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Deciding the ownership structure for your co-op
| Deciding the ownership structure for your co-op |
| Early in the planning process, your group has to decide whose needs or interests the new co-op will serve. This will determine who the member-owners of the co-op will be - or the ownership structure. This decision establishes the type of co-op you are forming.
This section introduces the types of co-operatives that exist and the key questions to be considered when choosing your ownership structure. The information here is more general than specific, so you are advised to consult with a co-op development expert and lawyer before completing the co-op formation process.
1. Types of co-operatives
2. Variations on co-op types
3. Questions to consider when structuring your co-op
4. Other options for organizing the co-op business
5. Links to additional information and advice
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1. Types of co-operatives
It is generally agreed that there are four types of co-operatives, defined by the ownership structure, or who owns and controls the co-op. The four co-operative types are:
 • Worker co-op
• Producer co-op
• Consumer co-op
• Multi-stakeholder co-op
This delineation by co-op type is important for research and statistical purposes and for understanding co-operatives as a whole.
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 People often confuse Co-op Type with Co-op Sector, so let's clarify what we mean by the two.
Co-op Type describes the ownership structure, or who owns the co-op.
Co-op Sector refers to the industry sector in which a co-op operates or the activities in which it is engaged. Examples of co-op sectors include agriculture, health care, housing, recreation and the arts, retail, construction, renewable energy, and financial services.
You can find more information on co-op sectors and types at Tools and guides for different kinds of co-ops .
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| Here is a description of the four basic types of co-ops, with links to further information and practical tools for each.
Worker co-op
This type of co-op is owned by its workers or employees and is set up to serve the needs of these worker-members. Worker co-ops aim to provide their members with quality jobs, control over their workplace and shared responsibility for the management and governance of their enterprise. These co-ops operate in all sectors of the economy, but their ownership structure makes them unique. Often they are more successful businesses because the worker owners have a greater stake in the success of the enterprise. LINK here for more information and practical tools for worker co-ops.
Producer co-op
This type of co-op is owned by and serves the needs of independent producers /small business owners in agriculture, the fisheries, forestry, the arts and other sectors. Producer co-ops typically perform one or all of the following activities:
1) Market the members' products or services
2) Provide value-added processing for members' products
3) Supply members the materials or services required to produce a product or service for the marketplace.
Examples of producer co-ops include all types of agricultural co-ops (machinery, farm supply, feedlots, seed cleaning, marketing and processing), co-ops in fish processing and marketing, artist supply and marketing, and taxi services. LINK here for more information and practical tools for producer co-ops.
Consumer co-op
This type of co-op provides goods or services to member-consumers who use these products or services.
Retail co-operatives provide a vast range of goods from food and groceries to hardware, petroleum, student supplies, and outdoor gear. Other consumer co-ops provide essential services to people in urban and rural settings - everything from housing, child care or health care to cable television, internet, water or energy supply, fitness facilities and funeral services.
While most consumer co-ops serve individual members, there are also 'shared-service co-operatives' that serve groups of small businesses and non-profit enterprises, helping them survive in a competitive economy by offering group buying, marketing and other services. LINK here for more information and practical tools for consumer co-ops.
Multi-stakeholder co-op
This type of co-op is formed when different ‘stakeholder' groups share a common interest in the success of an enterprise - e.g. employees, clients, community organizations or investors. The member-owners can include organizations and individuals, and the rules for how each stakeholder group is represented on the co-op's board are set forth in the bylaws.
In Canada, the multi-stakeholder model was first used in Quebec where it is known as a 'solidarity co-op.' It started out in health, home care and other social enterprises but in recent years this model has been used in local foods, biofuels and community economic development initiatives. LINK here for more information and practical tools for multi-stakeholder co-ops.
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2. Variations on co-op types
You may have heard of other co-op structures and wonder how they fit with the four classic types of co-ops described above. Here are a few examples.
Co-op federations
These are second-tier co-operatives whose members are co-ops rather than individuals. The member co-ops are generally of similar type or operate in a similar sector.
