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 group-served method. It then discusses the legal structures

and regulation within which co-operatives in Britain operate.

Democratic Enterprise

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

co-operatives.

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

co-operatives, producer co-operatives, worker co-

operatives, and hybrid co-operatives.

• There is a legal framework for establishing and running a

co-operative.

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:

Drumchapel Credit Union – serves a local community in

the west end of Glasgow city.

Regional:

Heart of England – is a

consumer society serving the midlands of

England, in particular the

regions of Coventry and

Warwick.

National:

Scotmid – is the largest

independent co-operative in Scotland and has a wide portfolio of businesses.

International

Mondragon Co-operative

Corporation – has plants in 18 countries outside of

Spain.

Membership-based method of classification

Type of membership

Primary co-operative (centralised)

Provide direct services to patron-users (i.e. members).

An example of a ‘primary co-operative’ would be GreenCity Wholefoods, a worker co-operative based in Glasgow.

Secondary co-operative (federated)

Membership of a secondary co-operative consists of other co-operatives.

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 co-operative’ would be the Co-operative 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

Marketing

Production supply

Service

Credit

Mutual insurance

Machinery ring

Consumers

Retail

Credit

Housing

Health

Insurance

Community

Workers

Can be any form of business once it is owned and democratically controlled by its employees

Hybrid

Serves two or more different groups

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 co-operative 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 co-operative 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 co-

operative 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 co-operative 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 co-

operatives, 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 Partnership Corporation

Industrial and

Provident Society

Advantages

Easy and inexpensive to organise

Owner has complete control

Owner receives all income

Easy to organise

Partners share control

Partners receive all income

Owners have limited liability

Large pool of investors and easier to raise capital

Business life is perpetual

Owners have limited liability

Democratic governance structure

Business life is perpetual

Disadvantages

Owner has unlimited liability

Owner is taxed on all business profits

Not suitable for large or complex businesses

Some partners have unlimited liability

Partners are taxed on all business profits

Personality differences may cause problems

Complex and costly to organise

Double taxation (corporate profits and dividends)

Owners have little control

Limited return on capital

Difficult to raise external capital in the form of equity

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).

3. Practical issues e.g. cost of registering as one legal form or

other.

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/conte

nts.

References and Reading

Atherton, J., J. Birchall, E. Mayo, and G. Simon. Practical Tools for Defining

Co-operatives. 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.