Democratic Enterprise
Co-operative societies in
society: classifications and
incorporation
This topic explains the three principal ways of classifying co-operatives:
the area-based method, the membership-based method, and the groupserved method. It then discusses the legal structures and regulation
within which co-operatives in Britain operate.
Learning Goals
• identify the different types of co-operatives;
• assess the advantages and disadvantages of
various methods of classification;
• recognise the legal structures that apply to cooperatives.
Key Arguments
• Co-operatives are classed in different ways: by area, by
membership, and by group served.
• Co-operatives are most commonly classed according to the type of
group served.
• The group-served method distinguishes between consumer cooperatives, producer co-operatives, worker co-operatives, and
hybrid co-operatives.
• There is a legal framework for establishing and running a cooperative.
Introduction
Co-operatives are a diverse and flexible enterprise model
but attempts have been made to appropriately classify
them. Three of the more common methods are:
• by area
• by membership
• by group
Area-based method of classification
Area served
Local:
Regional:
National:
International
Drumchapel Credit Heart of England
Scotmid – is the
Mondragon CoUnion – serves a
– is a consumer
largest
operative
local community in society serving
independent coCorporation –
the west end of
the midlands of
operative in
has plants in 18
Glasgow city.
England, in
Scotland and has a countries outside
particular the
wide portfolio of
of Spain.
regions of
businesses.
Coventry and
Warwick.
Membership-based method of
classification
Type of membership
Primary co-operative
(centralised)
Secondary co-operative
(federated)
Provide direct services to Membership
of
a
patron-users
(i.e. secondary
co-operative
members).
consists of other coAn example of a ‘primary operatives.
co-operative’ would be
GreenCity Wholefoods, a
worker co-operative based
in Glasgow.
An
example
of
a
‘secondary co-operative’ is
the Co-operative Retail
Trading Group (CRTG),
who acts as a wholesaler
for all of the independent
co-operative retail societies
in the UK.
Mixed
Some
co-operatives
(usually
regional)
can
supply
services
to
individual members as well
as
other
co-operative
businesses.
An example of a ‘mixed cooperative’ would be the Cooperative Group, which
admits into membership
individuals as well as other
businesses.
Group-served method of
classification (1)
The ‘group served’ method is the most widely-used
method of classifying co-operatives. Within each
of the group categories (producers, consumers,
workers, and hybrid) there are co-operatives that
focus on different areas of activity, such as
marketing, or housing, or insurance.
Group-served method of
classification (2)
Group served
Producers
Consumers
Marketing
Retail
Production
supply
Credit
Service
Health
Credit
Insurance
Housing
Workers
Hybrid
Can be any form of Serves
business once it is more
owned
and groups
democratically
controlled by its
employees
two or
different
Mutual insurance Community
Machinery ring
Note that the above examples are merely representative of the type of
businesses co-operatives can be rather than a definitive list.
Producer co-operatives
Producer owned businesses enable self-employed people
and businesses to gain the strength in numbers they
need to survive in the market. An example of a producer
co-operative would be a group of farmers banding
together to market their produce jointly.
Case study - Ocean Spray
Ocean Spray is an agricultural co-operative owned by more than 600 cranberry growers
across North America and Canada and over seventy Florida grapefruit growers. The
co-operative was formed in 1930 by three cranberry growers who shared a common
goal of expanding the market for their crops through innovative products.
Ocean Spray is a type of enterprise known as a marketing co-operative. This means that
Ocean Spray’s owners use the co-operative for joint marketing and production
operations. Each farmer will supply their produce to Ocean Spray which offers the
highest price it can as well as guaranteeing to purchase all of their members’
produce. Ocean Spray then markets and sells the farmers’ inputs through a wide
range of products, including juices, dried fruit and sauces.
Consumer co-operatives
Consumer owned businesses provide people with goods at
the lowest possible price, with a guarantee of good
value, and so make their income go further. An example
of a consumer co-operative would be a retailer serving a
local community with food and toiletries.
Case study - The Co-operative
Group
The Co-operative Group, headquartered in Manchester, England, is the UK’s
largest consumer co-operative. Operating across multiple industries and
with revenues of £13.7bn in 2010, the group is one of the most successful
retail co-operatives in the world. The group has operations in the food,
financial services, travel, pharmacy, funeral care, legal services, electrical
goods, and motor vehicles industries.