For example, over 280 retail consumer co-operatives in western Canada are members of Federated Co-operatives Limited. As members, they own and control the federation, which in turn serves the local co-ops by providing wholesale goods, marketing and merchandising services, financial management, training and other services. Co-op Atlantic provides similar services to consumer co-ops in the east, and Arctic Co-operatives does the same in the north.
Housing co-operatives across Canada are served by the Co-operative Housing Federation of Canada, and worker co-operatives by the Canadian Worker Co-op Federation.
Across the globe, co-op federations have been a very important structure for developing and strengthening the co-ops they serve. And they are one of the main tools for exercising the 6th co-op principle - co-operation among co-operatives.
New generation co-ops (NGCs)
This is a relatively new form of producer co-op that adds value to primary products and allows producer-members to move up the value chain and benefit from processing revenue. The model originated in the US in the late 1970s as a response to major changes in the agricultural industry that made it difficult for farmers to survive any longer as primary producers.
The NGC typically operates in agriculture but can also apply to resource industries such as fisheries or forestry. It is similar to the traditional co-op - with one-member, one-vote - but it has been adapted to address the higher capital needs of value-added processing and some of the limitations of the traditional model. Key features of the NGC include:
- Limited membership, tied to the processing capacity of the co-op
- A two-way delivery rights contract between the member and the co-op
- High level of investment by members
- Transferability of delivery rights shares.
LINK here for more information and practical tools for new generation co-ops.
Multi-purpose co-operatives
These co-ops are most common in the more remote northern communities of Canada, where a local community co-op provides a vast array of goods and services - including food and groceries, fuel delivery, postal services, housing, cable television and internet, hotels and outfitting services for tourists, and marketing of local crafts and specialty products.
These co-ops can succeed with such a large mandate for two reasons:
1) They operate in isolated areas where such services would otherwise be unavailable; and
2) They are members of the Arctic Co-operatives Limited federation, which provides marketing, management, financing and other supports that help make the local co-op operations viable.
Community development co-operatives
These are not typical consumer co-ops since they rarely sell a product or service. Instead, they tend to be not-for-profit organizations that provide community services in their area and act as agents of social change. Their mandates vary - from providing training or support services in low-income communities, to pursuing economic development and employment creation for a community or region. These co-operatives generally rely on funding partnerships with government and other agencies to achieve their goals.
3. Questions to consider when structuring your co-op
The following questions reveal inter-related angles on the same picture. They are intended to help you think about what type of co-op you are forming and who should your members should be.
Who will be the members? Who will own and control the co-op?
In answering this question, there are further questions to consider.
Who determined the need? The people or group that defined the need may be the best people to own the new co-op. People who have some sort of problem and really need the co-op are usually the best potential members because they have a strong stake in making it happen. However, if they do not have the skills, time or energy to organize the new co-op, they may not be able to develop or run the co-op.
Who has the time and energy to develop and run the co-op? When there are a range of possible owners/members, the question is which group of people has the commitment to do the planning and organizing of the new co-op. It usually takes a lot of time (possibly 2-3 years), patience, leadership, and skill to start something new. It also takes some money to buy shares and pay for the initial planning and set-up costs, although some financial support may be available.
Is there a common bond or history of working together? If the potential members already have some existing relationships or knowledge of one another, it is easier to create a co-op. If they all belong to the same organization, live close to one another, or worked together on the same community issue, they can build on this bond. If there is a choice between a membership of complete strangers and a membership of people with prior relationships, seriously consider the group with some history of co-operation.
 Cautionary Note:  Co-ops with a highly diverse membership often have difficulty serving their members well because the needs are too varied and sometimes conflict with each other. Multi-stakeholder co-ops can also face this challenge. They have diverse member groups whose various rights and responsibilities are spelled out in the co-op's articles of incorporation and by-laws. Yet, their challenge is to remain focused on the common purpose and goal, which meets a need for all the stakeholder groups.
What is the co-op's purpose and objective?
The co-op's purpose is directly tied to the members it will serve, and it is these members who will own and control the co-op. The purpose is usually based on a common need of the members, and the co-op is formed to serve the members and meet that need.
