- A co-operative is owned and operated by its members.
- Once a co-operative is formed, it has its own legal identity that is separate from the members who have established it.
- The ‘Co-operative Rules’ define the social or commercial activity of the co-operative, as well as its day-to-day operation.
Forming a Co-Operative
Co-operatives are formed with the purpose of benefiting their members. The members of a co-operative are also owners and decisions are made with the benefit of all members in mind. In practice, this means that one member also has one vote when it comes to decision-making. Because of this, it is often seen as an organisational structure that promotes democratic principles and equality.
A co-operative is a common organisational structure for people with similar goals and co-operatives are often used to provide their members with more bargaining power when trading in the market. For example, a co-operative can often buy goods at a reduced price because of the size of its orders. When acting on his or her own, an individual would not be able to get the same price.
The members of a co-operative have common economic, social and cultural goals that are met by governing principles of self-help, self-responsibility, and solidarity.
Difference Between a Co-operative and Other Incorporated Organisations
The co-operative is known for its promotion of democratic principles and equality.It is different from a company because of its “one man one vote” structure, and also different from an incorporated association because of the ability to distribute surplus funds to its members of they decide to do so (that is, unlike an incorporated association or club, it is not required to be “not for profit” (to not distribute surpluses funds to its members). Surplus funds do however need to be used for mutual member benefit. There are two types of co-operatives: distributing or non-distributing. This means surplus funds can be distributed to its members directly (distributing) or it can only be used to support activities of the co-operative (non-distributing).
Do members of a co-operative have personal liability?
Once a co-operative is formed, it has its own legal identity. This means that it can enter into legal transactions such as contracts or acquire property. This also means the co-operative bears liability for its conduct and can also be sued. Member liability is confined by the amount owed to the co-operative as a result of membership. This can include share capital, fees or subscriptions.
Each state and territory have legislation to govern co-operatives. The Co-operatives National Law (CNL) is a body of law gradually being introduced throughout Australia. The transfer to the CNL will:
- reduce the administrative costs of co-operatives by removing jurisdiction-based registration requirements,
- simplify financial reporting requirements for ‘small’ co-operatives,
- allow Model rules to be adopted,
- introduce duties of directors, officers and employees to reflect the duties of directors of companies, and
- impose new secretary obligations.
NSW and Victoria have adopted the CNL, with other states and territories expected to follow by adopting or passing legislation consistent with the CNL.
- A co-operative is an organisational structure that promotes a common goal and mutual benefit. It is based on shared ownership.
- In a co-operative, each member has one vote and decisions are made democratically.
- A co-operative can either be set up as a distributing or non-distributing entity.
Setting up a Co-operative
There are nine steps to set up a co-operative:
- Choose a name. The name must include the word ‘Co-operative’ and must end with ‘Limited’.
- Draft the co-operative rules. The rules govern the way a co-operative will operate. The rules will require details such as the name, primary activity, membership provisions, rights and liabilities of members, number of directors and meeting procedures. There are model rules included in the legislation.
- Draft the disclosure document. The disclosure document is only needed for distributing co-operatives. This document will explain members’ financial involvement or liability. It will require details of projected income and expenditure, names of prospective members and directors, and the extent of members’ involvement.
- Send the co-operative rules and disclosure document to the state or territory registry.
- Prepare the application to register a co-operative and have the co-operative rules, disclosure document and membership forms ready for the formation meeting.
- Once you have received preliminary approval of your co-operative rules and disclosure document, organise a formation meeting with at least five prospective members.
- Attend the formation meeting to elect the directors, chairperson and secretary, vote on the co-operative rules and approve the application to register the co-operative. Those present at the meeting can complete the membership application form.
- After the formation meeting, send the application form, fee and finalised co-operative rules and disclosure document to the state or territory registry.
- Once the co-operative is registered, a certificate of incorporation will be issued.
Running a co-operative
The elected board of directors need to manage the day-to-day running of the co-operative in line with the co-operative rules and legislation.
