed our

names, this _____________________ day of ___________________ , 20__ .

______________________________

APPENDIX F

SAMPLE PRO FORMA CASH FLOW STATEMENT

Item Mth 1 Mth 2 Mth 3 Mth 4 Mth 5 Mth 6 Mth 7 Mth 8 Mth 9 Mth 10 Mth 11 Mth 12

Totals

CASH RECEIPTS

Cash sales**

Credit Collections

Commission fees

Interest income

Loans

Equity (e.g. capital retain)

TOTAL RECEIPTS

CASH PAID OUT

Purchases**

Salaries

Employee wages

Payroll expense

Bad debts

Outside services

Supplies

Repairs & maintenance

Advertising/promotion

Car/travel

Accounting & legal

Rent

Telephone

Utilities

Insurance

Property taxes

Other taxes

Interest on loans***

Depreciation

Miscellaneous

Subtotal

Principal payment***

Capital purchases

Income taxes

Other withdrawal

TOTAL CASH PAID

CHANGE IN CASH

Beginning balance

Ending balance

*May have multiple statements for different years.

**May have more than one cash sale and purchases line (more commodities/products).

***May have more loan (e.g., operating, facility) and interest payment lines if more loans are obtained.

Pro forma cash flow statement, FY 20XX*

APPENDIX G

Pro forma income statements, FY 20XX

–

FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

INCOME

$ $ $ $ $

Cash sales

Commission fees

Total sales

Cost of goods sold

GROSS MARGIN

EXPENSES

Salaries

Employee wages

Payroll expense

Bad debts

Payroll expense

Outside services

Supplies

Repairs & maintenance

Advertising/promotion

Car/travel

Accounting & legal

Rent

Telephone

Utilities

Insurance

Property taxes

Other taxes

Depreciation

Miscellaneous

TOTAL OPERATING

EXPENSES

Operating income

Interest expense

NET MARGIN

Unallocated earnings

Allocated earnings

*This example shows 5-year projections but many projects focus on just 3 years. Operating statement line items will

vary in description and inclusion depending on project.

SAMPLE PRO FORMA INCOME STATEMENTS

APPENDIX H

SAMPLE PRO FORMA BALANCE SHEETS

Pro forma balance sheets, FY 20XX

–

FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

ASSETS

$ $ $ $ $

Current assets

Cash

Accounts receivable

Inventory

Prepaids (e.g., insurance)

Other

Total current assets

Fixed assets

Machinery & equipment

Buildings

Land

Less: accumulated depreciation

Total fixed assets

TOTAL ASSETS

LIABILITIES AND MEMBER EQUITY

Current liabilities

Accounts payable

Taxes payable

Patronage refunds payable

Line of credit

Interest payable

Total current liabilities

Long term liabilities

Machinery and equipment note

Real estate and building

Total long term liabilities

Total liabilities

Member Equity

Common stock

Preferred stock

Allocated earnings

Unallocated earnings

Per unit capital retains

Total member equity

TOTAL LIABILITIES & MEMBER EQUITY

*This example shows 5-year projections but many projects focus on just 3 years. Balance sheet line items will vary in

descriptions and inclusion depending on project.

APPENDIX I

Pro forma financial ratio analysis, FY 20XX

–

FY 20XX*

Item FY 20XX FY 20XX FY 20XX FY 20XX FY 20XX

Current ratio

(current assets/current liabilities)

Debt ratios

(total debt/total assets)

(total debt/member equity)

Average collection period

(receivables/sales per day)

Total assets turnove

(sales/total assets)

Profitability ratios

Return on equity

(net margins/total equity)

Return on investment

(net margins/investment)

Return on sales

(net margins/sales)

TOTAL LIABILITIES & MEMBER EQUITY

*This example shows 5-year projections but many projects focus on just 3 years. Balance sheet line items will vary in

descriptions and inclusion depending on project.

