Establishing a new business? Consider a Co-operative

busines smiling man butcher

Where you are establishing a business with others, some questions that are worth asking:

  1. Are you interested in starting a business where there is equal economic participation among the owners?
  2. Do you prioritise active, meaningful and engaged contribution from your fellow owners?
  3. Do you want your business to have a shared value structure, where all owners have equal voting rights?

There are many structures you can choose to operate a business through but if your answer is yes to these questions, then structuring your business as a co-operative might be an appropriate option. Co-operatives can satisfy a variety of needs that business founders often seek to achieve, and the key benefits of this model are set out below.

For Purpose & Value Alignment

Co-operatives do not necessarily have to be for-profit, but they are invariably always for-purpose. A core reason why business owners opt for the co-operative structure is because of the seven international co-operative principles that are embedded into the co-operative’s legal structure. Section 10 of the Co-operatives National Law sets out these principles:

  1. Voluntary and open membership
  2. Democratic member control
  3. Member economic participation
  4. Autonomy and Independence
  5. Education, training and information
  6. Co-operation among co-operatives
  7. Concern for the community

An increasing number of business owners are drawn to the ‘for purpose’ nature of co-operatives including the fact that co-operatives work for the sustainable development of their communities through policies accepted by their members. This can involve providing employment opportunities to local communities, education and training for members, reinvestment of profit into local communities and a key focus on inclusion without gender, racial or social discrimination.

Active Contribution

Members of a co-operative are its key stakeholders; that is because the members are the people closest to the business (think customers, employees, and sometimes suppliers). An individual’s incentive to actively contribute comes from their stake in the business’ success, as well as their genuine ability to influence the governance and operations of the organisation.

In order for an applicant to be successfully admitted as a member of the co-operative, the Board of Directors must be satisfied that they will be an ‘active member’. Each co-operative must have an ‘active member test’ which links to the purpose and primary activities of the co-operative – hence the test will be unique to each co-operative.

The benefit of this structure is to ensure that if a member doesn’t maintain an ‘active’ membership then that can lead to their membership being cancelled. Therefore there is always going to be sufficient engagement from active members, all pushing toward a common goal, rather than there being simply silent inactive shareholders relying on the few to push the business forward.

Equal Economic Participation & Equal Voting Rights

A unique aspect of the co-operative model lies in each member having equal voting rights, meaning that control within the organisation is not concentrated among major shareholders. This diffusion in control provides for a one member, one vote policy in collective decisions which benefits members by ensuring that voting is linked to membership, rather than the amount of share capital you own.

Further to avoid extreme majority or minority owners, if shares are on issue, one member is limited to owning a maximum of 20% of all issued share capital[1].

To ensure that control remains with the members, the Co-operatives National Law requires that the majority of directors must always be member-directors (i.e. directors that are also members).

These all go toward ensuring equal economic participation amongst all members (rather than concentrating investment and ownership in one or two people).

Flexible Business Structure

When discussing what kind of business you will run, it is important to consider what purpose your business will be serving. Are you focused on implementing social change? Or are you interested in lowering the cost of goods or creating greater access to services? Fortunately, the co-operative model offers a high degree of flexibility for businesses and its member / owners.

There are two types of co-operatives – distributing and non-distributing.

A distributing co-operative (i.e. a co-operative with share capital and the ability to pay a dividend to members) most closely aligns with a for profit company. Share value is fixed, and allows for continuous entry of new member/owners into the business. Profits can be distributed by way of dividends or by trading rebates or discounts.

A non-distributing co-operative is not intended to deliver ‘returns for their members’ and rather these are entities which deliver social outcomes – being eligible as charities. Non-distributing co-operatives may or may not have share capital.

You can change the structures between distributing and non-distributing depending on what bests suits the entity and its members throughout the life cycle. Each co-operative has its own set of Rules (akin to the Constitution of a company) that can be prepared to suit the needs of the members

Co-operatives offer a unique approach to business, emphasising collaboration and shared ownership. If you have any queries about whether a co-operative is the right structure for your new or existing business, please reach out to the Business & Commercial team on 02 6274 0999.

[1] Co-Operatives (Adoption of National Law) Act 2012 (NSW) (3.5) 363(2)

Published 24 January 2024.

Join our mailing list

Get in touch