Co-operatives are a prominent legal structure in Australia, although they have been shrouded in a degree of uncertainty, particularly following the legislative changes over the past decade. According to the Australian Co-op Federation there are around 1,700 co-operatives in Australia across sectors such as agriculture, arts, child care, health and respite care, community services, education, housing, communications and produce.

While co-operatives can be for-profit (distributing) or not-for-profit (non-distributing), this article will focus on the not-for-profit (NFP) structure, although you will find many core concepts are applicable to both structures.

What is a co-operative?

A co-operative is centred around the interests of members. It exists to enable members to share in the benefits of the co-operative to meet their needs, which could be physical, social, economic or cultural. In serving members, the co-operative provides goods or services that may otherwise be unavailable or too costly for members to access in their capacity as individuals. In return, members actively contribute to the co-operative, with each member having an equal say in the running of the organisation. Some local examples may include a community owned and managed NFP supermarket or bookstore.

Once registered with the relevant regulator (set out below at part 3), co-operatives have a separate legal personality and continue to exist until formally wound up, provided the basic requirements of the co-operative structure are met.

Co-operatives may be ‘distributing’ or ‘non-distributing’. Only non-distributing co-operatives are suitable as a NFP. Distributing co-operatives must have share capital with members owning a minimum number of shares. As is typical of for-profits, this type of co-operative can distribute annual profits to members.

Although a non-distributing co-operative may also choose to issue shares to members, it cannot share profits with members. All profits must further the purpose of the co-operative, meaning a non-distributing co-operative will be classified as a NFP entity. If the co-operative does not have share capital, it usually charges members a subscription fee. It is important to include the prohibition against giving returns or distributions on surplus or share capital in the rules of the non-distributing co-operative.

The Business Council of Co-operatives and Mutuals provides a useful example of the way share capital may be used by a non-distributing co-operative in their handbook titled Community Investment for Australian Co-operatives.

Example: A community that may be about to lose its local football club may form a non-distributing co-operative with share capital where members are entitled to either free or reduced cost services compared with non-members. The investment of the share capital by the community may serve to buy out the club and provide working capital. The provision of member services at the reduced rate would encourage members to engage with and use the club so that it remains operating in the community

What are the defining characteristics of a co-operative?

A fundamental premise of a cooperative is the commitment and adherence to seven principles acknowledged and understood internationally. These principles permeate through a cooperative’s governance, operations and activities and underpin their values. These principles are:

• voluntary and open membership;
• democratic member control;
• member economic participation;
• autonomy and independence;
• education, training and information;
• co-operation among co-operatives; and
• concern for the community.

  The co-operative structure has several other defining features:

• priority is given to the provision of services to members rather than maximising a financial return;
• there must be a minimum of five active members, each with limited liability and an equal vote at general meetings (regardless of their shareholding for a distributing co-operative);
• membership is open to individuals or organisations who are willing to comply with the rules of the co-operative, with the directors to make decisions as to the suitability of applicants;
• membership is also open to individuals under 18 years old, although these members cannot stand for office or vote; and
• a board of directors is elected by members and subject to legal duties.

Despite distinct characteristics, non-distributing co-operatives perform comparable services to NFP incorporated associations and companies limited by guarantee, with similar requirements for strong governance processes and legislative compliance.

The key distinction lies in the degree of ownership and control attributed to members. If you are wanting to limit ownership or control to a few people, it may be best to consider an alternative structure. Additionally, active membership is not a requirement for incorporated associations or companies limited by guarantee, so these structures may better suit an organisation with a more passive, less engaged membership.

What are the relevant laws?

Whilst co-operatives have existed for many years, the legislation and regulations have historically been complex and inconsistent, making it difficult for entities to operate across States and Territories.

In 2007, the decision was made to develop a uniform law to provide co-operatives with clarity and a national framework. This decision led to the establishment of the Co-operatives National Law (CNL). The CNL was intended to equip co-operatives to operate on a national scale whilst reducing red tape and the cost of compliance between jurisdictions. Practically, this means co-operatives carrying on business across State or Territory borders no longer need to register in each jurisdiction, and smaller co-operatives are subject to simplified financial reporting obligations under the CNL.

The CNL is accompanied by national regulations and local regulations in each jurisdiction. The national regulations are consistent across States and Territories and supplement the CNL. However, the local regulations address matters specific to the State or Territory, including issues such as fees and penalties.

For co-operatives registered under prior legislation, the automatic transfer under the CNL regime may have resulted in some inconsistencies between the way they operate and the requirements under the new law. So, if you haven’t comprehensively reviewed your governance and constitution since the introduction of the relevant State or Territory legislation set out in the table below, we strongly recommend you do so.

Co-operatives may apply to register as a charity with the Australian Charities and Not-for-profits Commission (ACNC). If successful, a charitable cooperative will be subject to additional requirements and compliance obligations. More information about the operation of charitable co-operatives can be found on the ACNC website.

What are the benefits and pitfalls of a cooperative structure?

A co-operative structure will not suit every organisation. As such, the advantages and disadvantages of this structure type must be carefully considered.

The co-operative structure is suited to organisations wanting to promote contribution and shared responsibility amongst members, as each member holds equal voting rights. This structure also encourages involvement as there is no limit to the number of members a co-operative can have, meaning the entity can grow significantly under this structure. The requirement for active membership empowers individuals to drive the organisation forward without the need for investor involvement. Finally, liability is limited, providing a degree of protection for all involved.

There are also a number of disadvantages to the co-operative structure. Most notably, it is not as well-known as other legal structures, requiring additional investment of time in understanding and interpreting any relevant obligations. The legislative amendments may also mean specialist advice is needed, which would involve additional costs to ensure compliance.

Unlike a company limited by guarantee (CLBG) (which can operate for a purpose unrelated to the interests of its members), the purpose of a co-operative must always be to provide benefits to its members. Additionally, all co-operatives must be committed to the internationally ordained while a CLBG has greater flexibility to determine its purpose and values.

As all members of a co-operative are eligible for one vote regardless of their involvement, active members may become discouraged if other members have equal voting rights for lesser contribution. Additionally, the passion that often drives active members can also result in conflict within the group, leading to disunity and divergent views. While the co-operative structure has no cap on membership, a large membership can make it difficult to engage all members.

Lastly, as co-operatives are intended to be member-serving, tensions can arise in decision-making between the best interests of members and the best interests of the co-operative, compromising longevity of the organisation.

How can we help?

Co-operatives can be complex to establish and run, yet effective if managed correctly. Please feel free to contact our specialist Charities + Social Sector Lawyers who would be happy to assist with any queries you may have.