SAMPLE PRO FORMA RATIO ANALYSIS

APPENDIX J

SAMPLE PROJECTED SOURCES AND USES OF FUNDS

STATEMENT

Projected Sources and Uses of Funds Statement, Month, 31, 20XX

Item Dollars

SOURCE OF FUNDS

Operations:

Net margin

Depreciation

Per unit capital retains

Facility loan

Operating loan

Inventory loan

Total sources

USE OF FUNDS

Patronage refunds payable in cash

Additions to fixed assets

Additions to investments

Deferred charges

Loan principal paid

Net increase in working capital

Total uses

Changes in working capital:

Change in current assets:

Cash and certificates of deposit

Accounts receivable

Accrued interest payable

Operating loan payable

Term loan payable

Net change in current liabilities

Net change in working capital



APPENDIX K

SAMPLE SCHEDULE OF FIXED ASSET COSTS AND DEPRECIATION

Schedule of fixed asset costs and depreciation

Item Cost Annual Depreciation

Land x NA

Less timber sale x NA

Total land, net X NA

Buil

din

gs and equipment

Buildings (18-year life): x x

Erected building, site preparation x x

Engineering

x x

Equipment installed (12-

year life) x x

Total buildings and equipment x x

Organiza

tional expense (5-year life) x x

Total fixed assets x x

NA = Not applicable.

x = dollars



APPENDIX L SCHEDULE OF FINANCING NEEDS AND SOURCES

Schedule of financing needs and sources

Item Fixed assets Inventory capital Operating capital Total provided

Total capital x x x x

Equity x x x x

Borrowed funds:

Bank loan x x x x

Long-term note x x x x

x = dollars.



APPENDIX M

SAMPLE FORMAT OF COOPERATIVE ARTICLES OF

INCORPORATION

ThisoutlineprovidesanexampleofhowCooperativeArticlesofIncorporationmightbesetup.*



ArticlesofIncorporation

___________________________________________________________

(NameofCooperative)



We,theundersigned,allofwhomareresidentsandcitizensoftheStateof

__________________________,engagedintheproductionofagriculturalproducts,dohereby

voluntarilyassociateourselvesforthepurposeofformingacooperativeassociation,(wi

th/without)

capitalstock,undertheprovisionsofthe______________________ActoftheStateof

__________________________.



ArticleI—Name

ArticleII—PrincipalPlaceofBusiness

ArticleIII—Purposes

ArticleIV—Powers;Limitations

Section1.Powers

Section2.Li

mitations

ArticleV—PeriodofDuration

ArticleVI—Directors

ArticleVII—Membership(fornonstockcooperative)or

ArticleVII—CapitalStock(forstockcooperative)

Section1.AuthorizedAmounts;Classes

Section2.CommonStock

Section3.PreferredSto

ck

ArticleVIII—Amendment



Intestimonywhereof,wehavehereuntosetourhandsthis_____dayof__________,

20__.Stateof________________________.Countyof_______________________.

Beforeme,anotarypublic,withinandforsaidcountyandState,onthis___dayof___

____,20__,

personallyappeared_____,knowntometobeoneoftheidenticalpersonswhoexecutedthewithin

andforegoinginstrument,andacknowledgedtomethathe/shehadexecutedthesameasafreeand

voluntaryactanddeedfortheusesandpurposesthereinsetforth.



Witnessmyhandandofficialsealth

edayandyearsetforth.



NotaryPublic________________________________________________________________

InandfortheCountyof_____________________,Stateof___________________________

MyCommissionexpires_____________________________



_______________________________________

*Steeringcommitteeshouldhirelegalcounseltohelppreparelegaldocuments.

SeeUSDACIR40,SampleLegalDocumentsforCooperativesformorede

tailedinformationonwhatis

containedintheArticlesofIncorporatio n foracooperative.

