Cooperation is the Key
The change in Kentucky agriculture is raising renewed interest in cooperatives. Cooperatives have been designated as a key component to revitalizing Kentucky agriculture, giving farmers opportunities to pool their resources. Cooperatives by definition are a type of business owned and controlled by the members who use its goods and services. Cooperatives are a good form of business if designed properly, but are only one form of business.
I think that we need to take a look at cooperatives in a broader sense. At the root of cooperatives is cooperation. Cooperation is the key to success for any cooperative. Cooperation, as defined in Webster's dictionary, means "to act jointly with another or others." This broader thinking allows for several other types of business structures for Kentucky agriculture. Having the flexibility to choose business structures will provide Kentucky producers additional opportunities in defining their business.
Many reasons exist for choosing a particular business structure. But I want to focus on two of these: capitalization and taxes.
Capitalization and financing are keys to business success. Businesses that do not have the proper capitalization and cash flow are in trouble. Agricultural groups working in cooperation should always keep capitalization in mind when researching their business opportunities. Cooperatives are often limited in their ability to capitalize. Cooperatives can traditionally use three sources of funding to raise money. These sources are owners contributions-that is money contributed by members, loans, and grants. Federal and state regulations limit outside investor funding for cooperatives. Other forms of business have more flexibility. Limited Liability Corporations, or LLC's and Subchapter S Corporations have more flexibility for outside investor funding.
Taxation is another key to organizing a group in cooperation. Cooperatives are allowed favorable tax treatment through special IRS regulations. Cooperatives are taxed similarly to partnerships. That means the tax is paid by the owners of the business-not by the business itself. Therefore, cooperatives are considered single taxed businesses. This is a big benefit to farmers interested in cooperatives. However, cooperatives are not the only business structure with favorable tax advantages. The LLC and Subchapter S corp also allow for favorable tax treatment to owners.
The Kentucky Center for Cooperative Development (KCCD) is designed to assist groups interested in cooperation. The Kentucky Center for Cooperative Development mission is to provide leadership, educational, technical, and financial resources for groups and organizations seeking to enhance opportunities through cooperation.
Developing businesses is difficult work. Working in cooperation makes the business development process even more difficult. Recent statistics show that only one out of ten businesses are successful. Therefore, I suggest that groups fully weigh the costs and benefits of a business structure to give them the best opportunity to succeed in a difficult environment. I encourage every group to seek professional business assistance from knowledgeable sources. Always seek a qualified attorney and accountant to help you decide the business structure right for you.
For More Information
For additional information, please contact your county extension agent or Heath Hoagland at (859) 257-6527.