Cooperative Development: How New Cooperatives Are Formed

What Is Cooperative Development?

Cooperative development refers to the process by which new cooperatives are formed — from initial idea and feasibility assessment through legal incorporation, financing, and the first year of operations. It also encompasses the broader ecosystem of organizations, funding programs, and technical assistance providers that support cooperative formation and growth.

Forming a cooperative is more complex than starting a sole proprietorship or even a standard LLC, because the cooperative must simultaneously build a business and a democratic governance structure. A viable cooperative needs a sound business model and an engaged membership that understands, participates in, and trusts the organization's governance. Getting both right at the same time is the central challenge of cooperative development.

The cooperative governance structure must be built simultaneously with the business model. The stakes are real: underdeveloped cooperatives — those that rush to incorporate before establishing a committed membership or adequate financing — have high failure rates in their first three years. Conversely, cooperatives that invest in thorough development work — proper feasibility analysis, member education, adequate capital — show strong long-term survival rates compared to conventional small businesses.

The Seven-Step Cooperative Development Process

The USDA Rural Development program, the National Cooperative Business Association (NCBA CLUSA), and the University of Wisconsin Center for Cooperatives all use variations of a common framework for cooperative development. The steps below reflect the standard practice recognized across these organizations.

Step 1: Identify the Common Need

Cooperatives form when a group of people share a problem that collective action can solve more effectively than individual action. The starting point is always a common need — not an abstract desire to do something cooperatively, but a specific, concrete problem.

Examples of common needs that have produced successful cooperatives:

Farmers unable to find reliable cold storage and processing facilities for their produce (agricultural marketing cooperative)
Workers at a failing company who want to buy the business rather than lose their jobs (worker cooperative conversion)
Rural residents without access to affordable broadband (rural broadband cooperative)
Small retailers who cannot individually negotiate competitive wholesale prices (retailer purchasing cooperative)
Care workers who want to own the home care agency where they work (care worker cooperative)

A cooperative development practitioner's first job is to verify that the common need is real, widespread enough to generate viable membership, and not already being adequately served.

Step 2: Form a Steering Committee

Once a core group has identified the common need, a steering committee of committed individuals takes responsibility for the development process. This committee typically includes three to twelve people willing to invest significant volunteer time over several months.

The steering committee should represent the potential membership broadly — different geographic areas, farm sizes, business types, or demographic groups, depending on the cooperative's purpose. The committee will:

Guide the feasibility study
Make decisions about the cooperative's structure and governance
Recruit members and raise initial financing
Oversee legal incorporation

Development organizations often assign a professional cooperative developer — sometimes called a development technician or cooperative specialist — to support the steering committee. This person provides expertise in cooperative law, governance, and finance that most founding groups do not have internally.

Step 3: Conduct a Feasibility Study

The feasibility study is the most critical step in cooperative development. It tests whether the proposed cooperative can operate as a financially sustainable business that serves its members' needs better than available alternatives.

A thorough feasibility study examines:

Market analysis. Is there sufficient demand for the cooperative's services or products? For a marketing cooperative, this means analyzing market prices, buyer demand, and competitive conditions. For a consumer cooperative, it means assessing whether enough households in the area will shift their purchasing to the cooperative.

Operational analysis. What facilities, equipment, staff, and technology does the cooperative need? What are the realistic operating costs? Who will manage day-to-day operations?

Member commitment analysis. Will enough potential members commit to using the cooperative at the volumes needed to reach break-even? This is often tested through a member intent survey — a written survey in which prospective members state how much product they will deliver or how much they will purchase through the cooperative. Intent surveys must be analyzed conservatively; actual patronage typically runs 20–30% below stated intent.

Financial projections. A pro forma income statement, balance sheet, and cash flow projection for three to five years. The projections should be built on the conservative end of the member intent data and should explicitly model the ramp-up period when the cooperative is not yet operating at full capacity.

Capital requirements. How much startup capital does the cooperative need? What will come from member equity, what from loans, and what from grants?

If the feasibility study reveals that the cooperative cannot achieve financial sustainability at a realistic membership level and price point, the development process should stop. Proceeding with an infeasible cooperative harms the very members it was designed to help. For an overview of how cooperative finance works once operational, see that article.

Step 4: Build Member Commitment

Assuming the feasibility study is positive, the steering committee moves into an active membership recruitment phase. Prospective members must be educated about:

What a cooperative is and how it differs from other business structures
The specific governance model of this cooperative — how they will vote, who will sit on the board, how earnings will be distributed
Their financial obligations — membership shares, required patronage commitments, potential assessments if the cooperative runs a deficit
The risks and realistic upside of participation

This education step is frequently rushed by overeager founding groups who want to get to incorporation quickly. Shortchanging member education produces cooperatives where members do not understand what they own or how their governance rights work — a setup for low participation, governance conflicts, and eventual failure.

The subscription process formalizes member commitment: prospective members sign a subscription agreement and pay their initial membership share or a deposit. The cooperative development process typically continues to incorporation only once a threshold number of subscriptions have been received, confirming that sufficient member commitment exists.

Step 5: Draft Founding Documents and Incorporate

A cooperative's founding documents include:

Articles of incorporation (or charter): filed with the state or provincial government, these establish the cooperative as a legal entity
Bylaws: the governing document that specifies membership eligibility and rights, board structure and election procedures, how patronage is calculated and distributed, meeting requirements, and dissolution procedures
Member agreement or subscription agreement: the contract between the cooperative and each member

Most US states have a specific cooperative association statute. Common ones include the Minnesota Cooperative Association Act, the North Dakota Cooperative Association Act (one of the most flexible), and California's worker cooperative statute. Some states with weaker cooperative statutes allow cooperatives to incorporate under agricultural association acts or as LLCs with cooperative provisions in the operating agreement.

