The seven cooperative principles are the guidelines that define how a cooperative is owned, governed, and operated by its members: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; cooperation among cooperatives; and concern for community. The International Cooperative Alliance adopted them in their current form in 1995 as part of its Statement on the Cooperative Identity, which also defines a cooperative as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.”1International Cooperative Alliance. Cooperative Identity, Values and Principles
Where the Principles Come From
The framework traces to 1844, when 28 artisans working in cotton mills in Rochdale, England, pooled their resources to open a small store. The Rochdale Equitable Pioneers Society wrote a set of operating rules that became the template for member-owned businesses worldwide: sell at fair prices, give each member one vote regardless of investment, and return surplus based on how much each member actually used the store.2International Cooperative Alliance. Our History
The International Cooperative Alliance, founded in London in 1895, has maintained and revised these guidelines as the movement spread. The current seven-principle framework was issued at the ICA’s centennial congress in 1995, along with underlying values of self-help, democracy, equality, equity, and solidarity.1International Cooperative Alliance. Cooperative Identity, Values and Principles
Voluntary and Open Membership
The first principle says cooperatives are “open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.”1International Cooperative Alliance. Cooperative Identity, Values and Principles Two things matter. The door is open, and nobody is forced through it. Members choose to join and can choose to leave.
Open does not mean unconditional. A farming cooperative can reasonably limit membership to people who actually farm. A credit union can require members share a common bond like an employer or geographic area. The principle targets arbitrary exclusions, not functional ones. The test is whether the restriction relates to the cooperative’s purpose or exists to keep certain people out.
Joining typically requires purchasing a membership share or paying an equity contribution. Whether that money comes back when you leave depends on the cooperative’s redemption policy, and those policies vary widely, so reading the bylaws before joining is worth your time.
Democratic Member Control
This is the principle that most clearly separates cooperatives from investor-owned businesses. In a traditional corporation, voting power scales with share ownership. In a cooperative, every member gets one vote regardless of how much capital they contributed. A member who put in the minimum share and a member who invested significantly more have identical say in governance.1International Cooperative Alliance. Cooperative Identity, Values and Principles
Members exercise control by electing a board of directors and voting on major decisions at annual or special meetings. Elected representatives are accountable to the full membership rather than to a subset of large investors. Decisions can move more slowly than at a top-down corporation, because building consensus among equals takes more effort than issuing directives from a boardroom. That tradeoff is the point.
Member Economic Participation
The third principle governs how money flows through the cooperative. Members contribute capital, and at least part of that capital is typically treated as common property of the organization. When the cooperative pays any return on member capital, the rate is usually limited to prevent the cooperative from functioning as a speculative investment vehicle.1International Cooperative Alliance. Cooperative Identity, Values and Principles For tax-exempt farmers’ cooperatives, federal law caps dividend rates on capital stock at the greater of the legal rate of interest in the state or 8 percent per year.3Office of the Law Revision Counsel. 26 USC 521 – Exemption of Farmers Cooperatives From Tax
When a cooperative generates a surplus after covering costs, the ICA framework identifies three common uses members can approve: building reserves (part of which would be indivisible, meaning no individual member can claim a share), returning benefits to members in proportion to their transactions with the cooperative, and supporting other member-approved activities.1International Cooperative Alliance. Cooperative Identity, Values and Principles The proportional return matters. Unlike corporate dividends paid per share, cooperative distributions reward use. A member who bought $10,000 worth of supplies through the cooperative receives a larger distribution than a member who bought $2,000.
Autonomy and Independence
The fourth principle protects the cooperative from losing its member-controlled character when it deals with the outside world. Cooperatives routinely borrow from banks, contract with suppliers, and sometimes accept government grants or outside investment. Any such arrangement must preserve democratic control by the membership.1International Cooperative Alliance. Cooperative Identity, Values and Principles A loan giving the lender a board seat, or an investor agreement granting veto power over member decisions, would undermine the principle.
When cooperatives raise capital from outside sources through instruments like preferred stock, voting rights for those outside holders are typically restricted. Under some state cooperative statutes, preferred stockholders can only vote on actions that directly affect their investment, such as mergers or dissolution, and each holder gets just one vote regardless of the number or value of shares held. Outside money is welcome; outside control is not.
