A cooperative which is also known as a co-op is a business that is mutually owned by a group of people and democratically operated by and for the benefit of its members. It is safe to say that a cooperative is formed when a group of people who share the same value and business principles decides to solve a need in society.
The truth is that there are no restrictions on the number and type of people that can form a cooperative in the United Kingdom, as workers in a factory, residents in an estate, truck drivers, teachers, retired civil servants, and traders in a market et al can form cooperative business.
Cooperative businesses are found everywhere in the United Kingdom and available statistics show that cooperative businesses contribute over £38 billion to the UK economy. There are thousands of successful co-operatives in the UK and across the country, and more people are choosing to create new co-operative businesses, either starting a new business or converting an existing business or service into a co-operative.
Types of Cooperative Business Ownership
Cooperatives offer a flexible model for new businesses and there are different types of ownership;
Worker-Controlled Cooperative Business
Worker-controlled cooperative business as the name implies is a cooperative business that is jointly owned and operated by workers in an organization.
These types of co-ops tend to have very flat structures and no hierarchy – some even pay all the staff equally no matter what their role. The workers are involved in decision making and how any surplus is shared out or reinvested in the business. How this works in practice depends on what the co-op has written in its rules.
Producer Owned Cooperative Business
A producer-owned cooperative business is a cooperative business that is jointly owned and managed by a group of producers or suppliers to get a better deal for their products or maximize the market for their products. A good example of this is farmer-owned agricultural co-ops, which work together to share resources and use their collective bargaining power.
Customer-owned Cooperative Business
A customer-owned cooperative business is a cooperative business that is jointly owned and managed by customers of a product or service in and around a community. Just like any other cooperative business, customer-owned cooperative businesses exist to serve the needs of their members, which in this case is access to affordable finance. Credit unions like The Co-op Credit Union are good examples of customer-owned organizations.
Community Owned Cooperative Business
A community-owned cooperative business is a cooperative business that is jointly owned and managed by people who reside in a community. Community-owned cooperative businesses usually raise finance through community shares. People invest often small sums of money and become co-owners of vital local enterprises – from pools to pubs, community housing to heritage buildings.
Multi-stakeholder Cooperative Business
Multi-stakeholder cooperative business as the name implies is a cooperative business that is jointly owned and operated by diverse groups of people coming together to form a cooperative business. For example, workers and residents of a community can come together to form a multi-stakeholder cooperative business.
So, this might mean a housing co-op with residents and workers making decisions together. Or a multi-million-pound retail co-operative where members are elected to have a say to represent customers and the communities where they operate.
Pros and Cons of a Cooperative Business
The fact that people come together to form a cooperative for the benefit of their members does not mean that there are no disadvantages.
Pros of a Cooperative
Top on the list of the pros of cooperative business is the fact that every member enjoys equal status and the business is built absolutely on a democratic style of management. The cooperative business operates a one-member-one-vote policy. This means that all the needs of members can be met without a single person dominating the decision-making process.
This kind of structure makes the organization more stable. Members can come and go without having serious implications for the business. And because of the ‘one-member-one-vote’ policy, all the members stand on an equal footing regardless of the number of shares they own.
Lower Debt Risk
Another positive when it comes to cooperative business is that it is a lower debt risk kind of business. The implication of this is that every shareholder, director, and employee has no responsibility for the debts of the cooperative unless those debts are caused by negligence or fraudulent activities. In essence, the liability of the members is limited to the extent of their investment in the cooperative.
Cooperative business usually comes with its own set of economic advantages. For consumer cooperatives, members are entitled to receive patronage dividends, which are determined by the amount the members spend on their products. Members who work within the cooperative are also qualified to get significant merchandise discounts.
The fact that cooperatives are member-owned and controlled, means that they enjoy more autonomy especially when you compare it to businesses that are owned and controlled by investors. In addition, all members and shareholders have to be active in the organization so the load of work can be divided almost equally.
Tax Advantage and State Assistance
Members are taxed once on their income from the cooperative itself, and not separately on an individual and corporate level. For-profit cooperatives are generally taxed as normal companies but they can reduce tax exposure by issuing patronage dividends (refunds issued to people purchasing their goods or services). The government also offers grants, loans, and financial assistance to cooperative societies.
The major reason why people form cooperatives is for the social benefits of their members. This is why the basic philosophy of any cooperative business is for the mutual help of its members. Cooperatives help instill moral values among members for a better living. It promotes the spirit of tolerance, cooperation, and self-help.