A co-op that sets out to achieve too much will often fail because its focus becomes too scattered. It is important that the purpose and core objectives be well defined, achievable, and agreed to by all members at the outset. The stated purpose and goals will help determine the type of co-op you are forming, which in turn will bring further clarity to the formation process.
Here are some examples:
- If the primary purpose is to provide employment for a group of people, you are likely considering a worker co-op.
- If the purpose is to market the products or services of independent producers or entrepreneurs, you are considering a form of producer co-op.
- If the purpose is to reduce the cost of products or services (for individuals or organizations) through group purchasing, you are looking at some form of consumer co-op, which includes shared-service co-ops.
- If the purpose is to unite a diverse group of individuals and organizations who all have a stake in solving a particular problem or benefiting from a particular course of action, you are considering a multi-stakeholder co-op.
How will the members benefit?
When deciding to form a co-op, the question of how a member will benefit is a key factor in structuring a successful organization. Many co-ops start out fuelled by ideological commitment, but those that succeed are sustained by members who stay with the co-op for the economic and personal benefits it provides them - whether that means reduced operating costs, increased marketing power, or access to housing or other essential services.
Co-ops that set out with the sole purpose of benefiting the environment or society as a whole - no matter how noble their intentions - tend to have difficulty retaining members over time. In fact, these groups should probably have considered a different organizational structure than a co-op.
More than a century of experience has shown that co-ops thrive when members see a clear link between their own personal success and the success of the co-op as a whole. Unless there is tangible and sufficient personal benefit in return for the commitment required of members, they simply will not maintain their interest in the co-op over the long term.
What about capital needs and share structure?
The type of co-op you plan to form must take into consideration the need for financing the business side of the enterprise. For example, if a producer co-op plans to construct a processing facility, the financial requirements will be high. As a rule, the first financial investors in a co-op are always the members it will serve. The intended members must be in a position to invest before outside financiers can be expected to take your business proposal seriously or to risk financing it.
Co-op legislation varies by province, but it will sometimes limit who can purchase shares in a co-operative and at what rate of return. These rules are designed to support the overall purpose and function of co-operatives, which is to retain ownership and control among the members that the co-op is intended to serve.
The good news is that a co-op with a solid business plan, committed members, and financial advisors who understand co-op investment share options rarely has difficulty raising the capital it needs.
LINK here for more information on co-op business planning and financing.
How does 'co-op type' relate to co-op incorporation and by-laws?
A producer, worker or consumer co-op will be incorporated under the same legislation and report to the same regulatory body of government. But the details of how each co-op will work are spelled out in the articles of incorporation and by-laws, which together form the legal foundation for the co-op structure.
The incorporation forms are the first part of this process and they will vary by province, with some requiring more information than others. Some provinces require the co-op's purpose and objectives, its member and ownership structure, and the type and value of shares. However, the trend is towards less information in the articles of incorporation, requiring only the name and address of the co-op, its directors, and the type and value of shares, along with special provisions that the co-op wishes to include.
Since the articles of incorporation are a legal document filed with the regulator, they are not changed easily or lightly, so the tendency is to include the more detailed information in the by-laws. The bylaws reside with the co-op and are subject to change as the co-op evolves and grows.
The by-laws are the second part of the co-op's legal foundation and structure. They spell out the member and ownership structure of the co-op and the rules and procedures for democratic governance. They address issues like voting and how organizational decisions are made, the rights and responsibilities of the board and members, how long directors can hold office, and under what conditions members' capital will be refunded by the co-op.
Since the bylaws are the day-to-day reference document the co-op will rely on, it is essential that they are well structured and concise, that they do not conflict with the articles of incorporation in any way, and that all members can read and understand the rules governing their co-op.
Recommendations
- Incorporate your new co-op after you have completed the feasibility study and business plan, as the purpose, membership, and financial needs will be clearer. It is also best to determine the co-op's name after you have decided the real nature of your business and the market you are trying to reach.
- Every co-op is advised to have a lawyer assist with or review the articles of incorporation and bylaws since these are a key to minimizing potential legal difficulties for your co-op.