Legal counsel experienced in cooperative law is essential at this stage. General business attorneys often produce poorly drafted bylaws that create governance problems years later.

Step 6: Capitalize the Cooperative

The cooperative must raise sufficient capital before beginning operations. Capital sources typically include:

Member equity. Members' initial shares and any additional equity assessments. The amount varies widely by cooperative type — a small worker cooperative might require $1,000–$5,000 per member; a grain handling cooperative might require $100,000 or more per farmer member.

Retained earnings (once operating). Over time, retained patronage allocations become the primary source of cooperative equity. But startups cannot rely on this — it only accumulates after the cooperative has been operating profitably.

Cooperative lenders. Institutions such as CoBank (agricultural cooperatives), National Cooperative Bank (NCB), and the Cooperative Fund of New England specialize in lending to cooperatives. They understand cooperative balance sheets, which look different from investor-owned businesses.

USDA Rural Development. The USDA's Rural Business-Cooperative Service offers several programs specifically for agricultural and rural cooperatives, including direct loans, loan guarantees, and technical assistance grants.

Community Development Financial Institutions (CDFIs). CDFIs such as Shared Capital Cooperative and the Cooperative Fund of New England provide below-market loans to cooperatives in underserved markets.

Grants. Some cooperative development organizations and state programs offer startup grants. These are most available for worker cooperatives in low-income communities, food cooperatives in food deserts, and agricultural cooperatives in rural development priority areas. See grants for cooperatives for a curated list of funding sources.

Step 7: Launch, Govern, and Stabilize

Once capitalized and incorporated, the cooperative holds its organizing meeting — the first formal member meeting — elects the initial board of directors, and begins operations. The first twelve to eighteen months are the highest-risk period, as the cooperative tests its business assumptions in real market conditions.

Key markers of a stable cooperative in its early years:

Actual member patronage is at least 70% of the intent survey projections
The cooperative is on track to break even by the end of year two
Board meetings are held regularly and governance procedures are followed
Members receive regular financial reports and understand the cooperative's performance

Development organizations typically maintain a relationship with new cooperatives through this stabilization period, providing ongoing technical assistance and troubleshooting.

Organizations That Support Cooperative Development

NCBA CLUSA (USA)

The National Cooperative Business Association CLUSA International is the primary US trade association for cooperatives. Beyond advocacy, NCBA CLUSA provides cooperative development technical assistance, particularly in international development programs across Africa, Latin America, and Asia. Domestically, NCBA CLUSA connects cooperatives with development resources and advocates for cooperative-friendly legislation.

USDA Rural Development (USA)

The USDA's Rural Business-Cooperative Service administers several programs that specifically serve cooperative development, including:

Rural Cooperative Development Grants (RCDG): Awarded to cooperative development centers to fund technical assistance
Value-Added Producer Grants (VAPG): Help agricultural producers add value to their products, often through cooperative formation
Business & Industry Loan Guarantees: Can be used to finance cooperative facilities in rural areas

As of 2024, USDA Rural Development had funded cooperative development centers in virtually every US state through the RCDG program.

Co-operative UK

Co-operative UK (formerly the Co-operative Group's development arm) provides technical assistance, governance support, and development resources for new and existing cooperatives across the United Kingdom. The organization produces widely used toolkits on cooperative governance, finances, and member engagement.

University of Wisconsin Center for Cooperatives

The UW Center for Cooperatives (UWCC) is one of the leading academic and practitioner centers for cooperative development in the United States. It produces research, training programs, and the widely distributed "Starting a Cooperative" guide series. The UWCC's cooperative development curriculum has trained hundreds of cooperative developers across the country.

State Cooperative Development Centers

Many US states have cooperative development centers funded partly through USDA Rural Development grants. Examples include:

California Center for Cooperative Development (CCCD) — focuses on worker cooperatives and food cooperatives
Agricultural Cooperative Development International (ACDI) — international agricultural cooperative development
Northcountry Cooperative Foundation — Minnesota-based, focuses on food and worker cooperatives

Common Development Mistakes

Experienced cooperative developers have documented a consistent set of mistakes that derail cooperative formation:

Skipping the feasibility study. Enthusiastic founders sometimes skip rigorous feasibility work because they are confident the cooperative will succeed. Underfunded, underpatronized cooperatives fail — and the members who invested lose their money.

Inadequate member equity. Starting with too little member capital forces reliance on debt, which strains cash flow. Lenders rarely provide 100% of startup capital; member equity must cover a meaningful share.

Weak member education. Members who don't understand patronage refunds, retained equity, or their governance rights become dissatisfied and disengaged. Member education is not optional.

Underestimating management needs. Cooperatives sometimes assume that member enthusiasm can substitute for professional management. Most successful cooperatives hire professional managers while maintaining democratic member governance.

Governance dysfunction. A board that micromanages management, or management that circumvents the board, creates dysfunction that can destroy an otherwise viable cooperative. Clear governance roles and boundaries must be established from day one.

Cooperative Conversion

A significant share of cooperative development activity involves converting existing businesses — typically sole proprietorships or small corporations — into cooperatives. Worker buyouts are the most common form: when a business owner retires or seeks an exit, workers sometimes purchase the business collectively through a worker cooperative structure.

The Democracy at Work Institute (DAWI) and the US Federation of Worker Cooperatives (USFWC) have developed specific toolkits and financing models for business-to-cooperative conversions. Several states, including New York, California, and Massachusetts, have created legislative frameworks and funding programs specifically to support worker buyouts.

Notable conversions include the Cooperative Home Care Associates in New York (1985), which converted from a conventional home care agency to a worker cooperative and grew to over 2,000 worker-members, making it one of the largest worker cooperatives in the United States.