Are you planning to form a business co-operative? Well, this article will guide you to take your final decision.
“Business Co-op is an employee-owned business where each member has an equal input, regardless of their shares ownership. The profits and dividends are shared equally among the members, which makes it a unique business model.”
A Business cooperative or just a co-op, offers the advantages of a group ownership. Even though it is similar to other business types such as partnerships or traditional corporations, a business co-op has its own legal structure. Being the most conventional kind of business, it makes the model unique for an existing or a new business venture.
Let’s look at some of the advantages & disadvantages of opening up a co-op.
Advantages of Business Co-Operatives
Easy to Form
Being a voluntary association, it can be formed with a minimum of 10 adults. The registration process is simple to follow and does not have many legalities to perform in order to set up a new business.
As a business co-op has a unique structure of working, it impacts the employees to be motivated and improve their performance as they are also the owners of the business. They tend to put in their heart and soul to the business and raise their voice regarding any issue as they are considered equal to others. This kind of motivation makes the employees more invested in the work and increases the profits of the business.
To become a member of co-operative, you do not have to go through a lot of hassle as it is open to all having a common interest and similar mindset. A person is allowed to join and leave the business according to their preference by returning their shares back, with no effect on the continuity of the business.
As all the members are equal owners in the business and share equal ownership, they are also responsible for equal distribution of the liabilities. Provided that they are not involved in any illegal activity, members of the co-op are limited to the extent of their investment in the business.
A business co-operative is managed in a democratic structure, which is based on the principle of “one man one vote”. All the members of the business have the right to vote or raise an issue in the management.
While in any other traditional corporation will be taxed twice on their net earnings as well as individual dividends. In a business co-op, the members are not taxed on the individual dividends and are only taxed once. This reduced the burden of taxes compared to other business structures.
A co-operative has a separate legal existence which is not affected by any activities such as death, insolvency, lunacy or permanent incapacity of any of its members. It continues to exist and grow for a long period.
Free from Speculation
Since the shares of the business are always open to new members, they cannot be sold at higher or lower rates than the par values. Therefore, it leads the business co-operative to be free from the speculation in share values.
Low Cost of Operations
Since the employees are the owners of the business, they are motivated to keep the cost of products, services, manufacturing, packaging, delivering or any other operation as low as possible. By leveraging their large size, they are able to obtain the products at an overall lower cost from suppliers.
Disadvantages of Business Co-Operatives
As a business co-operative distributes the profits among all the members equally, it makes this type of business not as profitable for the business owners. It brings down the per-person individual dividend. You should consider opening up a co-op if your primary goal is not earning profits.
The management of the co-op is inefficient because the members who are also the owners are part-time and inexperienced to perform as qualified managers of the firm. Any qualified and experienced person would not be tempted to work here, simply because of the limited pay structure of a business co-op.
Difficult to Raise Funds
Due to the business co-op financial and liability structure, it makes it difficult to attract large investors who would have small control and voice in the management. While setting up a new business co-op, the members look for alternative funding options such as crowdfunding or applying for small business grants.
Can you imagine more than 10 people agreeing on the same decision? It can be challenging. The process of making a decision as a co-operative can be a lengthy and frustrating task because every member gets an equal vote and say in the business decision.
Lack of Confidentiality
There is nothing kept personal or as a secret in a business co-operative simply because of the size of the members. As all the issues are discussed openly for every member’s input, they are free to inspect the books and records at any time, which makes it difficult to keep secrecy in the business.
Lack of Competition
Business co-operatives generally do not have a competitive market space. More or less, markets have assured and ready space for their products and services which makes the efforts slack in the competitive market.
Excessive control of Government can harm the functioning of the co-op. For instance, a business co-operative is asked to get its accounts audited by auditors of the co-operative department and then they are required to regularly submit the accounts to the Registrar. Such rules and regulations affect the flexibility of operations and efficiency of management.
Members of a co-op are generally from poor sections of the society who do not have access to credit facilities. While the private traders offer credit facilities to the consumers, it becomes a problem for the members to look for help from traders, even though they sell their goods and services at lower prices.
People with a democratic business ethos are the most suitable for this type of business structure. While enjoying reduced costs and a strong corporate culture, a business co-operative might be an appropriate choice of business for a lot of people.