Incorporating

Incorporating a Worker Co-op

Worker co-operatives are usually incorporated under the Co-operative Associations Act and Regulations. There is one federal act as well as different acts in each of the provinces and territories. Most worker co-ops are incorporated under provincial acts, although the federal act can be used if the co-operative is going to have a place of business in more than one province.

Each act has some provision for ensuring that the business is being carried on, on a co-operative basis. These provisions include one member/one vote, limited return on capital, limited liability, patronage dividends, audit requirements, etc. Some acts have specific provisions which must be followed to incorporate as a worker co-operative. The acts also have specific requirements for incorporation with options and restriction on the co-op’s capital structure. Because of the variability between different acts and their complexities, it is important to get advice from a knowledgeable person (an experienced co-op developer or lawyer) when drafting your incorporation documents. You want to ensure that the incorporation documents reflect your co-op’s goals and that they will support the long-term development of your co-op.

Legalities

There are a number of advantages gained by incorporation. The first is that an independent legal entity (the co-op) is created that has its own existence separate from any individual or group of members. It is the co-op that carries on business, signs contracts, receives loans, employs the members, etc. This means the co-op carries on business continuously as it develops and as new members join and other members retire or leave for personal reasons.

Another advantage of incorporation is that it provides limited liability to the co-op’s members – that is, members are not individually responsible for the co-op’s debts beyond the amount of shares for which they subscribed. If the co-operative should fail and be forced to dissolve, individual members are not personally liable for its debts. The exception to this rule is if any of the members have signed personal guarantees for loans for the co-op, in which case they continue to be liable for those debts.

Another benefit is that the process of incorporation also forces the members of the co-op to agree to some key principles as to how the co-op will operate. This provides clarity to the relationships of the members to the co-op and their rights and responsibilities.

Lastly it is also quite simple to incorporate as a co-op. Usually two documents must be submitted to the Registry (which government department varies depending upon jurisdiction.)

The first document is the Articles of Incorporation, which include the name and objectives of the co-op, the number and type of shares subscribed for by each member, and confirms the limited liability.

The second document is the co-op’s bylaws (sometimes call Rules). Though model bylaws are available and recommended, a new co-op can modify these bylaws to suit their own circumstances as long as they abide by the Act and Regulations.

You should also be aware of your legal obligation to provide information to the Registrar at your year-end. You must complete forms updating current officers, directors and business activities. You usually must file your year-end financial statements (balance sheet and income statement).

Bylaws

Bylaws are the “constitution” of your co-op. They tell members exactly what their rights and responsibilities are so that there won’t be misunderstandings or conflict. Members’ participation in identifying common goals and in understanding the co-ops bylaws are vital first steps in your co-operative education. A good set of bylaws includes:

the date the fiscal year ends, membership rules, including duties, eligibility, financial contributions, and termination, what each member can expect in return for contributions (how profits are to be shared, the interest to be paid on shares, what investment will be returned upon leaving the co-op) when meetings are held and how they will be conducted, how many seats are on the board of directors, their duties and how they are elected, how the bylaws may be amended, and dissolution procedures.

Although worker co-op bylaws have the same sections as most other co-operatives there are certain key sections which are at the heart of the worker co-op.

These include the requirements for membership such as:

  • The probationary period to be complete before a new employee can apply for membership;
  • The amount of the initial investment a new member must make and over what time period;
  • The right to work (access for members to the available work);
  • The process for resigning from the co-op;
  • The process for having your membership terminated if you no longer meet the requirement of membership; and
  • The conditions for having your share capital returned to you on leaving.

Another key issue is the process for the dissolution of the co-op – who should benefit if the business is sold and the co-op wound down? Should a limited number of members, i.e. only those who are members when the co-op is discontinued, benefit from any surplus above their share capital or should former members or the community also benefit? If a limited number benefit they may have an incentive to wind up the co-op simply for their own financial benefit ignoring the contributions of past members and the future employment for the community.