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Co-operative legal forms
A ‘legal form’ is the sort of entity that an organisation is considered to be in the eyes of the law, for example whether it is a company limited by guarantee or a society. It is really important to make sure that you choose the most suitable legal form for a new co-operative as it can have an impact on the sustainability and future direction of a business down the line.
Currently in the UK there is no co-operatives act so as a result an organisation wishing to register as a co-operative will need to choose a separate legal form to register as. The governing document (see Chapter 4 of our Simply Governance publication) is what makes an organisation a co-operative as it will include reference to the ICA Co-operative Values & Principles
Legal form should not be confused with organisational type of status. The organisational type of an organisation may define what type of business or activity it undertakes (such as community shop) or the sector it operates in (such as social enterprise) but it would be recognised as such in the eyes of the law.
There are several legal forms that a co-operative may choose to register with.
Society – either a Co-operative Society or a Community Benefit Society
Registered under the Industrial and Provident Society Acts 1965-2002, this is perhaps the most suitable legal form for co-operatives. The governing documents of a Co-operative Society has the ICA Co-operative principles, for example one member one vote, enshrined within it, it also requires member benefit to be the primary reason for setting up the co-operative.
The Community Benefit Society option also enshrines the principles but must be set up for community benefit. Many mutual organisations choose this structure as it provides for member involvement but has a wider community benefit at its core.
Another reason that the Society legal form is popular is its ability to issue withdrawable share capital – also known as community shares - to its members.
Private Company Limited by Guarantee
Registered under the Companies Act 2006, this is the most common legal form for voluntary and community organisations and is a popular form for co-operatives that do not wish to issue shares (rather each member guarantees a certain amount, usually £1, in the event of the company being wound up with outstanding debts). Many co-operatives, of all types, operating on a not-for-private-profit basis will choose this legal form.
Private Company Limited by Shares
Registered under the Companies Act 2006, this is the most common legal form for smaller commercial business. Some co-operatives have adopted this form although it may not be appropriate as they are prohibited from issuing shares to the public.
Community Interest Company (CIC) Limited by Guarantee
Registered under the Companies (Audit, Investigations and Community Enterprise Act) 2004, this legal form is most appropriate for organisations wishing to trade but place restrictions on how any profits or assets can be used (all CICs must have a statutory asset lock). This legal form cannot offer shares to the public.
Community Interest Company (CIC) Limited by Shares
Registered under the Companies (Audit, Investigations and Community Enterprise Act) 2004, this legal form is most appropriate for organisations wishing to trade but place restrictions on how any profits or assets can be used (all CICs must have a statutory asset lock). This legal form can issue shares, and pay a dividend on them which is subject to a cap, but shares cannot be issued to the public.
Limited Liability Partnership
Registered under the Limited Liability Partnerships Act 2000, this legal form provides limited liability for its members with the flexibility and tax advantages of an unincorporated partnership. It has been used particularly by worker co-operatives and co-operative consortia due to their membership often being made up of self-employed people.
All of the above are incorporated legal forms, this means that they are seen as separate legal entities to its members and governing body and are formally registered with a registrar. Before deciding on the legal form an organisation should also decide whether to be incorporated or not (see Chapter 3 of our Simply Legal publication). Some small co-operatives may choose not to incorporate and operate as an unincorporated association or partnership, Co-operatives UK has a set of model rules for this.
For more information about Legal Forms, please see Chapter 5 of our Simply Legal publication.