APPENDIX N

ThisoutlineprovidesanexampleofhowCooperativeBylawsmightbesetup.*



ArticleI—Membership

Section1.Qualifications

Section2.SuspensionorTermination

ArticleII—MeetingsofMembers

Section1.AnnualMeetings

Section2.SpecialMeetings

Section3.No

ticeofMeetings

Section4.Voting

Section5.Quorum

Section6.OrderofBusiness

Determinationofquorum

Proofofduenoticeofmeeting

Readinganddispositionofminutes

Annualreportsofofficersandcommittees

Unfinishedbusiness

Newbusiness

Electionofdirectors

Adjournment

ArticleIII—DirectorsandOfficers

Section1.Nu

mberandQualificationsofDirectors

Section2.ElectionofDirectors

Section3.ElectionofOfficers

Section4.Vacancies

Section5.RegularBoardMeetings

Section6.SpecialBoardMeetings

Section7.No

ticeofBoardMeetings

Section8.Quorum

Section9.ReimbursementandCompensation

Section10.RemovalofDirectors

ArticleIV—DutiesofDirectors

Section1.Managementof Business

Section2.EmploymentofManager 

Section3.BondsandInsurance

Section4.Accounti

ngSystemandAudits

Section5.Depository

ArticleV—DutiesofOfficers

Section1.DutiesofPresident

Section2.DutiesofVicePresident

Section3.DutiesofSecretary

Section4.DutiesofTreasurer

ArticleVI—OperationatCostandMe

mbers’Capital

Section1.OperationatCost

Section2.MarginAllocation 

Section3.PerͲUnitRetains 

Section4.Dividends

Section5.RecordsandDocumentation 

Section6.FiscalYear

Continued next page

SAMPLE OUTLINE OF COOPERATIVE BYLAWS

APPENDIX N

Continued

ArticleVII–EquityRedemption 

Section1.RegularRedemption

Section2.DiscretionarySpecialRedemptions

ArticleVIII–Consent

ArticleIX–NonpatronageIncome

ArticleX–Losses

 Section1.PatronageLosses

 Section2.NonpatronageLosses

 Section3.Ge

neralProvisions

ArticleXII–DissolutionandPropertyInterestofMembers

ArticleXIII–Indemnification

ArticleXIV–Amendments



We,theundersigned,beingalloftheincorporatorsandmembersofthe______________association,

doherebyassenttotheforegoingbylawsanddoadoptthesameasthebylaw

sofsaidassociation;and

inwitnesswhereof,wehavehereuntosubscribedournames,this________dayof______,20__.



_______________________________________

*Steeringcommitteeshouldhirelegalcounseltohelppreparelegaldocuments.

SeeUSDACIR40,SampleLegalDocumentsforCooperatives formorede

tailedinformationonwhatis

containedintheBylawsofacooperativ e.



OtherArticlessometimesincludedincooperativebylawsinclude:executivecommitteeandother

committees,membershipcertificates, stockcertificates,etc.



SAMPLE MEMBERSHIP CERTIFICATEAPPENDIX O

MembershipCertificate

Thiscertifiesthat_______________________________of_________________________

isamemberof_______________________________Associationandisentitledtoallofthe

rights,benefits,andprivilegesoftheAssociation.



Date_______________________________.

_______________________________

(President)



APPENDIX P

SAMPLE MEMBER AGREEMENT/MARKETING CONTRACT

THISAGREEMENTbetweenthe____________________________,Inc.,hereinafter

referredtoastheAssociation,andtheundersignedProducer,witnesseth:

TheProducer

1.AppliesformembershipintheAssociation,andifacceptedasamember,agreesto

beboundbyitsarticlesofincorporation,bylaws,rules,andre

gulationsasnowor

hereafteradopted.

2.AppointstheAssociationasagenttosellallthe__________________ofmarketable

qualityproducedananyfarmincontroloforoperatedbytheProducer,except

thatrequiredforconsumptiononthefarm.

3.Willdeliversuchproductsatsuchtimesandtosuchplacesinunadulterate

dform

undersuchconditionsasmaybeprescribedbyproperauthorities.

