The Co-operative Formation Process

Graeme Charles and David Griffiths

Every effort has been made to ensure that the information in this article is correct. The Co-operative Federation of Victoria Ltd and any employees or agents shall not accept any responsibility for loss or other consequence which may arise acting or refraining from acting as a result of material in this article.

These notes are a work in progress. Recommended corrections and additions are welcome.

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This is a brief introduction to the formation process for co-operatives. The formation process should be preceded by a The Formation Decision – a process of examining the options for business formation and making an informed decision for the co-operative option.

 

The notes are not comprehensive and do not provide the totality of information and advice needed to make the business, legal, financial and management decisions in forming a co-operative.

There are a number of critically important publications that you need to acquire for yourself - copies of State co-operative legislation and regulations, model rules if available and any guides issued by the Registrar. In Victoria, the following are available:

The Victorian legislation and regulations are available from Information Victoria, 356 Collins Street, Melbourne. The Guide and the Model Rules can be obtained from Consumer Affairs Victoria:

 

Consumer Affairs and Co-operatives

 

The Co-operatives Act 1996 can also be accessed directly through the Consumer Affairs site.

The Co-operative Federation of Victoria Ltd has also developed a series of

 

Legislation Information Sheets

 

on provisions in the Co-operatives Act.

 

Expertise can facilitate the formation process. Legal and accounting skills, for example, would be desirable. These may be internal to the formation group or brought in as external advisers. Experts are necessary but could be problematic if they have little experience and/or understanding of co-operatives. An accountant or a lawyer may have the necessary accounting and legal skills but have little knowledge of or experience in working with co-operatives. This creates a risk for the formation process. If the experts do not have the necessary experience and/or knowledge, then, it is essential that they have an ability to acknowledge their shortcomings, and have an openess to understanding the issues and a capacity to be objective - a willingness to apply their experience and knowledge to facilitating, not obstructing, the co-operative option.

 

In 2005, for example, a community service co-operative in Victoria was advised by its accountant that it should be incorportated as a company - because it needed to be incorporated with a legal status. The accountant had ignored the fact that co-operatives are incorporated and have legal status.


Formation Steps

There are ten basic steps in the formation of a co-operative:

Co-operative and Business Idea

A Public Meeting

Steering Committee

Member and Market Surveys
Co-operative Education

Rules

Feasibility Study

Pre-Formation and Formation Meeting

First Board

Registration

Co-operative and Business Idea

The first step involves deciding whether the co-operative option is viable by collecting information, clarifying the need for a co-operative and pulling together a core group committed to the co-operative ideal and the business idea.The co-operative idea is the values and principles of co-operation. The business idea is the business purpose and activities of the co-operative.

The key decision, however, for the core group is whether or not there is an agreed mutual need and whether or not a co-op is the best way to address it. Other legal and organisational options include an unincorporated business, an incorporated company, an incorporated association and a partnership.The issues that need to be addressed are discussed in The Co-operative Formation Decision.

A co-operative must be formed and registered in accordance with the provisions of the Co-operatives Act. The Co-operatives Act provides that upon incorporation, a co-operative has the characteristics of a body corporate, including perpetual succession, a common seal, the capacity to purchase, lease, hold, sell and dispose of real and personal property and to do all things that bodies corporate may do. The cost of incorporation under the Co-operatives Act is lower than incorporation under the Corporations Laws. The obligations of an office holder of a co-operative are less extensive than the obligations of an office holder of a corporation.

Getting started also means understanding the legislative framework for co-operatives. In Victoria it is the Co-operatives Act 1996 and Co-operatives Regulations

 

A Public Meeting

The second step is organising a public meeting to establish whether there is public support for the co-operative. At the meeting the core group with the co-operative idea will present its preliminary findings on the co-operative and business idea- what is the perceived common need, why a co-operative will meet that need and the benefits and limits of co-operatives.

The key issue is not only whether there is sufficient interest but whether there are sufficient individuals and organisations who will join and support the co-operative as active members - using the services of the co-operative. Co-operatives are created by members who not only own but use and benefit from the services of the co-operative.

In the 1980's there was a Victorian Government Co-operative Development Program. A Program by-product was the formation of co-operatives by concerned individuals who became members because of their concern to assist the unemployed not because they were going to use the co-operative as active members. This was an important influence on why the co-operatives did not survive beyond their concern - and government funding.

Clarity is also necessary as to what kind of co-operative would be formed because this will critically influence who are its members, the eligibility for membership and how the co-operative will function. This should, of course, be obvious - the formation of any co-operative is based on the mutual need of its members. But, then, there may not be agreement about what is the mutual need being met by the co-operative and, therefore, there may not be a basis for forming a co-operative.

