Introduction
Cooperatives represent a practical form of legal incorporation for a number of community organisations that wish to return benefits to their membership, and have become increasingly important as a vehicle of sustainable economic development.
Though cooperatives do not operate in the same way as a company, they are not non-profits. There are different implications for organisations that register as non-profits and those that choose the cooperative model, as well as critical differences in their membership, structure, and distribution of resources.
What is a cooperative?
The International Co-operative Alliance (2007) defines a cooperative 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. Co-operatives are usually understood to be either an agricultural form of business or a state-driven welfare intervention.
Catherine Parnell for the Non-Profit Consortium defines a cooperative in broad terms as a voluntary, democratic enterprise in which members with a common economic, social, or cultural purpose pool their resources to provide for their own benefit. They are sometimes described as businesses owned by their beneficiaries, and are often formed on the basis of ideals of self-help, democracy, self-responsibility, equality, and solidarity.
The Cooperatives Act 14 of 2005 as amended defines a cooperative as an autonomous association of persons united voluntarily to meet their common economic and social needs and aspirations through a jointly owned and democratically controlled enterprise organised and operated on co-operative principles.
Who can be a member of a cooperative?
Membership is open to anyone satisfying non-discriminatory membership requirements, though many cooperatives are formed around common goals or sectoral interests. To join, a member either donates resources or purchases shares in the cooperative. The purchase of shares affords each member a vote in the management of the cooperative. Cooperatives are democratically organised and therefore follow a one-member, one-vote model. Governed by the will of the majority of shareholders, the cooperative invests its pooled resources and then returns profits to its members and to the cooperative reserves for future investment.
What are the different types of cooperatives?
There are many different types of cooperatives, including agricultural cooperatives, consumer cooperatives, marking and supply cooperatives, housing cooperatives, financial services cooperatives, social cooperatives, burial society cooperatives, service cooperatives, and workers’ cooperatives.
What is the purpose of a cooperative?
Cooperatives are recognised as a viable form of economic growth and sustainable development for disadvantaged, vulnerable, and marginalised groups as well as those with limited resource capabilities. The creation of an economy of scale in a cooperative improves the odds of success and establishes a separate legal personality to represent the members’ interests, minimising the financial risk involved in starting a small enterprise and providing a means for members to achieve long-term ownership of the company’s sustainable activities.
What governs cooperatives in South Africa?
South African cooperatives are subject to the Cooperatives Act 14 of 2005. The provisions of this Act aim to create a legal and institutional framework that encourages the registration and development of cooperative enterprises and increased support for cooperatives from government agencies. The Cooperative Policy aims to promote the ideals of self-help and social responsibility through the cooperative model. In countries like Italy and the United Kingdom, cooperatives have improved the sustainability of community enterprises and opened the economy to disadvantaged and vulnerable social groups.
What are the principles for the establishment of cooperatives?
The Cooperatives Act provides that ‘‘co-operative principles’’ are the internationally accepted principles of co-operation, as exemplified by the principles adopted by the International Cooperative Alliance. The Act sets out the following principles for the establishment of a cooperative in the Republic of South Africa
- Membership must be open to all those who can use the services of the cooperative and are able to accept the responsibilities of membership
- Members must have democratic control of the cooperative.
- As far as possible, the members of the cooperative must provide its resource capital.
- Returns are to be paid out to members in respect of investment must be limited to a maximum percentage outlined in the cooperative constitution.
- Five per cent (5%) of the cooperative’s surplus per annum must be set aside as reserves for future cooperative investments; this surplus may not be distributed to any members.
- Cooperatives must provide education and training for their members.
What are the types of incorporation for cooperatives?
Cooperatives in South Africa may incorporate on either primary, secondary, or tertiary levels. Primary cooperatives are made up of individuals and provide employment or services directly to their members. Secondary cooperatives consist of primary cooperatives that incorporate on a sectoral basis. Tertiary cooperatives combine several secondary cooperatives performing similar activities in order to liaise with government bodies responsible for their sector of enterprise.
How do cooperatives register?
Persons wishing to register a cooperative regardless of its type or level must submit an application to the Registrar of Cooperatives located at the CIPC (Companies and Intellectual Property Commission). This application should include a constitution, a listing of founding members and directors, and a fee covering the registration process.
Once registered, a cooperative will receive a certificate and registration Identity Number (ID) from the Registrar and must submit any changes or amendments to its constitution to the Registrar for approval. Cooperatives are required to keep records of their constitution, 4 accounts, minutes, members, directors, and other details available for members or government officials at all times.
What is the difference between a cooperative and a non-profit?
There are a number of differences between cooperatives and non-profits, but the essential distinctions refer to their intended class of beneficiaries, their funding, and their legal status with regard to taxes and public benefit.
Cooperatives primarily provide benefits, employment, services, and revenues to their membership. A member of a cooperative is entitled to a portion of all of the cooperative’s resources and profits and invests in the enterprise with the expectation of receiving returns. This may mean access to health and financial services, education, or other benefits, but those benefits are only available to members of the cooperative and will be governed by the democratic interactions of its members.
A non-profit organisation (NPO) provides its services to a broad class of beneficiaries that, by definition, does not include its members. Where the bulk of a cooperative’s resources would come from pooled member capital or loans, non-profit organisations often fund their operations through public donations and grants.
Cooperatives are not eligible for approval as public benefit organisations. Only voluntary associations, charitable trusts and non-profit companies can in terms of the Income Tax Act be approved as public benefit organizations.
The Cooperatives Act says that social cooperatives are “non-profit”. This seemingly refers to the fact that they provide services to their members such as care of children, the sick, and the elderly. A cooperative does not qualify for registration in terms of the Companies Act of 2008. In terms of the Companies Act, a ‘‘non-profit company’’ is a company incorporated for a public benefit or other object as required by item 1(1) of Schedule 1; and the income and property of which are not distributable to its incorporators, members, directors, officers or persons related to any of them except to the extent permitted by item 1(3) of Schedule 1.
Are cooperatives eligible for public benefit status?
No. Public benefit status in South Africa is conferred upon organisations that meet the criteria set out in Section 30 of the Income Tax Act. These include classification as a non-profit company in terms of the Companies Act of 2008, a charitable trust, or a voluntary association; having as an objectives the carrying out of one or more public benefit activities; carrying out activities in a not-for-profit manner and with altruistic or philanthropic intent; at least 85 percent of such activities, measured either by cost or by time, must benefit persons in South Africa; and the organisation's activities are for the benefit of, or widely accessible to, the general public, including any section thereof (other than small and exclusive groups).
Cooperatives provide benefits primarily to their membership and they are therefore not eligible for public benefit status.
Are there tax benefits for cooperatives?
Cooperatives are not tax exempt and may access tax benefits as small business corporations. A co-operative is treated in the Income Tax Act as if it is a company. It may accordingly access the taxation rates for small businesses.
Services
Mzaidume Consulting has extensive expertise and experience in the creation and management of cooperatives, and is able to provide a full range of corporate secretarial services in support of a cooperative.