What is a co-operative?
A co-operative is a way of organizing people to achieve a goal. The model can be used to form a for-profit business or non-profit organization. As a business model it’s versatile and functions well in every sector of the economy – from utility companies to grocery stores and global marketing firms to community gardens. More formally, a co-operative is a way to organize people, things, and processes into a legal entity. This entity should serve a specific purpose, whether as a for-profit, charity, or non-profit venture.
What are the benefits of the co-operative business model?
The co-operative business model has two key advantages. The first is its ability to support local economic, business and community development. The second is its versatility. A co-op can be a small, three-person shop or a global partnership, and just about everything in between.
Other advantages at a glance
- Each shareholder has one vote (rather than one vote per share), which makes it different from an investor-driven corporation.
- Versatility in profit distribution options. From financial gain for shareholders to community development, profits from co-ops are distributed in a wide variety of ways.
- Succession. The structure of a co-operative organization creates continuity. Shareholders/members can join and leave at any time without compromising the viability of the entity.
- Shareholder liability is limited. Shareholders are not responsible for the co-operative’s debt and can only lose what they have invested.
- As legally incorporated entities, co-operatives can own things (like land or buildings) and take mortgages or enter into contracts.
How do I know if I should form a co-operative?
A co-operative is generally formed when a group of people identify an opportunity, need, or problem that is best addressed through working together. Because the venture involves a group, formally organizing the group into a legal entity has benefits. The two best ways to do this are to form a corporation or a co-operative.
The co-operative model works best when a group wants a high degree of equity or equality between shareholders/members of the co-operative.
The opportunities for forming a co-operative are endless, but a few examples include:
Small business succession planning. In this case, a co-op can provide a group or community-based business buy-out option for small business owners who want to retire.
Increasing marketing capacity for producers. Producers can form a co-op (like cranberry farmers did when they created Ocean Spray), to market their products under a single brand and to a much broader, sometimes global, marketplace.
Cross-community partnership. In this case, a co-op is formed to govern a relationship between municipalities, First Nations, or corporations.
Utilities. A co-op can create purchasing power and operational efficiencies for groups looking to increase access to vital utilities, such as power.
Local Investment: People can use a co-op to pool investment funds and support local entrepreneurs and economic development.
What are the disadvantages of the model?
Every business model has disadvantages. The co-operative model is no exception. It’s important to conduct feasibility studies and explore the opportunity fully before deciding on the co-operative model. Here are three disadvantages of the model:
Engagement and participation may not be equal by all shareholders or members.
Known as the “free-rider” problem in governance models, there is potential for people to benefit from work done by others. Taking steps to mitigate the “free-rider” problem is a good idea. Plus, it can help avoid governance issues as the business matures and succession has taken place.
Lay person board
Any organization with a board can experience this challenge, and some might argue that this disadvantage can be an advantage. Whatever a group’s perspective on the matter, a layperson board carries risk that should be mitigated in some way.
Groups incorporating a co-operative business can encounter red tape. In Saskatchewan, for example, new co-ops need to have a minimum of 6 founding members to incorporate, and for-profit housing co-ops are not allowed.
While there are ways around most of these limitations, the agility of a newly forming business can be impacted.
Lack of awareness and understanding of the business model
While not necessarily a deficiency in the model itself, the misconceptions related to the model create disadvantages other business models do not necessarily face.
Complicated communications and barriers to attracting shareholders to a new venture are just two examples. Plus, this situation creates opportunities for the model to be used where it shouldn’t be and not used when it should be.
Why Co-operatives First?
A co-operative is a business and requires the same level of energy, skill and commitment as any other business. We know it can be frustrating and confusing. But we’re here to assist with the process.
Co-operatives First has the supports, resources and experience to help groups decide if they should become entrepreneurs. We also have the networks and connections to support groups working hard to build their businesses. Plus, this support is free.