Introduction
There are a number of structures that you can choose from when starting a business. The most common business structures in Australia are sole trader, partnership, company and trust. In this article we’ll explain the unconventional co-operative business structure. Co-operatives focus on concepts of self-help, responsibility and equality, rather than profit-making values.
Definition of a co-operative
Co-operatives are democratic organisations which are member-owned. It is a distinct legal entity, which means that the members have the right to control the co-operative’s activities and are liable for any legal claims. As previously mentioned, co-operatives don’t seek to maximise return to investors. Rather, its primary purpose is to pursue the economic, social or cultural needs of its members.
Types of co-operatives
In Australia, co-operatives can be either distributing or non-distributing. Specifying the type of co-operative you want to establish is required.
Distributing
A distributing co-operative, formerly known as a trading co-operative, has shares and can distribute any surplus funds to its members. This can be by way of a rebate, the issue of bonus shares or the issue of a limited dividend.
It must have at least five active members. If less than five members wish to form a co-operative, permission from the Registrar must be obtained.
Non-distributing
A non-distributing co-operative, formerly known as a non-trading co-operative, does not require share capital. Similar to distributing co-operatives, it must also have at least five members. However, the surplus funds must not be distributed to its members. Therefore, non-distributive cooperatives are more suitable for community organisations.
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Get startedWhat are the advantages?
Equal voting rights
Unlike public companies, all members in co-operative business structures have equal voting rights at general meetings. This means that the capital is used for the common interest of the group regardless of a member’s level of investment or involvement.
Lower debt risk
Shareholders, directors, managers and employees are not responsible for the co-operative’s debts unless they are caused recklessly, negligently or fraudulently. In other words, members have little liability.
Age of members
Other than directors, members can be under 18 years of age. However these members cannot stand for office and do not have voting rights.
More control
Members and shareholders have control over the co-operative, rather than investors. This structure encourages shared responsibility and contribution from all members.
What are the disadvantages?
Limited profit distribution
As previously discussed, the distribution of profits to members is limited. Some co-operatives even prohibit any surplus. It may be difficult to attract potential members seeking a financial return on their investment.
Equal voting rights regardless of contribution
Although co-operatives endorse equal voting rights, this business structure may be unattractive to members providing greater involvement or investment than others as they still only get one vote.
Ongoing education programs
A co-operative business structure requires ongoing education programs for its members.
Key factors to decide
In deciding whether a co-operative is the right business structure for you, consider the following factors.
- Anyone can apply to be a member of a co-operative.
- Co-operatives run on the ‘one member, one vote’ system, regardless of a member’s investment or contribution.
- Decisions focus on delivering shared benefits to its members.
- The distribution of profits is low due to the limited supply of capital.
- There must be at least five members in order to form a co-operative.
In summary
In short, the co-operative business structure differentiates itself from other more common business structures in Australia in its sole purpose; ie. not being for profit, but rather to meet the economic, social or cultural needs of its members. Whichever business structure you choose, it is important to seek legal advice before making any big decisions.
