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What is a Co-operative?
The International Co-operative Alliance (ICA) defines a co-operative as: “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.” Co-operatives throughout the world are guided by a set of values and principles found in Appendix A of this resource.
Co-operatives and Corporations: Why They Are Created
People and communities work together for a variety of reasons and to fill a variety of needs. People work together to fill a gap in the market, to create employment or other benefits for themselves or others, or to retain or control access to goods and services. As described in Lesson Three, there are different types of needs and assets, and working together can help meet needs or build assets for people and communities.
Working together can be done informally, through a group or collective, or formally by incorporating as a corporation, co-operative, or other type of entity. There can be a variety of reasons for wanting to create a legally recognized entity. A common reason to incorporate is that it limits the liability of those creating the organization. It also allows groups to do things that otherwise only a person can do, like own property, borrow money, and sue people. Appendix B features a chart that further explains these and other differences between co-operatives and other types of organizations.
There are two kinds of limited liability organizations that are recognized as legal entities under Saskatchewan law: co-operatives and corporations. Most co-operatives in Saskatchewan are controlled by one of two Acts. The Saskatchewan Co-operatives Act governs the co-operatives found in this resource. For-profit corporations are created to make a profit for their owners, who are called shareholders.
Corporations create wealth for their shareholders by producing or selling goods and services at a profit. Co-operatives can be for-profit or non-profit, but no matter the structure, their main purpose is to meet member needs. Member needs could include providing employment, housing, or affordable access to goods and services.
Where the Money Comes From
All organizations need funds to get started and both corporations and co-operatives require investors. Investment can include loans from credit unions or banks, shareholder or member investment through share purchases or loans, or other investment from outside sources. Many organizations rely on a mix of funding to get started. Corporations generally sell shares in the company to raise capital. A shareholder can own a large percentage of shares, but may not ever use the company’s products or services. Shareholder interest in a company is based on their potential to gain a financial return from their investment. Their return grows based on the number of shares they purchase and the amount of profit the company generates.
Co-operatives, on the other hand, rely on their members to help capitalize the organization. Membership is based on the ability of the member to use the products or services of the co-op and their interest in being a member of the co-operative. All members contribute financially to their co-operative through the purchase of their membership share. This practice is reflected in co-operative principle three: Member Economic Participation.
Who has Control?
In for-profit corporations, shareholders control the company. The number of votes a shareholder has depends on the number of shares they own. Shareholders can also give their voting rights to other individuals who then vote by proxy. This means that a relatively small group of people can control the company if they own enough shares or have enough proxy votes assigned to them.
In co-operatives, members control the organization. The members each have one vote and proxy voting is not allowed. This practice is demonstrated through co-operative principle two: Democratic Member Control, often summarized as “one member, one vote.”
Although control rests with shareholders or members, a board of directors governs both co-operatives and corporations. These boards are elected or appointed by the shareholders or members to oversee the affairs of the organization on their behalf. Boards of directors act in the best interests of the shareholders (maximizing profit) or members (meeting member needs).
Where Do the Profits Go?
When a corporation makes more money than it spends, it is called a profit. In a corporation, profits are distributed to shareholders as dividends. Dividends are paid based on the number of shares owned. Owning more shares means the shareholder receives more money when the company is profitable.
When a co-operative makes more money than it spends, it is called a surplus. In a for-profit co-operative, members may also receive a dividend or patronage allocation if the business is profitable. The portion of the surplus they recieve is based on how much a member has used the co-op that year.
Non-Profit Corporations and Community Service Co-operatives
Non-profits and community service co-operatives are designed to meet social, cultural, or economic needs of the community. They have a broader purpose of benefitting society in some way, rather than just benefitting their members or maximizing profit. These organizations can
still make a profit or surplus, which must be used to further the purposes of the organization.
