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Co-operatives

This page contains:


Introduction
Legal structures for co-operatives

  Unincorporated associations

  Limited company

  Community interest company

  Co-operative society

  How to set up a co-operative society
Comparison of a registered co-operative society and a limited company
European co-operative society

What's new

Introduction  

A co-operative has been defined 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 (source: the International Co-operative Alliance Statement on the Co-operative Identity, Manchester, 1995).

It is estimated [2011] that there are over 4,800 independent co-operative businesses in the UK. They work in all parts of the economy, from healthcare to housing, farms to football clubs, credit unions to community owned shops, pubs to public relations, wind farms to web design.

Employee-owned businesses are a subject closely  related to co-operatives but belong to a broader category. There is no single legal model for such businesses.


For further information, see:

Employee ownership: guide for employees

Co-operatives UK
The Co-operative Group’s co-operative enterprise hub
Get Legal website

Legal structures for co-operatives


Historically in Britain the industrial and provident society has developed as the legal form for a co-operative. However, other legal structures may be used. The available structures are:


* Unincorporated association


* Limited company


* Community interest company


* Co-operative society


* European co-operative society

Comment: in considering the establishment of a business in which the workers have an ownership interest, it is also necessary to take into account employment law; see:
Contracts of employment and working hours/Employee-owner status


There is official guidance on Tax and National Insurance on employee share schemes


Unincorporated association


The simplest type of organisation will be an unincorporated association. All that is required is a written constitution in the form of rules and the appointment of the first members. Apart from an application form, register of members and perhaps payment of a fee, no other formalities would be needed.

Comment: However, it will usually be advisable for a co‑operative, whatever its type, to incorporate in order to gain separate legal personality and to limit the liability of its members and governing body.

Limited company


The limited company status includes three forms:


* private company limited by guarantee
* private company limited by shares
* public company limited by shares


These legal structures for trading are considered in our pages the Private limited company and Public company.


Legaleze comment: in relation to the use of these structures for co-operatives, it should be noted that company law does not protect or recognise co-operative principles. However company law is well developed and competent professional advisers will be familiar with it. By comparison, the law relating to industrial and provident societies (see below) is less well developed and fewer advisers are familiar with it.


A limited company by guarantee will be appropriate if there is to be no share capital. If you wish to have the word “co-operative" in the name of the company, approval from Companies House is needed - see the Companies House Companies Act 2006 Guidance – Incorporation and names


The company should normally be limited by guarantee with each member having one vote and include a non-profit distribution clause in the articles of association.
If share capital is required, a private limited company may be used.

In the case of a large organisation, or if it desired to offer shares to the public, a public limited company may be appropriate. This type of company may lawfully offer its shares to the public. The John Lewis Partnership may be regarded as an example of a co-operative structured as a public limited company, although it does not claim to be a co-operative and it has developed its own special type of co-ownership whereby the employees or "Partners" are all owners of the business.

Community Interest Company (EW, S; extended to, NI)


The community interest company ("CIC") is dealt with on our page relating to Social enterprises. The CIC is not a separate legal form but is a specialised type of limited company (whether limited by guarantee, private limited by shares or public limited). It is designed for use by organisations that wish to conduct their business for community benefit and must satisfy the CIC Regulator that it satisfies the community interest test.

As noted in the case of ordinary limited companies, the CIC is not designed particularly for co-operatives. The asset lock may be useful for co‑operatives wishing to apply for funding or promote themselves as not-for-private profit. The asset lock would also prohibit distribution of assets to members at the point of winding up.

Co-operative societies (EW, S. NI: equivalent legislation)


The co-operative movement England may be traced back to the Rochdale Society of Equitable Pioneers, a group of 28 weavers and other artisans in Rochdale formed in 1844.

Prior to 1852, industrial and provident societies had to be established under the Acts relating to friendly societies and were of the nature of partnerships, the liability of their members being unlimited. The Industrial and Provident Societies Act 1852 defined the purpose of those societies as the carrying on or exercising in common of any labour, trade or handicraft, with certain exceptions.

Co-operative Society

Co-operative societies were formerly called  Industrial and provident societies and were governed by the Industrial and Provident Societies Act 1967 to 1978. The extensive and complex legislation was consolidated by the Co-operative and Community Benefit Societies Act 2014 (CCBSA) with effect from 1 August 2014.


