PART ONE: UNDERSTANDING CO-OPERATIVES
How are they different to other businesses and organisations?
In many ways co-operatives are just like other businesses and organisations. They face the same economic challenges and often perform the same services; they must have robust business practices and they need to conform to legislation.
There are, however, significant differences which provide special challenges and benefits to their owners. The most important differences relate to structure, philosophy and purpose.
Democracy is a key difference between a co-operative business and a company. This can be a strength, as it offers members more control and the ability to make decisions that represent the views of the majority of members. Conversely, however, a decision which provides maximum benefit to members may not always be the best decision for the long-term viability of the co-operative. For example, farmers as members of a co-operative may decide that the co-operative should deliver all of its surplus to members so that individual farmers will achieve the best profit margins for their farms. Such a decision will leave the co-operative without any operating surplus to improve other services such as product-handling or development and marketing. As in any business there is a need to make balanced business decisions that consider all the interests within a co-operative. As a co-operative grows it will require increasing amounts of assistance from people with expertise or knowledge. Whether or not they are members, they can help the co-operative better balance member interests with the ongoing interests of the co-operative.
In a company the decision process is simpler. Decisions are made according to what will give the company the best profit.
Another key difference in a co-operative is the requirement for active membership. Active membership is mandated by the law, and its nature is determined in the co-operative’s rules. It is active membership that defines the minimum commitment and support from members to the co-operative to ensure its ongoing operations. Active membership is the ‘quid pro quo’ for democratic control of the entity. Only active members can vote and control the co-operative and this is what makes the decision-making more responsive and dynamic to members’ interests and needs.
In a company, members or shareholders vote according to the number of shares they hold. Their interests are satisfied (or not) by dividends. If a member of a company is not satisfied then the member will dispose of his or her shares.
Co-operatives are more difficult to form than companies and this is one factor that contributes to the smaller size of the co-operative sector.
Co-ops can do what other business structures can do. What makes co-ops different is their balancing of business and social purpose through the co-operative principles, which are adhered to globally.
The main difficulty in forming a co-operative is the need for agreement by a group of people (minimum of five by law) with a similar need or interest who commit to future co-operation. In this way forming a cooperative has some similarities to forming a partnership under a contract. By contrast a company (either public or proprietary) can be formed by a single person. There are many reasons for companies being formed. Because they can be formed by a single person, they are commonly used by small business operators or service providers as a means of managing tax liability or separating personal and business liability from their trading operations. There are many other reasons for companies to be formed. Some companies are formed by groups of people seeking to co-operate to buy or provide cheaper services. As these companies grow, they might do more than provide services to members, and if they are successful then they might also be targets for takeover by other companies.
Co-operatives are also different from incorporated associations. An incorporated association by statute must not be for profit. This does not mean that it cannot make a surplus or profit from its activities; rather, it means that it cannot distribute any of that surplus to its members. The broad intention of legislation for the incorporation of an association is to provide a simple, and low cost mechanism for social, sporting or charitable groups to conduct their activities.
Co-operatives can be formed to pursue a not-for-profit purpose, and generally if that is its primary purpose it will be formed as a non-distributing co-operative without a share capital to meet the definition of ‘not for profit’ under tax law. The following table summarises the differences between co-operatives, companies and associations.
Co-operatives are also different from incorporated associations. An incorporated association by statute must not be for profit. This does not mean that it cannot make a surplus or profit from its activities; rather, it means that it cannot distribute any of that surplus to its members. The broad intention of legislation for the incorporation of an association is to provide a simple, and low cost mechanism for social, sporting or charitable groups to conduct their activities.
Co-operatives can be formed to pursue a not-for-profit purpose, and generally if that is its primary purpose it will be formed as a non-distributing co-operative without a share capital to meet the definition of ‘not for profit’ under tax law. The following table summarises the differences between co-operatives, companies and associations.
| Co-operatives | Companies | Associations | |
|---|---|---|---|
| Primary Purpose | Meet the common needs of members | Maximise profit for shareholders | Meet identified needs of the community |
| Organisation ownership | Owned by the users who benefit from membership | Shareholders | No ownership, any assets acquired belong to the association and are never distributed to members |
| Ownership limit | Member may not hold more than 20% of issued share capital | Member may hold 100% of issued share capital [substantial shareholding disclosure requirements for public companies, especially listed companies] | N/a |
| Day-to-day management control | Board [subject to statutory requirements for member vote on certain issues] | Board | Management Committee |
| Voting rights | One vote per member | One vote per share | One vote per member |
| Major stakeholders | Members who use its services | Shareholders | Group that it is established to serve |
| Share ownership | Shares can only be acquired by active members | Shares can be acquired by any person or organisation | N/a |
| Capital structure | Share capital from active members – although according to Accounting Standards, share capital must be recorded as a liability in the balance sheet because it is capable of repayment. Debt funding can be comprised of private debt, member loans and publicly issued debt securities such as debentures or CCUs | Share capital including share capital from public issue of shares – nonrepayable during the life of the company. Debt funding through private debt, publicly issued debt or hybrid securities | Membership fees, donations, government funding |
| Number of members | Minimum of five members (either individual or corporate) | Minimum of one member, although a public company must have three directors | Minimum of five members (six in Western Australia) |
| Membership | Restricted to persons willing to commit to active membership and able to use the co-operative’s services | No restrictions other than limits on foreign ownership of shares or substantial shareholding requirements | Anyone who supports the association’s purpose |
| Active involvement of member | Membership cancelled if active involvement ceases | Not required | Not required |
| Share price | Rules set “nomimal value” for issued shares although in some cases a premium may be payable on application (there are restrictions on how the premium may be applied). No opportunity for capital gain | Share price varies according to either assetbacking or market price, enabling opportunities for capital gain | No shares |
| Share disposal | Shares may be repurchased (with limits) at their nominal value or less | Shares may be sold at an agreed price | N/a |
| Surplus distribution | A surplus can be shared among members based on use of goods and services, or donated partly or fully to a charity or not-for-profit. Distributing co-operatives only may also declare dividends (franked or unfranked) based on shares | Dividends (franked or unfranked) are distributed to investors according to the class of share. Share profits are based on share ownership with no limit on the dividend | Surpluses belong to, and are retained by, the association. They cannot be distributed to the members |
| Member Liability | Member liability limited to unpaid amounts on shares and any other charges payable to the co-operative | Shareholder liability limited to any unpaid value of shares held | Member liability limited to any outstanding fees owing to the association |
| Decisions of entity | Democratic | According to majority of votes of shareholders (one vote per share) | Democratic |
| Member involvement | Active involvement of members required | No requirement for active involvement | Encouraged |
Mutuals
Mutuals, like co-operatives, are member-owned but they might not be member-governed. Those electing the board of directors may be drawn from a specific group of members who have a particular expertise, such as medicine in the case of a health fund mutual. Mutuals only deal with their members while co-operatives can trade with non-members.
Industry superannuation funds are sometimes considered mutuals but their members are often compelled to join due to industrial agreements and they do not directly elect the governing body.