Choosing a Business Structure - A Comparison of Business Structure

Summary

Our Co-operative History

People around the world have been forming co-operatives for more than 150 years. In Saskatchewan, our co-operative history began before the turn of the century. Our first co-operatives were creameries and grain growers' co-operatives, but gradually more types were added including retail stores, credit unions, a range of agricultural co-operatives, and community service co-operatives such as recreation, health clinics and daycares.

Saskatchewan's co-operatives range in size from small agricultural co-operatives to large industrial enterprises. They form a system of stable and enduring enterprises which make tremendous contributions to the economic and social health of communities, and provide thousands of jobs. They operate side-be-side with privately-owned businesses operated as sole proprietorships, partnerships and investor-owned corporations. Co-operatives are legally-established organizations which conform to our provincial laws. They are financed by selling shares to members, issuing securities approved by the Co-operatives Securities Board, and by debt capital.

The Co-operative Difference

A co-operative is owned and democratically controlled by its members. Surplus is allocated to the members in proportion to their purchases or use of the goods or services produced by the co-operative. Each member has one vote regardless of the investment s/he holds in the co-operative.

There are three important differences between co-operatives and other types of business: purpose, the way financial surplus or profit is used or distributed, and the ownership and control structure.

Purpose

The purpose of a private business, whether it is the corner drugstore or the largest manufacturer, is to make a profit for its owners on the capital they have invested. This is done by offering goods and/or services for sale to the public.

The purpose of a co-operative business is generally to provide its members with goods and/or services, usually at competitive prices. Savings, which belong to the members, are fundamentally different from profits on invested capital. For example, a member of a retail co-operative may receive his or her saving through lower prices at the time of purchase, as in a direct-charge co-operative, or through a patronage refund at the end of the year. The amount of the refund depends on the total surplus earned by the co-operative, and on the dollar-value of a member's purchases. Refunds, also called patronage refunds, are in proportion to a member's use of the co-operative. The greater the use, the greater the potential savings.

Distribution of Surplus

In a private business, profit is the money left after all expenses are paid. Profits or earnings can be reinvested in the business, or distributed to the owners in relation to the number of shares they own. Shares are a specific portion of the capital of a co-operative. The more money invested, the greater the potential for profit. In the case of an investor-owned corporation, the part of the profit which is returned to shareholders is distributed as dividends paid on shares. Such dividend rates are normally set by a corporation's board of directors.

In a co-operative business, any surplus at the end of the fiscal year is allocated to members' accounts as a patronage refund. All or part of these funds may be paid to the members, or kept in the business as additional members' shares or loans. In either case, the amount allocated to a member is in proportion to that member's use of the co-operative. In a worker co-operative, patronage dividends are normally based on hours worked and, in effect, increase the members' wages.

Control

In most businesses, control is in the hands of the owners, whether one or many. Further control is determined by the individual or group which owns the most voting shares.

In an investor-owned corporation, shareholders vote according to the number of shares they own. The more shares, the more votes. If individual shareholders cannot vote or choose not to, they may assign their voting rights to other individuals who then become the absent shareholders' proxies. Thus, even in large corporations, if one person owns enough shares (either directly or by proxy), that person can effectively control the operation.

In a co-operative, each member has only one vote regardless of the amount of money that member has invested in the co-operative, and proxies are not permitted. Thus, the control structure of a co-operative is democratic.

Another important difference in the ownership and control structures of private and co-operative businesses is the way boards of directors are chosen. In non-incorporated private businesses, individual partners usually exercise direct control.

Public and private investor-owned corporations have boards of directors who guide the affairs of the corporation in the interests of the shareholders. They are elected by the shareholders, and those with the most shares exercise greater control. The directors may or may not be shareholders themselves.

Incorporated co-operative businesses and organizations also have boards of directors. These directors are members (or delegates in the case of federations or other co-operatives with delegate structures) who have been democratically elected by other members or delegates.

Loss or Liability

In a sole proprietorship or partnership, the owner or partners are legally liable for all debts, operating losses or other liabilities incurred by their business. In all corporations, including co-operatives, the liability of shareholders is limited to the value of the shares they hold.

Community Service Organizations (Non-profit co-operatives)

Organizations such as child care centres, community recreation halls, and community health clinics may be incorporated as community service co-operatives, non-profit corporations or business corporations. Boards of directors are elected in all cases. In co-operatives, the principle of "one member-one vote" is mandatory. In non-profit corporations, voting may be restricted to one member-one vote, but the restriction must be specified in the articles or bylaws. In business corporations, voting is based on the number of shares a person holds.

In community service organizations, whether co-operatives or charitable non-profit corporations, any surplus must be retained within the organization or donated to another non-profit organization or co-operative. It is never distributed to members or shareholders.

If the co-operative is set up as a community service co-operative (non-profit), it must be noted as a restriction in the articles. It could be worded as "this organization is established as a community service co-operative, and any surplus resulting from the yearly operation shall be transferred to reserve for future use and no part of the surplus shall be payable to any member."

Choosing a Business Structure

Members have several options when choosing a business structure. The appropriate choice depends on the organization's purpose and objectives. The following chart outlines some of the options and their advantages and disadvantages.

Additional Information

This fact sheet is part of an ongoing series produced by Saskatchewan Industry and Resources. This series examines the structure, organization, incorporation and operation of co-operatives. It also explores the flexibility of this unique business structure, and its application within a broad range of social and economic conditions.

We welcome your comments, questions, and suggestions for topics to be addressed in future fact sheets. A complete list of Saskatchewan Industry and Resources' publications is available upon request. For more information, or to contact a Co-operative Development Officer in your region, please contact:

Prepared by: Saskatchewan Regional Economic and Co-operative Development