Articles > Startups

How Do I Set Up A Cooperative?

February 19, 2021   Daniel FellowesPhilip Evangelou

A co-operative is a unique business structure that is owned and controlled by its members. Generally all members are also expected to assist in running the organisation in some way.

Setting up a co-operative can be a rewarding alternative to setting up a traditional business structure, but those considering doing so should be aware of the specific rules for co-operative structures. 

Co-operatives national law

The Australian States and Territories have begun to introduce uniform laws about the set up and operation of co-operative business structures across the country. This regime, called the co-operatives national law, aims to reduce the regulatory red tape and costs involved with operating a co-operative interstate.

Naming your co-operative

The proposed name of your co-operative must follow certain rules. It must include the word ‘co-operative’, or the abbreviation ‘co-op’. The name must also end in either ‘Limited’ or ‘Ltd’, denoting the public nature of the organisation. Finally, the proposed name cannot be too similar to an existing organisation, or be misleading. 

Co-operative rules

When establishing your co-operative, you will need to draft rules to govern the organisation. These rules act as a contract between each member and the organisation, the director and the organisation, and each member and other members, so it is important that they represent how you want your organisation to run.

You can adopt its own set of rules, or use the model rules produced by each state to conform with the co-operatives national law. It is also possible to pick and choose, as well as customise the model rules, so long as the rules comply with the co-operatives national law.

Distributing vs. non-distributing co-operatives

The rules your co-operative needs will differ depending on what type of co-operative you intend to run. When drafting your rules, it is important to decide whether you want your co-operative to be distributing or non-distributing. Distributing co-operatives, also known as ‘for profit’, can return excess funds (profits) to members, and must have share capital. On the other hand, non-distributing co-operatives, known as ‘not for profit’, cannot distribute excess to members, and can elect whether or not to have share capital.

Both distributing and non-distributing co-operatives will have general rules, for example, about membership, meetings and dispute resolution. However, distributing co-operatives should have rules about how and when excess funds can be returned to members. Both distributing and non-distributing co-operatives with share capital should specify rules about how shares can be purchased and sold, or otherwise dealt with.

Primary activity and active member provisions

A co-operative’s rules must set out what its primary activities are and include ‘active member provisions’. The primary activity is essentially the main purpose or purposes why the co-operative exist. Your co-operative’s rules should include an explicit statement of what its primary activity is, such as: ‘Our purpose is to sell avocados on behalf of our members’. The primary activity should account for at least 10% of your co-operative’s turnover. 

The active member provisions should clearly outline the members obligations to engage with the primary purpose. This could include, for example, to pay a membership fee, or to buy, sell, or supply a minimum amount of goods or services to the co-operative in a financial year. The active member provisions can be almost whatever you and your co-founders agree on, however there are some limitations. These limitations include that the provisions should:

  • Be reasonable, considering the activities of the co-operative as a whole,
  • Be clear, measurable and concise, and,
  • Define the period in which members must fulfil obligations to maintain a relationship with the co-operative (For example: do your members have yearly obligations? If so, do you use the calendar, or financial year?).

Disclosure Statement

When starting a distributing co-operative, you must produce a disclosure statement for potential members. This statement should include any information potential members should know before committing to membership. This should include:

  • Costs involved in forming the co-operative,
  • Primary activity and active member provisions,
  • Projected profit/loss of the co-operative for its first year in operation,
  • Any contracts the co-operative may need to enter to commence activities,
  • Rights, obligations and liability of shareholders (if the co-operative has share capital), and,
  • Any other information the state registrar (your state’s fair trading/consumer affairs body) directs must be included.

Generally non-distributing co-operatives do not need a disclosure statement. However, the state registrar may direct your co-operative to prepare one depending on your co-operative’s nature and activities.

Formation meeting

Once you have named your co-operative, drafted its rules, and (where required) produced a disclosure statement, the next step is to seek registrar approval and have a formation meeting. You need to submit these items to the state registrar and get their approval before the formation meeting. 

You may also wish to have membership applications ready for your potential members to join your co-operative.

Preparing for the meeting

Once you have your rules, name and disclosure statement approved, you are ready to hold your formation meeting. You must bring a copy of the approved disclosure statement and at least two copies of the approved rules to the meeting. You will also need to prepare a co-operative registration application.

During the meeting

At the commencement of the meeting, you should nominate a chairperson to run the meeting, and a secretary to take the minutes. These positions are for the purposes of the meeting only, and you will elect a board of directors separately.

There needs to be a minimum of five potential members present at the formation meeting. This can include the chairperson, secretary and any proposed directors, as well as general members. 

The proposed members present must vote the pass the proposed rules with a two-thirds majority. The chairperson and secretary must sign the rules if this vote is successful.

A representative should also be elected to deal with the state registrar in the final stages of the process.

Registering the Co-operative

Upon completion of a successful formation meeting, your co-operative is ready to apply to the state registrar to be registered. Because of the co-operatives national law mentioned above, you only need to register in one state. This state should be the primary state of your organisation’s activities. 

Your application must include: 

  • Approved and signed co-operative rules,
  • Approved and signed disclosure statement, and,
  • Application fee.

Once approved and registered, you are ready to commence your co-operative’s activities. Congratulations!

To sum up

The co-operatives national law greatly simplifies the process for establishing new co-operatives. To summarise the steps for setting up your own co-operative, you must:

  1. Produce a set of draft rules, a disclosure statement and name your co-operative,
  2. Get approval for your proposed co-operative, garner interest and hold a formation meeting, and
  3. Apply for registration to your state’s fair trading or consumer affairs authority.

About Daniel Fellowes

Avatar photoDaniel is a paralegal at OpenLegal. He is a final year business and law student at the University of Technology Sydney, majoring in finance and legal futures. His interests are newlaw, legal technology and commercial law.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.