Societies registered under the 2014 Act may be formed either as a Co-operative Society or as a Community Benefit Society. Both types are corporate bodies with legal personality and limited liability. Community benefit societies are dealt with in our page on Social enterprises

Societies registered before August 2014 must meet the conditions for qualification either as a Co-operative Society or as a Community Benefit Society. If they fail to do so, their          registration is liable to be cancelled by the Financial Conduct Authority.

A society qualifies for registration under the 2014 Act if it is a society for carrying on any industry, business or trade (including dealings of any kind with land) which meets the following conditions:

(a) that it is shown to the satisfaction of the Financial Conduct Authority (FCA):

(i) in the case of registration as a co-operative society, that the society is a bona fide co-operative society, or

(ii) in the case of registration as a community benefit society, that the business of the society is being, or is intended to be, conducted for the benefit of the community;

(b) that:

(i) the society has at least 3 members, or

(ii) the society has 2 members both of which are registered societies;

(c) that the society's rules contain provision in respect of the matters mentioned in CCBSA s. 14, and

(d) that the place that under those rules is to be the society's registered office is in Great Britain or the Channel Islands.

Bona fide co-operative test

The FCA provide guidance on the registration of Registered Societies on its website. The FCA will normally expect a  Co-operative society to to fulfil the following conditions, the first four of which also reflect the International Co-operative Alliance's Statement on the Co-operative Identity:

* Community of interest - There should be a common economic, social or cultural need or interest among all members of the co-operative.

* Conduct of business - The business will be run for the mutual benefit of the members, so that the benefit members obtain will stem principally from their participation in the business. Participation may vary according to the nature of the business and may consist of:

- buying from or selling to the society;

- using the services or amenities provided by it; or

- supplying services to carry out its business.

* Control - Control of the society lies with all members. It is exercised by them equally and should not be based, for example, on the amount of money each member has put into the society. In general, the principle of ‘one member, one vote’ should apply. Officers of the society should generally be elected by the members who may also vote to remove them from office.

* Interest on share and loan capital - Where part of the business capital is the common property of the co-operative, members should receive only limited compensation (if any) on any share or loan capital which they subscribe. Interest on share and loan capital must not be more than a rate necessary to obtain and retain enough capital to run the business. Section 2(3) of the 2014 Act states that a society may not be a bona fide co-operative if it carries on business with the object of making profits mainly for paying interest, dividends or bonuses on money invested with or lent to it, or to any other person.

* Profits - If the rules of the society allow profits to be distributed, they must be distributed among the members in line with those rules. Each member should receive an amount that reflects the extent to which they have traded with the society or taken part in its business. For example, in a retail trading society or an agricultural marketing society, profits might be distributed among members as a dividend or bonus on purchases from or sales to the society. In other societies (for example, social clubs) profits are not usually distributed among individual members but members benefit through cheaper prices or improvements in the amenities available.

* Restriction on membership - There should normally be open membership. This should not be restricted artificially to increase the value of the rights and interests of current members, but there may be grounds for restricting membership in certain circumstances, which do not offend co-operative principles. For example, the membership of a club might be limited by the size of its premises, or the membership of a self-build housing society by the number of houses that could be built on a particular site.

Names for society


Before deciding upon the proposed name of the society, the FCA guidance sahould be consulted.


Among other requirements, the name should not be the same or too similar to the name of an existing registered society or registered company. It will be necessary for this purpose to check both the FCA Mutuals Public Register
and the index of company names which may be accessed from the Companies House website

How to set up a registered society


Consult the FCA website relating to Registered Societies noted above:

Note that an application made through one of the Model Rules Sponsors, such as Co-operatives UK, will facilitate the approval of the Rules and speed up the application process.