4.WillnotifytheAssociationofanylienontheproductsdeliveredhereunder,and

authorizestheAssociationtopaytheholderofsaidlienfromthenetproceeds 

derivedfromthesaleofsuchproductsbeforeanypay

mentismadetothe

Producerhereunder.

5.Willprovidecapitalinsuchamountsandinsuchamannerasmaybeprovidedin

thebylaws.

TheAssociation:

1.AcceptstheapplicationofProducerformembershipintheAssociation.

2.Agreestoac

tasagentforthemarketingofproductsofProducerashereinprovided.

3.WilldisposeofProducer’sproductsinamannerdeemedtobemostadvantageous

foritsmembers.

4.WillaccounttotheProducerinaccordancewiththiscontractforallamounts

receivedfromthesaleofproductsashereinprovided.

5.Willre

flectinanappropriatecapitalaccountthecapitalreceivedfromeach

patron.

TheProducerandtheAssociationmutuallyagreethattheAssociationshallhavethe

power:

1.Toestablishvariousplansformakingretur

nstotheProducer.

2.ToblendorpoolproceedsfromsalesofproductsoftheProducerwiththeproceeds

ofthesalesofproductsofotherProducers,andtoaccounttoorsettlewith

Producerthereforeinaccordancewithestablishedplans.

3.ToprocessorcausetobeprocessedproductsoftheProduceranddisposeofthe

sameinthemannerdee

medmostadvantageoustoitsmembers.

4.Tocollectfrombuyersofproductsthepurchasepricethereforeandtoremitthe

sametoProducerunderaplanauthorizedbythiscontractaftermakinguniform

deductionsdeemedadequateforallnecessaryexpensesandforcapi

talpurposes.

IncaseofabreachofthiscontractbytheProducer,theactualdamagetothe

Associationandotherproducerscannotbedetermined.Therefore,Produceragrees

topaytotheAssociationasliquidateddamagesforsuchbreach,thesumof

________dollars(_________)per____________onallproductsthatwouldhave

beendeliveredhadtheProducernotbreachedthesaidcontract.

AndtheAssociationshallfurtherbeentitledtoequitablereliefbyinjunctionor

otherwisetopreventanysuchbreachorthreatenedbreachthereofandthepayment

Continued next page

APPENDIX P

Continued

ofallcostsoflitigationinconnectionwiththeexerciseofanyoralloftheremedies

availabletotheAssociation.

Thiscontractshallremainineffectforaninitialtermof(______)yearsfromthe

datehereof.Followingtheinitialterm,thecontractmaybecancelledbynoticegiven

inwriti

ngbyeitherpartytotheotherwithinten(10)daysafteranyyearlyanniversary

date,andsuchcancellationshallbecomeeffectiveonthelastdayofthesecond

calendarmonthfollowingthemonthduringwhichsuchnoticeisgiven.

Date______________

Producer’ssignature________________________(________________________)

Printnameher

e

Address

_____________________________________________________________________________

(R.F.D.orStreetNo.)   (Town)(StateandZipCode)

SocialSecurityNo._____________________County____________________________



Acceptedthisdayof_________.20__.

______________________________,Inc.

By______________________________,Pres.

By______________________________,Secy.



(SomeStatelawsprovideforfillingorrecordingcooperativemarketingcontractsin

acountyrecorder’sofficetogivenoti

cetothirdparties thatthecontractexists.And

acknowledgmentifthecontractistobefiledorrecorded.)



REFERENCES

Brockhouse, John W. and James J. Wadsworth. “Vital

Steps: A Cooperative Feasibility Study Guide”

Cooperative Service Report 58, U.S. Department of

Agriculture, Washington, DC, December 2010.

http://www.rd.usda.gov/files/sr58.pdf

Frederick, Donald, A., “Co-ops 101, An

Introduction to Cooperatives,” Cooperative

Information Report 55, Rural Development, U.S.