Central to the success of the Co-operative Group is the collective ownership
structure of the business, whereby only those who trade with the cooperative can be owners. And as owners, members are entitled to a share
of the profits generated by the business based on their patronage.
Worker co-operatives
Worker owned businesses provide people with an income,
but also are a way of gaining control over the conditions
under which they labour, providing what the International
Labour Organisation calls ‘decent work’. A worker cooperative is a business that is jointly owned and
democratically controlled by those who work for the
company.
Case study – Suma Wholefoods
Triangle Wholefoods Collective Limited, trading as Suma Wholefoods, is the UK’s largest
worker co-operative (where the members of the business are employees). Based in
Elland, near Halifax, the company has over 120 members and a turnover of £25m.
Not only do the worker-members collectively own the company and have the right to
participate in a share of the profits generated, they also act as the ultimate governing
body in the business through a non-hierarchical management structure.
The organisation has a two tier structure for governance, with the members electing a
Management Committee at the Annual General Meetings (AGM). The Management
Committee is delegated decision making responsibility for the company and is
accountable to the members.
Hybrid co-operatives (1)
A hybrid co-operative (also known as a multi-stakeholder co-operative)
is defined as a multi-member class co-operative that has its own
distinct rules regarding membership, governance and patronage.
For example, Eroski supermarket, part of Mondragón, has both
workers and consumers as its members. Hybrid co-operatives draw
on the strengths and eliminate the weaknesses of different cooperative enterprises: consumer co-operatives are scalable and
highly adept at raising capital, whereas worker co-operatives are
committed to providing satisfying, rewarding employment for
workers.
Hybrid co-operatives (2)
There are three major factors in the structure of a hybrid co-operative:
• Membership – What are the rules governing how different
stakeholders become members e.g. should worker members
contribute more capital and undergo a period of probation?
• Governance – How should members be represented on the board
i.e. equally or by some other proportional mechanism?
• Patronage – Should each membership class receive the same
proportion of the surplus generated?
Advantages/Disadvantages of Hybrids?
Legal regulation
Under UK legislation, co-operatives have a variety of options regarding
the legal form for the enterprise. Three of the common legal forms
are:
• Industrial and Provident Society (IPS)
• Private company limited by guarantee
• Private company limited by shares
There are other legal forms co-operatives can adopt, such as those that
enable the creation of community benefit co-operatives (known as
BenComms) or charitable organisations.
Industrial and Provident Society
(1)
An Industrial and Provident Society (IPS) is an organisation conducting
an industry, business or trade, either as a co-operative or for the
benefit of the community, and is registered under the Industrial and
Provident Societies Act 1965. Companies that wish to set up as an
industrial and provident society must register with the Financial
Services Authority. Traditionally, co-operatives were set up under
this act because their unique ownership and governance structures
were viewed as incompatible with registration under the Companies
Act.
Industrial and Provident Society
(2)
The Industrial and Provident Societies Partnership Act 1852 (predates
the act for investor-owned companies by four years).
A society may register as an Industrial and Provident Society if it
satisfies either of the two conditions found at Section 1 (2) of the
Industrial and Provident Societies Act 1965:
• The society is a bona fide co-operative
Or
• Special reasons (benefit of the community)
Bona fide co-operative (1)
No legal or statutory definition!
There are some agreed conditions however:
1. The members of the co-operative must have a common economic, social or
cultural need/interest.
2. The purpose of the co-operative is to operate for the mutual benefit of its
members.
3. The co-operative is jointly owned by the members and is democratically
controlled based on a system of one member/one vote.
4. There is a limited return (if any) on share and loan capital.
5. The members of the co-operative receive their share of the co-operative’s profit
in proportion to their participation in the business.
6. There should be no discriminatory restrictions on membership.
Bona fide co-operative (2)
These conditions were designed in such a way so as to reflect
the ICA Statement on the Co-operative Identity.
Industrial and Provident Society
(3)
IPS co-operatives are regulated by the Financial Services Authority
(FSA) but are not subject to stringent regulations; doesn’t have any
strong powers except the ability to cancel registration of a cooperative if enough members vote to do so.
IPS legislation is out-of-date (new act passed in 2010 but not yet law)
and places restrictions on co-operatives, especially in relation to
raising capital:
• Individual members can only provide a maximum of £20,000;
• Business members can provide up to £40,000.
