purpose of a traditional corporation). Profits, or what co-ops call surplus, are distributed to members in proportion to use, with a limited return on capital in general in cooperatives, a departure from the practice of corporations, where profits are distributed according to stock ownership (in proportion to investment). Tax liability is also different. Under U.S. law, members pay income tax on “qualified profit distributions based on patronage,” and the cooperative pays taxes on unallocated surplus and nonqualified profits (University of Wisconsin Center for Cooperatives 2012). Owners of C corporations (the stockholders) pay taxes on their dividends and capital gains from the sale of stock, while the corporation pays taxes on profits. Stockholders of S corporations pay individual-rate taxes on their profit share and their capital gains.
Table I.1 provides more details about differences and comparisons with other business structures. For specific details about how cooperatives compare with employee-owned businesses, table I.2 compares cooperatives, particularly worker cooperatives, with employee stock-ownership plan (ESOP) companies. Under worker-cooperative-ownership structures, the employee-owners vote for the board of directors, which sometimes consists of all the employee-owners. In worker cooperatives, labor rents capital instead of capital renting labor, which allows the “new assets and liabilities created in production” to accrue to the residual claimants (workers) (Ellerman 1990, 207). In worker cooperatives, “the relationship between the worker and the firm is membership, an economic version of ‘citizenship,’ not employment”—the employment relationship is abolished (206). In ESOP structures, ownership is still determined by traditional corporate stock ownership—with voice and profits determined by how much stock is owned—and the proportion of stock ownership allocated to employees is determined by the actual plan that created the ESOP. ESOP companies democratize some of the stock ownership by distributing stock to employees and thus giving them some level of participation in profit distribution and overall governance. But unless the company is 100 percent employee owned, the ownership of stock does not translate into employee control over decisions and work rules. ESOP structure does not necessarily change any of the major economic relationships or institute workplace democracy. An ESOP is basically a retirement plan that distributes stock ownership to employees as a major component of the retirement account. ESOP employees receive a return on their investment and any share of the profits upon exit from the company, which usually occurs at retirement, rather than during their employment or in proportion to their use, as in a cooperative.
Owners of corporations are stockholders, and their power derives from the amount of stock they own (their proportion of the investment). Co-op members are the owners, determined by the enterprise’s bylaws and the fact that they have invested at all in the co-op (no matter how much or how little). Co-op members all have equal voting power (“one person, one vote”), and their influence on the cooperative depends on their participation in and use of the cooperative. Surplus distribution is decided jointly and shared relatively equally. These differences in structure and procedure provide cooperatives with different mechanisms and unique functioning for conducting business—and they often give cooperatives an advantage over other types of businesses.
Cooperatives are not just economic enterprises; they are also relatively homogeneous associations of people who have come together to address a common need or want, which “reduces to a minimum potential frictions and suspicions within the aggregate” (Emelianoff 1995, 250). Traditional neoclassical economics lacks a theory of democratic or social enterprise, because “the firm is seen as a technologically specified black-box or, from the institutional viewpoint, as a piece of property, a capital asset—not a community of work qualifying for democracy” (Ellerman 1990, 207; see also Fairbairn 2003). Emelianoff (1995) tried to apply pure neoclassical economic theory to the theory of cooperation, and while he could describe what cooperatives are, he had trouble categorizing them as economic enterprises because of their social aspects and their function for use rather than for profit. Emelianoff seemed more comfortable categorizing cooperatives as some kind of not-for-profit organization without an economic basis, i.e., not a business. Fairbairn (2003, 3) notes that business leaders, policymakers, and mainstream economists view cooperatives as burdened and marginal and as more likely to fail because they are expected to do more (i.e., they are hindered by the expectations of and obligations to their members), but they cannot raise capital from markets in the same way as other business corporations. Spear (2000, 510) turns this notion on its head and expresses the concern that for-profit businesses, in their quest for excessive profits, exploit situations to provide inferior products and services. Spear observes that asymmetrical information and lack of opportunity to monitor quality create a failure in the ordinary contractual processes so that exploitation can occur. This gives not-for-profit enterprises an advantage as companies that can build and depend on trust, reciprocity, and transparency.
Emelianoff (1995) had no theory of the social enterprise when he wrote about the economic theory of cooperation in 1948. Later in the twentieth century, as scholars developed theories of not-for-profit enterprises, social entrepreneurship, the social economy, and the solidarity economy, there was a better understanding of cooperatives as economic enterprises with unique strengths. Today we have a much better understanding of not-for-profits and of organizations that operate economically and within some kind of market using monetary exchange, but where making a profit is not the primary purpose. Spear, for example, explains that demand-side theories of contract failure and excessive market power help to explain how state and market failures lead consumers and workers to search for alternatives that base economic exchanges more on trust and transparency (2000, 510). In addition, supply-side theories that focus on agency and the dynamics of institutional choice (508–9) contribute an understanding of social entrepreneurship and historical legacies to the understanding of cooperative effectiveness and efficiencies.
The Cooperative “Advantage”
Spear sums up the current understanding of the economic and social advantages of cooperatives: the associative nature of cooperatives and their tight connections with community “provide a uniquely favourable basis for the utilization of social capital, its reproduction and accumulation.” This attracts nontraditional resources, reduces costs of ownership, provides “a network of [reciprocal and] trust relationships which reduce asymmetric information and opportunistic behavior,” and allows “more efficient economic exchanges and activities” (2000, 519). Cooperatives address market failure, asymmetric information, distrust of opportunism, excessive market power, and barriers to entry.
As early as the 1920s there was clearly a growing concept of cooperatives as economic entities that solve economic problems in different ways than conventional for-profit businesses. For example, the director of the Division of Foods and Markets of the New York Department of Farms and Markets argued that “there is scarcely a duty connected with the marketing work that we cannot accomplish more effectively by the path of organization of cooperative enterprises than we can through any means of governmental control or governmental direction that did not involve cooperative effort” (Jones 1920, 51). He also argued that cooperative organization was the best way “to accomplish standardization, uniform packing and more economical methods of shipping” in the private sector, and to change distribution conditions: “if you have a consumers’ organization that is distributing foodstuffs solely for use, you can change the physical facilities and change the methods of doing business and approach your whole problem from the standpoint of rendering the most efficient and economical service to the people” (53). The chair of the Committee on Cooperative Organizations of the Division of Foods and Markets also noted that cooperatives allow “uniformity of shipments.” In addition, the committee