There are many different types of co-operatives:

It is also necessary to establish whether the co-operative will be registered as a trading or non-trading co-operative.  These terms are included in state co-operative legislation. They are misleading for they imply there is a difference between co-operatives that trade and co-operatives that do not trade. This is not, in fact, the difference, that is meant by the terms trading and non-trading col-operative.

A trading co-operative allows its members to receive a share of any surplus funds or a return on the capital they have invested if the co-operative is wound up. Members of a non-trading co-operative do not receive a distribution of surplus and if the co-operative is wound up only get back the original value of their shares. A trading co-operative must have a share capital. A non-trading co-operative has the option of deciding whether or not to have shares.

A member of a co-operative with share capital is liable to the co-operative for the amount, if any, unpaid on the shares held by the member, together with any charges payable by the member to the co-operative. Otherwise, a member of a co-operative is not under any personal liability to the co-operative.The basis for any co-operative is its members. Members can be individuals or corporations.

At the public meeting there needs to be plenty of time for discussion so that everyone who wants to can express their views and ask questions.An essential characteristic of co-operatives is their commitment to democracy, and, therefore, the public meeting should reflect and reinforce this commitment.

Steering Committee

After reports and the subsequent discussion, a decision has to be made on whether or not to proceed.  A resolution would, then, be put to the meeting for a decision. If it is agreed to proceed, then, a steering committee should be appointed to develop the proposed co-operative.  The meeting will have to decide on the size of the steering committee, its terms of reference and when it is to report to another public meeting. This should also be put to the meeting as a resolution. Once passed, the Chair could call for nominations to the Steering Committee. If there are more nominations than the number allowed for in the resolution, then, there will have to be an election.

The Steering Committee will have five basic tasks:

For what is needed for a feasibility study and what is co-operative specific: The Co-operative Feasibility Study.

These tasks are critically interdependent. In undertaking these tasks, the Steering Committee must be able to identify the critical questions that need to be addressed for each task.

It is also important that all members of the Steering Committee contribute to its deliberations. While individual members will make different contributions because of differences in resources, skills and availability,  decisions must be made by the group – not by individuals within the group. This is the beginning of co-operative decision-making.

Member and Market Surveys

The two most important tasks of the Steering Committee are to survey (a) potential members and (b) the market in which the co-operative proposes to operate.

A co-operative is formed to serve its members by providing services that are used by the members. It is critical to establish, therefore, who will join the co-operative and actively use its services.

It will be tempting to accept as members individuals who buy shares, and indeed, may be in a position to purchase extra shares but whose contribution ends with their shareholding and they are unlikely to be active users of the co-operative.

The member survey will need to attempt to establish whether or not potential members will be active in the co-operative. There is a need to develop agreement by potential members on the vision and purpose of the co-operative and their obligations as members. These issues need to be clarified before - not after formation. The potential members must be able to agree on:

All these are necessary to the establishment and development of a co-operative. It is critical, therefore, that at least the elements of these exist prior to formation. It is too late once the co-operative has been formed to realise that the actual and potential members do not share an understanding, trust and commitment. The clearest test of this will be to organise a co-operative education study group for the core group and potential members.

Co-operative Education

Ongoing co-operative education programs are essential for co-operatives. It is important, therefore, that in the pre-formation period the Steering Committee and other potential members participate in a co-operative education program.

A discussion group should be formed to study co-operative values and principles. The discussion group will reveal the ability to work together.

All potential members of a co-operative need to understand the nature of co-operatives: What are the distinct characteristics of co-operatives? What are the differences between co-operatives and other business structures? How are the co-operative values and principles important to co-operatives? How do and can co-operatives apply these values and principles? What are the distinctive co-operative competencies? What is known about the history of local and well-known co-operatives?



Rules

All co-operatives have Rules. The Rules of the co-operative describe how the co-operative will organise itself. Rules are a contract between the members and the co-operative.

Copies of Model Rules are available from the Registrar of Co-operatives. There are four Model Rules available:


trading co-operative

                  non-trading co-operative issuing shares

                non-trading co-operative not issuing shares

               non-trading, government guarantee co-operative

 

The Rules are available in hard copy and electronic format.For many co-operatives the Model Rules will meet their purposes with a few necessary additions based on the nature of the proposed co-operative e.g. name, share allocation, objectives, number of directors, whether or not there will be independent directors, quorums, primary activities, whether or not there will be corporate and/o under 18 members and the active membership provisions. The easiest course of action is to use the model rules as the basis with amendments to suit individual circumstances.