4. Other options for organizing the co-op business
Like other forms of enterprise, co-ops have a range of options available when deciding how to structure their business operations. The type of co-op structure they have chosen will always determine how the co-op is owned and governed, but the structuring of the business operations is another matter. Besides the standard operation that proudly flies the co-op name and banner, here are a few other examples of how co-ops can structure their businesses.
Purchasing and operating an existing business
For a number of reasons, a group of workers or a community may buy an existing business, to retain jobs that might be lost or to keep services in their community. In some cases it even makes sense to keep the old name of the business, especially if it has a strong reputation or a well established brand. In all cases, the co-operative operates under its normal rules and is accountable to its members, even if the co-op name does not appear on the shop door.
For example, the Village Grocery Workers Co-operative operates a Foodland grocery franchise in St. Peters, Nova Scotia. The Foodland brand name appears prominently on the store, but a note to customers at the door proudly states that the store is operated by the worker-owned co-operative.
Joint ventures and strategic alliances
It is not uncommon when a co-op is entering into a complex and expensive venture to work jointly with other partners who bring needed expertise, capital or other resources to the enterprise. In all types of strategic alliances, the co-op and its partners will remain separate and distinct entities, governed by the people and rules of their particular organizations, but they will set out rules for how they will co-operate for mutual benefit.
Certain formal joint ventures require that the co-op and its partners establish a separate legal entity with its own set of rules and ownership structure to govern the new venture. The new business entity can be another co-operative or a for-profit corporation. Two or more co-operatives will often establish joint ventures to meet mutual goals. The co-op directors of the new entity will report to the co-op board, where any key decisions will be made about the co-op's responsibility in this venture.
One example of such a venture is Co-operative Research Farms (CRF). It was formed when several of Canada's large co-op federations joined with other international co-operatives to build their research capacity in animal nutrition. All the co-operatives benefit from the creation of superior animal feed through CRF, which is supplied through co-op stores to thousands of local farmer members.
See the article Weathering the Storm for another great example of how co-ops work with other partners to create opportunities and achieve shared goals.
Other forms of strategic alliance are established for short or long-term periods to meet the shared objectives of a co-op and its partners. Some alliances are informal and based on a verbal understanding, but very often the terms and conditions of the alliance are spelled out in a memorandum of understanding (MOU) or other legal agreement. They can include agreements to undertake specific activities like a joint promotional campaign or product distribution network, or sharing research and development costs and results. In some cases, a co-op will set up a general alliance with a partner or group of partners, in which they prepare an agreement to work collaboratively on a wide range of initiatives.
Subsidiaries
Many of Canada's larger co-ops have set up subsidiary corporations that operate as separate businesses but still remain under the co-op's ownership and control. In some cases they are wholly owned by the co-operative, and in other cases they are owned jointly with another business or group of investors.
Co-ops sometimes use this option as a way to access capital from other investors, but most often as a way to limit risk and liability for the co-operative. For example, if the co-op wishes to enter a new and unproven business activity, it will often set up a subsidiary as a means to protect the co-op from potential losses. In all cases, the subsidiary reports to the co-op board on a regular basis and the board oversees major decisions about the future and direction of the enterprise.
As an example, Co-op Atlantic has several subsidiary companies. One is Avide, formerly known as Atlantic People's Housing, an enterprise that provides affordable housing for seniors and other groups. When it was launched it represented a new line of business for Co-op Atlantic, compared with its core activities related to wholesale and federation services for hundreds of co-op stores in the Atlantic region.
5. Links to additional information and advice
Co-op Advisory Services and Support
See this page for links to provincial and national co-op associations that can assist your co-op.
Coopzone Developers Network
Find contact information here for some of the people available to assist you in structuring and starting a co-op. This list is not a complete one, so contact your provincial co-op association or talk to existing co-ops to get recommendations for other co-op consultants, lawyers, etc.
Weathering the Storm
This news article details the success of a Quebec forestry business that is thriving despite a crisis in its industry. Boisaco was a joint venture formed in the 1980s by three stakeholder groups - a logger's co-op, a millworkers' co-op, and a consortium of local businesses. They bought a bankrupt sawmill and restored it to prosperity through a unique business approach that focused on the long-term needs of their community.
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