U.S. tax law reinforces this practically. Under Subchapter T of the Internal Revenue Code, cooperatives that operate on a cooperative basis can deduct patronage dividends from taxable income.4Office of the Law Revision Counsel. 26 USC 1382 – Taxable Income of Cooperatives Courts have identified three characteristics that define this cooperative basis: capital must be subordinate to members in both control and economic benefits, members must have democratic control, and surplus must be allocated to members in proportion to their participation.5Internal Revenue Service. Letter Ruling 202614001 An organization that hands outsiders real control over its operations risks failing this test and losing favorable tax treatment.
Education, Training, and Information
The fifth principle requires cooperatives to invest in the knowledge of their members, elected board members, managers, and employees so each group can contribute effectively. The obligation extends outward: cooperatives are also expected to inform the general public, especially young people, about how the model works.1International Cooperative Alliance. Cooperative Identity, Values and Principles
This is the most underappreciated principle. A cooperative where members don’t understand their rights, where board members don’t grasp their fiduciary duties, or where the public has never heard of the model is a cooperative operating at a fraction of its potential. Many cooperatives fund education programs from a dedicated portion of their annual surplus, and some incorporate this commitment directly into their bylaws. An uninformed membership cannot exercise meaningful democratic control.
Cooperation Among Cooperatives
The sixth principle recognizes that cooperatives serve their members most effectively by working together through local, national, regional, and international structures.1International Cooperative Alliance. Cooperative Identity, Values and Principles In practice, this takes many forms. Rural electric cooperatives share purchasing power through generation and transmission cooperatives. Credit unions participate in shared branching networks that let members access services at cooperatives they don’t belong to. Agricultural cooperatives form regional federations to negotiate better market access.
A single cooperative competing alone against corporations with enormous market power faces structural disadvantages. A network of cooperatives pooling resources, sharing expertise, and coordinating advocacy can punch well above its weight. The ICA itself, along with national organizations like the National Cooperative Business Association, exists because cooperatives applied this principle to their own movement.
Concern for Community
The seventh principle commits cooperatives to sustainable development of their communities through policies approved by the membership.1International Cooperative Alliance. Cooperative Identity, Values and Principles Because cooperatives are rooted in specific places and serve specific populations, they tend to be attuned to local needs in ways that businesses owned by distant shareholders are not. A grocery cooperative in a rural town has a direct stake in that town’s survival that a national chain store does not.
Community investment takes different forms depending on the cooperative’s industry and members’ priorities. It might mean sourcing locally, supporting environmental programs, investing in affordable housing, or offering services in underserved areas. The critical feature is that these commitments come from member decisions rather than corporate social responsibility departments.
How the Principles Show Up at Tax Time
For members of U.S. cooperatives, the third and fourth principles have a very concrete expression in the form of patronage dividends. A patronage dividend distributes the cooperative’s net income based on how much business each member did with the cooperative during the year, not on how much capital they invested. If you bought $5,000 in supplies and the cooperative returns 10 percent of patronage, you receive $500.
Under Subchapter T, a cooperative can deduct qualified patronage dividends from its taxable income, avoiding the double taxation that hits traditional corporations where the company pays tax on profits and shareholders pay again on dividends.4Office of the Law Revision Counsel. 26 USC 1382 – Taxable Income of Cooperatives The member who receives the dividend reports it as income, so the earnings are taxed once.
There is a catch. For the cooperative to claim the deduction, at least 20 percent of the patronage dividend must be paid in cash or by qualified check. The remainder can be issued as a written notice of allocation, essentially a paper credit on the cooperative’s books that the member may receive in cash later.6Office of the Law Revision Counsel. 26 USC 1388 – Definitions and Special Rules Members owe tax on the full amount of a qualified patronage dividend in the year they receive it, including the portion retained by the cooperative. You pay tax on money you haven’t fully received yet, which surprises many new cooperative members.
Farmers’ cooperatives that meet additional requirements under Section 521 can qualify for further tax benefits. They must operate to market members’ products or purchase supplies for members, cap dividend rates on capital stock, and cannot do more business with nonmembers than with members.3Office of the Law Revision Counsel. 26 USC 521 – Exemption of Farmers Cooperatives From Tax The restrictions reinforce the principles themselves: the business exists to serve its member-owners, not to generate returns for outside parties.