Wilson, Cooperatives: The First Social Enterprise

Elaine Waterhouse Wilson (West Virginia) has published Cooperatives: The First Social Enterprise in the DePaul Law Review. Here is an excerpt from the introduction (footnotes excluded):

    Especially in the context of income inequality, however, the opportunity to invest directly in alternative for-profit solutions has a third option: cooperatives. The modern cooperative business model devel- oped in direct response to social unrest, unemployment, poverty, and inequality. Community benefit is not just a consequence of the cooperative business model; it is a fundamental part of its structure. Yet the cooperative is a for-profit entity, and therefore not exclusively charitable. As a result, the charitable sector can look to cooperatives as a social enterprise-based solution to important and seemingly intractable social issues, such as income inequality.

    A cooperative is a business entity that is owned and managed by its members—those individuals for whose benefit the cooperative was organized. These members may be individual laborers in a workers’ cooperative, farmers in an agricultural marketing coop, or consumers in search of organic and fair trade produce at the local food coop. Unlike the standard investor capital-based business organization (sometimes referred to as an investor-owned firm or IOF), a cooperative’s mission is not necessarily to make a profit or to increase shareholder value; rather, the cooperative’s mission is to serve the needs of its members, whomever and whatever they may be. Historically, these members have often been a class of individuals in need of assistance, such as the unemployed weavers of the Rochdale cooperative or the poor farmers in California studied by Aaron Sapiro. Because the history of the cooperative is rooted in social change, the cooperative movement has developed a set of internationally recognized values that emphasize democracy, community, equality and sustainability, which are inherent to all cooperatives.
Due to their member-focused mission, cooperatives have difficulty obtaining capital from profit-oriented sources. Foundations and other charitable organizations looking to make social enterprise investments may be able to fill this funding gap. By definition, the goal of a mission-related investment by a charity is to achieve a charitable goal, sometimes while making a profit and sometimes while intentionally sacrificing profit. While a charitable investor is still just an investor in, and not a member of, a cooperative, the charitable investor’s goals and the member-owners’ goals can still be in alignment. If the charitable investor can assure itself that the cooperative business model is, at least in part, “charitable,” then it can find a way to invest in coopera- tives in the same manner as it might invest in a benefit corporation or a L3C (or for that matter, any for-profit business with a distinct charitable activity).

    This is not to say that cooperatives, specifically, or social enterprises, generally, are the solution to all that ails; rather, the intention is to find a place for cooperatives in the dialogue about social enterprise. As the cooperative and social enterprise movements merge, it is necessary to examine the legal and tax structures governing the entities to see if they help or hinder growth. If the ultimate decision is to support the growth of cooperatives as social enterprise, then those legal and tax structures that might impede this progress need to be reexamined.

Lloyd Mayer