Financial reporting: A co-operative needs to maintain a registry of financial records for a minimum of 7 years. An annual report needs to be lodged with the relevant state or territory registry before the end of the financial year. The type of annual report lodged will depend on whether a co-operative is classified as small, large or distributing. A bank account may be opened in the name of the co-operative, with the co-operative rules outlining which signatories are authorised to operate the account.
Meetings: After an initial board meeting, a co-operative needs to hold board meetings every three months. Special general meetings can also be called upon by the board or by members. An annual general meeting needs to be held for the presentation of the annual report, the election of directors and to give members the opportunity to ask questions or make comments. The co-operative rules and legislation outline the procedure for setting up these meetings, including what constitutes a quorum and the record keeping requirements.
Register: A co-operative needs to make available certain documents and maintain registers. These include the co-operative rules, co-operative legislation, minutes from meetings, annual reports and a register of directors, members and loans. All members should be able to inspect the register without cost.
Decision-making in a co-operative
The decisions in a co-operative can be made by ordinary resolution or special resolution. An ordinary resolution can be reached by a simple majority of members. A special resolution needs a two-third majority of members. Certain decisions require a special resolution as outlined in the CNL or the appropriate state or territory legislation. There are also special circumstances where an ordinary or special resolution needs to be passed by way of a postal ballot or special postal ballot.
Closing a co-operative
It is not uncommon for a co-operative to close. There could be some factors leading to this decision, including the fact that common goals may no longer be shared or the economic conditions were not favourable to continue running the co-operative. A co-operative can close by:
- voluntary wind-up by members,
- voluntary deregistration by members and
- insolvency commenced by directors, creditors or the court.
Frequently Asked Questions about Co-operatives
Q: Can I change a co-operative to another business structure?
A: A co-operative can change to a registered company, an incorporated association or an Aboriginal corporation. A change in the business structure needs to be approved by the appropriate state or territory registry. If the change is approved by the registry, members need to be notified and in most cases a special resolution needs to be passed.
Q: What is the difference between a small and a large co-operative?
A: A small co-operative needs to satisfy certain criteria to be classified as “small”. This includes satisfying at least two of the following points:
- the consolidated revenue must be less than $8 million,
- the value of consolidated gross assets must be less than $4 million or,
- the number of employees must be fewer than 30.
The above figures are based on the previous financial year and will take into consideration the co-operative’s controlled entities.
A small co-operative cannot have any securities on the issue to non-members, this is unless the non-members are former members who have cancelled their membership. A small co-operative can not issue shares to more than 20 members in one financial year. If more than 20 members have been issued with shares, the value of the shares must not be more than $2 million.
If a co-operative does not meet the above criteria, it will be considered a large co-operative. The classification of a co-operative will determine its financial reporting obligations.
Q: Can I change the co-operative rules once they have been drafted?
A: The co-operative rules can be changed. However, some changes may require approval from the state or territory registry before taking effect. The rules that need approval include those relating to:
- active membership,
- converting from a non-distributing to a distributing co-operative,
- the co-operative’s primary activities,
- winding up and
- the issue or sale of shares.
An application to make changes can be lodged at the state or territory registry. Members will also need to be notified and often a special resolution needs to be passed to make the relevant changes.
Q: Do co-operative directors and officers have specific duties?
A: The CNL and relevant state or territory legislation outlines the specific obligations and duties of directors and officers in a co-operative. They include acting honestly, acting with care and diligence, not disclosing confidential information and ensuring the co-operative can meet its financial obligations.
How can LegalVision help me?
LegalVision provides businesses and individuals with tailored online legal advice. An important question is to determine whether a co-operative is the right organisational structure for you. We can provide advice on whether a co-operative would suit your goals and activity. Once you are sure that a co-operative is the best structure for you, we can draft your co-operative rules and provide you with advice on the legal obligations of running a co-operative. If you have already set up a co-operative, we can assist with any of the legal questions you have along the way.
Would you like to get in touch with Kristine about this topic, or ask us any other question? Please fill out the form below to send Kristine a message!