Company Limited by Guarantee
(CLG)
Companies limited by guarantee do not have any share capital in the
business and members act as guarantors rather than shareholders.
At the time of incorporation, members agree to cover a certain
amount of the assets of the company (usually £1) in the event of the
business being wound up. This legal form is most common amongst
charitable and voluntary organisations but has been utilised by cooperatives, particularly worker co-operatives, since it is thought to
provide strong protection for the values and principles of the
business.
Example of co-operative CLG
The Very People, a marketing co-operative based in
Glasgow, Scotland, adopted the CLG model after advice
and consultation from Co-operative Development
Scotland (CDS). The six members do not hold any
shares in the business and operate a one member/one
vote governance system.
Company Limited by Shares (CLS)
Companies limited by shares are prohibited from selling their share
publically but still retain the ability to raise capital from external
sources. The liability associated with these shares only relates to the
value of the unpaid amount on the shares in the event of the
company winding up.
Example
Harness Care Co-operative, a health care practice operating in the
Brent area of Greater London, registered as a company limited by
shares in 2008.
CLG or CLS?
Companies limited by guarantee are unable to issue equity shares,
restricting their ability to raise capital. While most co-operatives do
not choose the limited by shares legal form, it is possible to operate
a one member/one vote governance system by issuing non-voting
shares in the co-operative. There is a danger however, that
members will seek to maximise the value of the co-operative in
order to realise the capital gains accrued by their non-voting shares.
Analysis of corporate legal
structures
Sole trader
Advantages
Easy and inexpensive Easy to organise
to organise
Partners share
Owner has complete control
control
Partners receive all
Owner receives all
income
Owner has unlimited
liability
Disadvantage
s
Partnership
Owner is taxed on all
business profits
Not suitable for large
or complex
businesses
income
Corporation
Owners have
limited liability
Large pool of
investors and
easier to raise
capital
Industrial and
Provident
Society
Owners have
limited liability
Democratic
governance
structure
Business life is
perpetual
Business life is
perpetual
Some partners have Complex and
Limited return on
unlimited liability
costly to organise capital
Partners are taxed
on all business
profits
Double taxation
(corporate profits
and dividends)
Difficult to raise
external capital in
the form of equity
Personality
differences may
cause problems
Owners have
little control
Limits on the
amount members
can invest
Factors influencing the choice of
legal form
1. A business must carefully assess its financial and administrative
needs before choosing a legal structure (capital or labour
intensive?).
2. Ridley-Duff and Bull argue that ‘the social identity of the owners
(investors, consumers or employees) radically transforms the way
the organization is run, and the way the benefits of ownership and
trading are distributed.’
–
IPS – close affinity with values and principles.
–
CLG – ability to pool resources and expertise (common for service oriented
producer co-operatives).
Summary
•
There are different ways of classifying co-operatives but the most common
method is by user served.
•
Co-operatives have a variety of legal forms under which to incorporate as well
as structures for community-benefit co-operatives and charitable organisations.
•
There are numerous benefits and disadvantages to each legal form and a clear
understanding of the co-operative’s financial and administrative needs is
required to select the appropriate structure.
•
Different legal forms protect the interests of the holders of power in an
organisation; a co-operative must ensure that the members of the business are
recognised by the chosen legal form.
Resources and Support
Mutuals Register https://mutuals.fsa.gov.uk/.
Companies House
http://www.companieshouse.gov.uk.
Co-operative and Community Benefit Societies and
Credit Unions Act 2010
http://www.legislation.gov.uk/ukpga/2010/7/content
s.
References and Reading
Atherton, J., J. Birchall, E. Mayo, and G. Simon. Practical Tools for Defining Cooperatives. Manchester: Co-operatives UK, 2011.
Co-operatives UK. Simple Legal (2nd edition). Manchester: Co-operatives UK,
2009.
Co-operatives UK. Simple Finance. Manchester: Co-operatives UK, 2011.
Financial Services Authority. Annual Report of the Registry of Friendly Societies
2000–2001. London: Registry of Friendly Societies, 2002.
Ridley-Duff, R. ‘Cooperative Social Enterprises: Company Rules, Access to
Finance and Management Practice’ Social Enterprise Journal 5 (2009): 50–
68.