Schedule 1 of the Co-operatives Act 1996 lists those matters for which the Rules must make provisions. There are 26 matters for all co-operatives, nine additional matters for co-operatives with share capital and two for non-trading co-operatives. A copy of these is attached.

In developing the Rules, consideration should be given to how the Rules can and should reflect and reinforce co-operative values and principles. This would go beyond the minimum registration requirements.

It is important that in presenting its report to the Steering Committee that the working group explain what rules are compulsory, what choices were made about other rules and why and whether or not there were disagreements about these choices.

 

A Feasibility Study

While the format of the feasibility studies are similar, the complexity and length of the study will depend on the co-operative and business activities.The common elements of any co-operative feasibility study are the following:

Pre-Formation and Formation

Before organising the formation meeting, once the Rules have been prepared by the Steering Committee they should be submitted to the Registrar of Co-operatives for approval at least 28 days before the formation meeting. In doing this, it is also necessary to pay an application fee. You will need to check with the Registrar of Co-operatives to establish the current fee.for lodging Rules.

Within 28 days of submitting the Rules, the Registrar of Co-operatives has to approve the name and rules of the co-operative and any disclosure statement. The Registrar will also provide an application to register form and an approved copy of the rules to present at a formation meeting.

In addition, if you have a disclosure statement and a report from an expert such as an accountant or auditor to support the disclosure statement, then, you must seek and provide their written permission to use their report.

Contact the Registrar of Co-operatives for the current guide on preparing disclosure statements.

Disclosure statements are required for a trading co-operative and must be submitted to the Registrar for approval 28 days before the formation meeting.  In the disclosure statement it will be necessary  to cover such things as:

When the Steering Committee has surveyed members and the market, developed Rules and a feasibility study it is time to organise the  public meeting  to finally decide whether or not to form a co-operative.

At least five prospective members must be present at the meeting - people who would be eligible to join the proposed co-operative

.

You must make sure that you have enough copies of the Rules, the Feasibility Study and any Disclosure Statement for everyone who attends the meeting. Of course, copies of these should be distributed before the meeting and/or people could be informed about how to obtain the reports.

 

At the formation meeting a chairperson should be elected to run the meeting and a secretary appointed to keep a written record of the meeting. The meeting should discuss the Rules, the Feasibility Study and any disclosure statement and it is important to make sure that they are clearly understood.

If the meeting decides to change the rules, you will have to get the changes subsequently approved by the Registrar of Co-operatives and then organise another formation meeting. To avoid this problem you should attempt to minimise the possibility of the meeting changing the rules. This could be achieved in a number of ways. Copies of proposed Rules could be submitted to potential members for feedback as individuals or at a meeting before being submitted to the Registrar before the formation meeting. This does not mean that individuals should be discouraged from advocating changes to the Rules or, indeed, a majority voting to change the Rules at the meeting. It may be inconvenient but it is democratic.

If there are no changes to the Rules, then you move a resolution that the co-operative be formed and the Rules adopted. Two-thirds of the proposed members attending the meeting must vote to adopt the Rules. The next step is to elect a board of directors - the first board of the co-operative.

Members at the formation meeting must complete an application for membership which includes member’s full name, street and postal address, number of shares and face value, how much the member paid and signature.

First Board

The formation meeting will appoint the co-operative’s first board. The co-operative is managed and controlled by a board of directors elected by the members and subject to the Rules. 

The board is responsible for the development of guidelines for the control of the co-operative’s business activities, approving general business arrangements, ensuring that there is adequate bookkeeping and regular financial statements, ensuring prudent decision-making, ensuring the manager serves the co-operative in accordance with policy determined by members and the board, represents member interests and takes active steps to involve members.

For the roles and responsibilities of directors:

Co-operative Governance Manual.

Registration

Once a meeting has decided to form a co-operative and adopt the Rules, the chair and secretary of the formation meeting need to sign two copies of the Rules and if a trading co-operative is being formed a copy of the disclosure statement.

Within two months of the formation meeting the following should be sent to the Registrar of Co-operatives:

On the Application to Register Form you include:

The Application to Register form is available from the Registrar of Co-operatives.

A copy of the Rules approved signed by the chairperson and secretary

The CFV's The Co-operative Start-Up Manual should also be consulted. You can download from http://www.australia.coop

Co-operatives Act 1996

Requirements for all co-operatives

The rules of all co-operatives must set out or make provision for each of the following—

In addition to the matters specified in clause 1, the rules of a co-operative with a share capital must set out or make provision for each of the following—

In addition to the matters specified in clauses 1 and 2, the rules of a non-trading co-operative must provide—

 

 

Last updated: 14 July, 2005 10:24 AM