What is a cooperative?

Learn about the basics of cooperatives.


A cooperative is a type of organization that is owned and operated by its members—who share in the benefits and responsibilities of the organization. The members of a cooperative can be individuals, businesses, or other organizations, and they work together to achieve common goals.

One of the key features of a cooperative is that it is owned and controlled by its members. This means that the members have a say in the decision-making processes of the organization, and they share in the profits or benefits that are generated by the cooperative. This democratic structure ensures that the organization is run in the best interests of its members, rather than the interests of a few individuals or shareholders.

What are LCAs?

One type of cooperative that is gaining popularity is the limited cooperative association, or LCA.

An LCA is a type of cooperative that is designed to combine the benefits of a cooperative with the advantages of a traditional limited liability company (LLC). It provides a structure that allows members to enjoy the flexibility of a LLC while also benefiting from the member-driven structure and shared profits of a cooperative.

The LCA model was first introduced in the United States in 2008 and has since been adopted in several states, including Minnesota, Wisconsin, and Iowa. It is gaining popularity because it offers a more flexible structure than a traditional cooperative, making it easier to attract investors and provide more investment opportunities.

An LCA can be formed for any lawful purpose, and its membership can include individuals, businesses, and other organizations. Like traditional cooperatives, an LCA is owned and governed by its members, with each member having an equal say in the decision-making processes of the organization.

Another advantage of an LCA is its flexibility in terms of governance and management. Unlike traditional cooperatives, an LCA can be managed by a board of directors or by a management team, giving the members more freedom to structure the organization in a way that works best for them.

Why Colorado?

While Ohio and Minnesota also have Limited Cooperative Association (LCA) laws, some legal experts believe that Colorado's LCA law is more favorable for businesses, including DAOs. Here are some ways in which Colorado's LCA law compares favorably to Ohio and Minnesota:

  • Perpetual existence: Colorado's LCA law allows for the perpetual existence of an LCA, while Ohio's and Minnesota's LCA laws require an expiration date or a vote of the members to continue beyond a certain period. This feature can be particularly beneficial for DAOs, which may need to operate indefinitely.
  • Member-driven: Colorado's LCA law places a strong emphasis on member-driven decision-making and democratic governance, while Ohio's and Minnesota's LCA laws provide more limited options for member participation and decision-making. This aligns well with the values and principles of many DAOs.
  • Flexibility: Colorado's LCA law provides a high degree of flexibility in terms of organizational structure and governance, while Ohio's and Minnesota's LCA laws are more prescriptive in their requirements. This can be beneficial for DAOs, which may have unique needs and requirements.
  • Tax benefits: Colorado's LCA law provides certain tax benefits for businesses, including the ability to be treated as a partnership for tax purposes. While Ohio's and Minnesota's LCA laws also provide tax benefits, Colorado's tax framework is generally considered to be more favorable for businesses.
  • Blockchain-friendly: Colorado has established a legal framework that recognizes the validity of blockchain-based records and electronic signatures, while Ohio's and Minnesota's LCA laws do not specifically address the use of blockchain technology. This can be particularly beneficial for DAOs that operate on a blockchain-based platform.

Overall, Colorado's LCA law provides a legal framework that is well-suited for DAOs, particularly those that prioritize member-driven decision-making, democratic governance, and collaboration. The flexibility of the LCA structure, combined with limited liability protection, perpetual existence, and tax benefits, make Colorado's LCA law a favorable option for many businesses, including DAOs.

How does membership in a cooperative work?

Membership in a cooperative is typically based on the philosophy of “one member, one vote.” This means that all members of the cooperative have an equal say in decision making and operations. These decisions can range from setting prices for goods and services, to hiring staff, to determining which projects to pursue.

Members are also typically required to pay a membership fee in order to join their local cooperative. This fee often goes towards covering costs such as infrastructure or product development related to the cooperative's mission. In return for their contributions, members may receive discounts on products or services offered by the co-op or even profit sharing depending on the cooperative's particular set up.

In addition, cooperatives usually hold regular meetings where important decisions can be voted on by members. Participation in these meetings is encouraged as it helps ensure that everyone’s interests are taken into account when deciding how the cooperative should move forward.

Overall, membership in a cooperative involves shared ownership among those involved and a collective focus on meeting the needs of its members. By participating in regular meetings and contributing to the organization financially, members help shape the future direction of their cooperative while enjoying some benefits along the way.

What is patronage?

In the context of an LCA, patronage refers to the collective economic benefits or profits that are generated by the association's activities and distributed back to its members, who are both producers and owners of the business. Patronage can take different forms, such as dividends, rebates, or equity payments, and is usually proportional to the level of participation or use of the cooperative by each member.

In other words, the more a member participates in the LCA's activities, such as by contributing goods, services, or capital, the more patronage they can expect to receive. This encourages members to have a vested interest in the success of the cooperative and helps to align their goals and interests with the collective well-being of the business.

Isn't patronage an investment?

No. While you may be contributing money to a new cooperative or interesting collective, if you are participating in the patronage system for Limited Cooperative Associations, you are participating in something like a closed economy, part social experiment and part capitalism. You are not investing in the traditional sense of the word. For more information see the securities exemption for cooperatives.

Financial Returns

Financial returns from cooperatives are typically distributed to members in the form of patronage dividends or rebates, depending on the specific cooperative's bylaws and policies.

Patronage dividends are usually based on the amount of business that a member has transacted with the cooperative during the year. This could be based on the volume of goods or services provided by the member, or the amount of capital they have invested in the cooperative. The total profits earned by the cooperative are allocated to each member on a pro-rata basis according to their patronage, and the member receives a payment in proportion to their share of the profits.

Rebates, on the other hand, are generally based on the amount of purchases made by the member from the cooperative. The cooperative may agree to distribute a certain percentage of the profits earned on member purchases back to the members in the form of a rebate.

It is also common for cooperatives to retain a portion of the profits to support the growth and stability of the business, or to allocate them to a reserve fund to provide for unexpected expenses or future investments. The specific distribution of financial returns will vary depending on the nature of the cooperative and the agreement among its members.