Choosing between co-operative types

The reasons for choosing a distributing or non-distributing co-operative form will differ between communities.

All co-operatives may be formed to provide services to members by carrying out some form of enterprise. Member benefit in a co-operative is shaped by co-operative values and principles, which distinguishes it from the private benefit of company shareholders.

Non-distributing co-operatives, however, may be formed to provide broader social, public benefit or charitable services, and for communities wishing to establish services for broader public benefits, this type of co-operative will offer certain advantages:

  • a not for profit co-operative that also has a charitable purpose will be able to obtain charitable tax exemption status and possibly deductible gift recipient status. Depending on the type of service to be offered, tax exemptions may deliver significant operational savings for the enterprise. Deductible gift recipient status will make donations to the enterprise more attractive to potential donors.
  • An asset lock – the prohibition on distributing any surplus assets of such a co-operative effectively locks the entity’s assets into the co-operative’s purpose. When a non-distributing co-operative is wound up, any surplus assets must be gifted to another not for profit organisation with a similar purpose. An asset lock provides a level of comfort to persons who wish to donate to or invest in a community purpose, and who want to ensure that any resulting assets remain dedicated to that purpose or community. This is not to say that a co-operative will not ever lose its assets, such an event is possible if the co-operative is badly managed so that its assets are dissipated.
  • Active membership requirements for non-distributing co-operatives can be simply stated as an obligation to pay an annual subscription, which may even be nominal. A modest obligation will mean that it is easier for members to comply with this requirement and this broadens the field of community ‘investors’.
  • A not for profit entity may be eligible for other public funding to augment community investment.
  • Potential community investors are more likely to trust or feel comfortable investing in a not for profit, particularly if the purpose is one that is important to the community.
  • Non-distributing co-operatives that are not charities may be formed for a variety of reasons that will serve a community’s needs. Members of these co-operatives benefit because the service they need or desire is secured and it may even be delivered at a better price to members.

A community that may be about to lose its local football club may form a non- distributing co-operative with share capital where members are entitled to either free or reduced cost services compared with non-members. The investment of the share capital by the community may serve to buy out the club and provide working capital. The provision of member services at the reduced rate would encourage members to engage with and use the club so that it remains operating in the community.

A distributing co-operative will present more favourable investment options for those interested in financial returns.

  • Distributing co-operatives can pay dividends or rebates to members based on either the number of shares held or the amount of business done by the member with the co-operative, which can incentivise member loyalty and strengthen the business model.
  • In the event of the co-operative winding up, the members may potentially receive a share in the net assets of the co-operative over and above their share capital investment.
  • Dividends issued by a co-operative are now capable of being franked, thus delivering franking credits to shareholders.
  • Co-operative shares are usually linked to membership and not equity and so do not have a capital gain component. There are limited means available for co-operatives to deliver capital gains to shareholders via share transfers.
  • Active membership requirements can significantly contribute to the sustainability of a distributing co-operative. Active membership requirements are discussed later in this Part of the Handbook.
  • Distributing co-operatives do not have a statutory asset lock. However, shares in distributing co-operatives are not tradeable on a stock exchange and can only be acquired by members. This is an effective protection against takeover by other organisations and provides a level of security for assets built up by the co-operative through community support14.

Distributing co-operatives are not the equivalent of a ‘for profit’ company. They do present more of the investment features of a company, however they achieve more because of their adherence to the co-operative principles, in particular the third principle. This principal is fully stated in the CNL as follows:

Member Economic Participation

Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of the capital is usually the common property of the co-operative. They usually receive limited compensation (if any) on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes:

  1. developing the co-operative, possibly by setting up reserves, part of which at least would be indivisible;
  2. benefiting members in proportion to their transactions with the co-operative;
  3. supporting other activities approved by the membership.

This principle not only entrenches the member focus of a co-operative, but it also provides for an ongoing capital asset that can have broad community benefit. This is not the same as an asset lock, however, it creates a context for the development and accumulation of a community asset.

The existence of a distributing co-operative in a community will of itself deliver a broader benefit to that community through the mere existence value of 

the service and any multiplier effect (e.g. job creation, minimizing the need for service users to relocate to the urban centres etc). It is the mutual commitment by the community and to the community, however, that differentiates this model of doing business. 

The choice of whether to form a distributing or a non-distributing co-operative will come down to the type of enterprise that the co-operative will undertake to deliver and the degree to which financial reward is a factor in attracting investment within a particular community.

In Australia, it is possible to form a company that looks and operates like a co-operative. A company must have a special constitution that imports the co-operative principles and provides for one member: one vote, democratic governance and a community ethic. It is even possible to obtain permission to use the word ‘co-operative’ in the company’s name, provided that the constitution clearly incorporates the co-operative principles. Companies formed in this manner would need to be public companies15. Public companies are regulated by the Corporations Act and their ability to offer securities through a crowdfunding platform is yet to be determined.16

Forming a co-operative under the CNL

Forming a co-operative in Australia is a two stage process.

First, the persons who wish to form a co-operative, referred to as ‘promoters’, need to draft a set of rules or constitution, and a disclosure statement (the ‘formation disclosure document’) and present both of these documents to the relevant state or territory Registrar of Co-operatives for approval. The CNL provides model sets of rules for each co-operative type and these can be accessed through the website of the relevant state or territory Registrar. The approval process also entails choosing a name for the co-operative.

Second, once the relevant first stage approvals have been obtained, the promoters, (must be a minimum of 5 persons), must formally meet and agree to form the co-operative under the terms of the rules and in the knowledge of the material presented in the disclosure document. This is referred to as the ‘formation meeting’. The evidence of the formation meeting is presented to the Registrar using a standard form and the Registrar then registers the co-operative.

The websites of each Registrar provide guidance and links to the necessary forms and fees for this two stage process. See Part 5 for a list of Registrars in each State and Territory.

For co-operatives that propose to seek share capital from members, the share capital required is a clear and separate requirement of membership. In addition to share capital investment, the members must also agree to actively support the co-operative enterprise. This requirement is set out in the active membership rule.

One of the most difficult aspects of the formation process is drafting what is referred to as the ‘active member rule’. The difficulty arises not only because it needs to meet strict legislative requirements, but it needs to be flexible enough so that it serves the needs of a broad range of community investors.