Cons of a Cooperative
The major drawback of a cooperative business is financial constraint. This is so because cooperatives have fewer capital incentives, hence they don’t appeal to big investors. While it is attractive for smaller investors, big players won’t be interested when they know that greater contribution does not lead to greater shares.
Plus, a cooperative usually has trouble getting loans from well-established financial institutions, such as banks. This makes the cooperative business model only ideal for those with lower start-up costs.
Longer Decision-Making Process
Like the regular business out there, cooperatives usually take time to decide because every member must be involved in the decision-making process of the business. In cases where decisions must be made fast, cooperatives might not be effective. Many people have control and authority so resolutions often take time.
Lack of Business Exposure
Another major drawback when it comes to cooperative business is the lack of business exposure when it comes to the people managing the business.
The truth is that a large number of cooperative societies can’t employ professional managers because of their limited resources. Cooperatives do not attract specialized skills to run their affairs because they can’t afford to pay higher salaries. Ultimately, many co-op firms fail due to ineffective organization and management.
Lack of Profit Motivation
Come to think of it, one of the major drivers for businesses all across the world is profits. With cooperative business, it is not so and lack of profit motivation can negatively affect the business.
Business Structure of a Cooperative Business in the United Kingdom
Presently, there is no co-operative legal form in the UK, and so organizations wishing to become co-operatives have to choose one of the existing legal forms to begin operation. It is usually advisable for a co-operative, whatever its type, to limit the liability of its members and governing body.
Co-operatives can also choose to operate on an unincorporated basis when they first startup or if limited liability is not required, in which case they will still need to adopt a written constitution. All types of co-operatives, regardless of the legal form, can be registered through Co-operativesUK.
Having said that, if a co-operative business wants to incorporate there are several legal forms that may be considered and they are;
Private Company Limited By Guarantee/Shares
The limited company legal form is the most popular legal form for businesses in the United Kingdom. This business structure is widely used by co-operatives and is very familiar to the majority of advisers, professionals, and funders.
Private companies limited by shares are prohibited from offering shares to the public, so if the proposed co-operative wishes to raise funds from the public this legal form should be avoided. Companies can be set up in as little as 24 hours, and are registered by Companies House directly, or through Co-operativesUK
Industrial and provident society (IPS)
Most people believe that the Industrial and provident society (IPS) route is the stronger form of co-operative. It contains statutory protection of the cooperative principles – for example, one member one vote – and is designed to enhance democracy and protect the rights of the members. IPSs are registered with the Financial Services Authority (FSA). The FSA scrutinizes the governing document (Rules) of applications to register as an IPS.
Community Interest Company (CIC) Limited By Guarantee/Shares
The CIC is a relatively new legal form. It is a limited company but with special features and is available for use by organizations that wish to conduct their business for community benefit. One of its key features is an asset lock, whereby assets of a CIC are protected and cannot be distributed for private benefit.
The asset lock may be useful for co-operatives wishing to apply for funding or promote themselves as not-for-private profit. It is not possible for a CIC limited by guarantee to pay dividends to members and a dividend would be subject to a cap in a CIC limited by shares. The asset lock would also prohibit the distribution of assets to members at the point of winding up.
How to Form a Co-Operative in the United Kingdom
Here are simple steps to form a cooperative business in the United Kingdom;
- Outline a broad feasibility plan: what are the objectives of the business? Discuss these with the rest of the group setting up the business.
- Discuss a draft legal structure: who are the members – are they the staff, the consumers or community, or other small businesses? What are the benefits of membership and the responsibilities?
- Develop a business strategy
- Incorporate the new business, if appropriate. This is strongly recommended if you are trading with external customers as it gives you limited liability status
- Carry out detailed financial planning – build the financial model including start-up costs, overheads, etc., and finalize a full business plan
- Seek start-up finance. Most co-operatives do this by raising money from members and/or seeking a business loan. Suitable grants may also be available.
- Carry out organizational planning – a detailed action plan, quality and performance standards, staff policies
- Develop a marketing plan
- Develop a communication plan for ongoing interaction with members.
A co-operative is about groups of people and it is critical to keep all the members or potential members on board. Active and engaged members – whether they be consumers or employees – are one of a cooperative’s greatest sources of strength.
It is important to state that the stages in setting up a co-operative in the United Kingdom vary according to the type of co-operative. So, when you want to set up a co-operative, you should seek professional advice from a co-operative development body if there is one in your area.