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 formally organize people, things and processes into a legal entity serving a specific purpose, whether for-profit, charity or non-profit. As an incorporated entity, co-operatives also have limited liability.
What are the benefits of the co-operative business model?
The co-operative business model has two key advantages. The first is how strongly it can support local economic, business and community development. The second is how versatile the model is – capturing both 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, as is the case with an investor-driven corporation.
- Versatility in profit distribution options. From financial gain, to community development or scholarships, profits from co-ops are distributed in a wide variety of ways.
- Co-operatives are good at succession. The structure of the organization or business creates continuity, as shareholders and/or members join and leave at any time.
- Shareholder liability is limited (same as a corporation). What this means is that, generally, 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 chattels, land, and take mortgages or enter into contracts.
When to form a co-operative?
A co-operative is formed when a group of people identify an opportunity, need or a problem that is best addressed through working together and are looking to formally organize the group into a legal entity serving a specific purpose. The co-operative model works best when that group values – or there is a strategic advantage to including – a high degree of equity or equality between shareholders or members of the co-operative.
The opportunities for forming a co-operative are endless, but a few examples include:
Small business succession planning: co-op forms to provide a group or community-based business buy-out option for small business owners looking to retire
Increasing marketing capacity for producers: producers form a co-op, such as cranberry farmers did in creating OceanSpray, to market their products under a single brand and to a much broader, sometimes global, marketplace
Cross-community partnership: co-op forms to formally govern a relationship between municipalities, First Nations or corporations
Solar farm or community-based power production: co-op forms to create purchasing power and operational efficiencies for those interested in purchasing solar panels or creating community-based power
Investing locally: co-op forms to pool investment funds and support local entrepreneurs
What are the disadvantages of the model?
Every business model has disadvantages. In some cases, the co-operative model may not be the best organizational form to use when hoping to capitalize on an opportunity. It’s important for those organizing a business to conduct feasibility studies and ensure that they have explored the opportunity fully before deciding on the co-operative 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 and 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, having 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, for-profit housing co-ops are not allowed; multi-stakeholder co-ops have no provisions; and new co-ops need to have a minimum of 5 founding members to incorporate.
While there are ways around most of these limitations, it does impact the agility of a newly forming business and can expand time to market.
Lack of awareness and understanding of the business model
While not necessarily a deficiency inherent in the model itself, the misconceptions surrounding the model create disadvantages that other business models do not necessarily face.
These misconceptions can hinder communications and the ability to attract shareholders to a new venture. They also impact when and where the model is used, which means it’s used where it shouldn’t be sometimes and at other times groups do not take advantage of its benefits.
Why Co-operatives First?
A co-operative is a business and requires the same level of energy, skill and commitment as any other business. Starting and building a business can be complicated, confusing and frustrating. But we’re here to assist with that process.
Co-operatives First has the supports, resources and experience to help groups decide if they should become entrepreneurs, and we have the networks and connections to support group entrepreneurs working hard to build their businesses. And we provide this service at no cost.