You will need to:


* Choose a name acceptable to the FCA;


* Draw up a detailed description of the activities the society will undertake and explain how these activities will benefit the community. This is important because the information you provide here will help the FSA to decide if there are special reasons why the society should be registered under the Industrial and Provident Societies Act 1965 and not as a company under the Companies Acts;


* Prepare a set of rules of the society which deal with all the matters required by the law
* Complete the application form;


* Have three members and the secretary available to sign the form;


* Submit it to the FCA with the fee

Comparison between a registered society and a limited company registered under the Companies Act


Societies registered under the 2014 and predecessor Acts share the characteristics of legal personality and limited liability with companies registered under the Companies Act 2006 and its predecessors. However, some salient points of difference between registered societies and companies registered under the Companies Act are as follows (NB: this is not a comprehensive list):


* Societies may issue shares to the public as may a public company, but a private limited company may not;


* Financial promotion regulations do not apply to shares of a registered society if non-transferable (Sched. 1 para. 14 Financial Services and Markets Act 2000 (Financial Promotion) Order 2005);


* The distribution of profits or capital to members of a society is restricted (see above);


* Members of a society’s committee are not subject to a detailed regime of duties and liabilities to members unlike that applicable to shareholders of a company [although the courts would probably apply similar principles];


* The services rendered to a society by a member of the committee of management or other directing body of such a society in his capacity as such are excluded from the statutory implied term that a supplier acting in the course of a business will carry out the service with reasonable care and skill (Supply of Services (Exclusion of Implied Terms) Order 1983);


* Members of a society’s committee are not subject to personal liability for the society’s debts in the case of wrongful trading (trading when insolvent) (unlike directors of a company (see Insolvency Act s.214);


* Criminal liability for officers and members of the committee of registered societies in respect of criminal offences committed by the society under the CCBSA is arguably less strict than that imposed on officers of companies under the Companies Act.

* Rules requiring the publication of a prospectus prior to making an offer of “transferable securities” to the public do not apply to societies registered as community benefit societies under the 2014 or earlier Acts. However societies registered as bona fide co-operatives under the 1965 Act are subject to the prospectus requirements.


* Dividends (“divis”) paid to members by societies are deductible from trading profits for tax purposes unlike company dividends (ICTA88 s.486 (10) & (11) and see the HMRC corporation tax manual

European co-operative society


Residents in different EU member states, or legal entities established under the laws of different member states or governed by the laws of two different member states, can establish a European co-operative society (“SCE”) (Council Regulation (EC) 1435/2003 art 2 and  ).

The principal object of an SCE is the satisfaction of its members' needs and/or the development of their economic and social activities, in particular through the conclusion of agreements with them to supply goods or services or to execute work of the kind that the SCE carries out or commissions. An SCE may also have as its object the satisfaction of its members' needs by promoting, in the manner set forth above, their participation in economic activities, in one or more SCEs and/or national co-operatives.

How to set up an SCE


An SCE which proposes to have its registered office in Great Britain must send the requisite documents to the Financial Services Authority (see European Cooperative Society Regulations 2006, SI 2006/2078 regs 8–13.).

Legaleze comment: although the FSA (in Great Britain) and the Department of Enterprise, Trade and Investment (acting as the Registrar of Credit Unions) in Northern Ireland) are responsible for SCE registration, it seems there is no information available on the FSA or DETI websites relating to SCEs.

What’s new item on this topic [see What’s new page or archive for full item]:

02/05/2013: BIS publishes template documentation for an employee-owned company
The Employee Ownership Implementation Group at the Department for Business, Innovation & Skills (BIS) has published a set of draft legal templates for use in establishing an employee-owned company. The legal templates were developed for BIS by David Pett of Pett, Franklin and Co. LLP. The templates include:

* Guide to the constitution of an employee-owned company;
* Articles of association of an employee-owned company;
* Model trust deed of an employees’ share trust, with notes;
* Articles of association of a trustee company

The documents may be found at:
https://www.gov.uk/government/publications/employee-owned-company-draft-model-documentation
Legaleze comment: the template documents appear to be a useful set of precedents for establishing a company in which employees may be shareholders, if not necessarily the controlling shareholders. There are certain tax aspects of employee owned shares which are covered. However, there are other models for employee-owned companies, notably Co-operatives. In any particular case, careful consideration of the commercial aspects, and legal and accountancy advice should be taken, before deciding the model to use.

30/04/2013: Employee share ownership measures come into force
The Government has announced changes to the law regulating the buy back of own shares by a UK limited company which are rules aimed at boosting direct employee ownership and cutting red tape. The object of the deregulation is to reduce the administrative burden of share buy backs allowing companies to avoid the situation where companies promoting employee ownership can become predominately owned by former employees or others outside the company.

[Page updated: 13/03/2016]

 

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