Department of Agriculture, Washington, DC, April

1997 (revised by James J. Wadsworth and E. Eldon

Eversull, November 2012).

http://www.rd.usda.gov/files/cir55.pdf

Frederick, Donald, A., “Do Yourself a Favor: Join a

Cooperative,” Cooperative Information Report 54,

Rural Development, U.S. Department of Agriculture,

Washington, DC, April 1996.

http://www.rd.usda.gov/files/cir54.pdf

Frederick, Donald A., “Sample Legal Documents

for Cooperatives,” Cooperative Information Report

40, Rural Development, U.S. Department of

Agriculture, Washington, DC, January 1999.

http://www.rd.usda.gov/files/cir40.pdf

Frederick, Donald A., “Income Tax Treatment of

Cooperatives,” Cooperative Information Report 44

Parts 1-5, Rural Development, U.S. Department of

Agriculture, Washington, DC, 2005.

http://www.rd.usda.gov/files/cir44-1.pdf

Patrie, William. "Creating ‘Co-op Fever’: A Rural

Developer’s Guide to Forming Cooperatives,"

Service Report 54, Rural Development, U. S.

Department of Agriculture, Washington, DC, July

1998.

http://www.rd.usda.gov/files/sr54.pdf

Patrie, William. “Creating Co-op Fever: The Hard

Lessons Learned,” Common Enterprise

Development Corp., Mandan, ND, 2009.

http://www.community-wealth.org/sites/clone.com-

munity-wealth.org/files/downloads/paper-patrie.pdf

Rapp, Galen. “Sample Policies for Cooperatives,”

Cooperative Information Report 39, Rural

Development, U.S. Department of Agriculture,

Washington, DC, May 1993.

http://www.rd.usda.gov/files/cir39.pdf

Reynolds, Bruce and James Wadsworth, “A Guide

for the Development of Purchasing Cooperatives,”

Cooperative Information Report 64, Rural

Development, U.S. Department of Agriculture,

Washington, DC, April 2009.

http://www.rd.usda.gov/files/cir64.pdf

USDA Rural Development, “Understanding Capper-

Volstead,” Cooperative Information Report 35,

Revised April 2009.

http://www.rd.usda.gov/files/cir35.pdf

USDA WEBSITES

U.S. Department of Agriculture:

http://www.usda.gov/

USDA Cooperative Programs:

http://www.rd.usda.gov/programs-services/coopera-

tives

Cooperative publications:

http://www.rd.usda.gov/publications/publications-

cooperatives

USDA Rural Development: http://www.rd.usda.gov

USDA Rural Development can also assist you from

its State Offices. Please look up and contact the

Rural Development State Office within your State:

http://www.rd.usda.gov/contact-us/state-offices

To order USDA publications email:

[email protected]

OTHER WEBSITES/RESOURCES

International Cooperative Alliance (ICA) Statement

of the Cooperative Identity:

http://ica.coop/en/whats-co-op/co-operative-identi-

ty-values-principles

University of Wisconsin Center for Cooperatives,

Research on the Economic Impact of Cooperatives:

http://reic.uwcc.wisc.edu/default.htm.

The Agricultural Marketing Resource Center

(AgMRC) has extensive information on value-added

businesses available at www.agmrc.org. This site

also provides links to resources for feasibility stud-

ies and business planning.

Outside advisors can assist in the development

process as well as be providers of other sources of

background information. There are cooperative

development centers located throughout the United

States with the sole purpose of being practitioners of

cooperative development. Those interested in devel-

oping cooperatives can benefit from contacting a

cooperative development center in their State or

region (if there is one) for assistance.

http://www.rd.usda.gov/files/RD Cooperative

Development Centers 20150121.pdf

Cooperation Works!

http://www.cooperationworks.coop/

eXtension.org Cooperative Community of Practice:

http://www.extension.org/cooperatives

Agricultural Marketing Resource Center (AgMRC):

http://agmrc.org/

University of Wisconsin Center for Cooperatives:

http://www.uwcc.wisc.edu/

Quentin Burdick Center for Cooperatives:

http://www.ag.ndsu.nodak.edu/qbcc/