Co-operative Development Scotland

Frequently Asked Questions

The co-operative difference

How are co-operative and employee owned companies different from traditional businesses?

Many traditional businesses are owned by external investors who hold all the shares and control how the company operates. Co-operative and employee-owned businesses are owned and controlled by their members, who can be employees, businesses or consumers. They are usually set up to meet common economic, social or cultural needs.

What is different about the culture of co-owned businesses?

Co-operatives are run according to seven key principles. These are:

1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training and information
6. Co-operation among co-operatives
7. Concern for the community

There are no designated principles for employee-owned businesses, although many of them share common interests and values, for example:

• Empowering employees to participate in decision-making
• Encouraging employee share ownership
• Fostering an open and honest business culture

What differentiates Co-operative Development Scotland from other economic development agencies?

CDS's role is to provide specialist advice to anyone interested in establishing or growing a co-owned business in Scotland. CDS is a subsidiary of Scottish Enterprise and has a Scotland-wide remit. As such, our services are integrated to the mainstream support provided by Scottish Enterprise and Highlands & Islands Enterprise. We also work closely with Business Gateway.

Business models

What are the main co-operative business models?

• Employee owned businesses are like conventional companies, but with much greater employee involvement and ownership.
• Worker co-operatives are businesses that are owned and democratically controlled by their employees.
• Business co-operatives allow individual businesses to procure, produce and sell more effectively, whilst still retaining their independence.
• Consumer co-operatives are owned by their customers on a membership basis to provide the goods and services that they need.
• Community co-operatives are owned, controlled and run for the benefit of those living in an area or having a common interest.

What is the best type of model for my business?

It will depend on what business you and your colleagues are in, or looking to create, and how you want to run the business. So for example, if you want to sell your collective services more effectively, a business co-operative may be the ideal model. But if you want to work together in a single enterprise where you are all sharing the risk and reward, a worker co-operative or employee-owned business might be better. Getting good advice at the outset is essential.

Can a partnership (for example, an accountancy firm) be a co-operative?

Yes, the business and the partners adopt the business structure and culture of collaboration required to be a co-operative business.

What are the key benefits of co-operation?

Co-operation has many benefits for businesses, employees and communities, including:

• increased productivity, innovation and survival
• rooting of businesses within their communities
• spreading the benefits more widely
• active citizenship and skills development
• environmental commitment

Management and decisions

How do you choose the senior management team if we all have a stake in the business?

Like any other business, a co-owned company will establish at the outset clear guidelines on its structure, decision-making and distribution of rewards. Many co-operatives and employee owned businesses have traditional management structures and positions, such as Finance and HR Directors. As in any other business, people fill the roles they are most suited to and decisions are made in the best interests of the business.

How does decision making differ to that in traditional businesses?

Debate and discussion tends to be more open and inclusive. Each business still needs to develop a process for discussing and agreeing a course of action on the normal range of issues that any business would face.

Can you bring in non-executive directors to a co-owned business?

Yes, as long as they are fully appraised of the structure of the business, and understand and support the co-operative culture.

Funding

Do you provide financial help to start a co-operative or employee owned business?

No, but we can guide you towards banks and other funding sources that have an understanding of co-operative businesses, and are therefore better placed to assess the funding requirements of your business. There may also be some specialist investment funds and advisers, for example the Baxi Partnership can provide up to £2 million of mezzanine finance for employee buy-outs and Co-operative & Community Finance can provide unsecured loans of up to £50,000.

Are there any general grants available to assist with the launch and expansion of a co-operative or employee-owned business?

CDS can offer funding support for feasibility studies and business planning. Ambitious co-operative and co-owned businesses can seek funding from banks, specialist growth funds and equity investment. We can help you identify suitable sources of financial backing.

Tax, legal and financial issues

What is the most tax-efficient business model?

Co-operative business models offer no business or personal tax advantages over traditional business models. However, a Trust Fund is often used to establish an employee owned business, and that can be a tax-efficient way of building value for the new owners. There are also tax-efficient ways of exiting from a company (which will be of interest to family-owned businesses looking to sell the company to the employees). However specialist advice is needed as this is a complex area.

Are co-operatives registered and incorporated like conventional businesses?

Many co-operatives are incorporated as limited companies and registered at Companies House, the same as other business models, and must comply with the Companies Act. Co-operatives can also be registered as Industrial & Provident Societies (IPS) under the Industrial and Provident Societies Act 1965. The Financial Services Authority is the registrar of IPSs and will check the constitution of each registering business to ensure it fits with bona fide co-operative values and principles. A co-operative registered at Companies House will usually only be screened in the same way if it has the word 'Co-op' or 'Co-operative' in its title.

How are profits distributed in a co-operative?

Profit distribution in co-operative business models is decided by the members. Typically, it could be a third distributed to members, a third retained for growth and a third used to benefit the community.

Are there any accountancy or other professional firms that specialise in advising co-owned businesses?

Many of the financial and legal issues facing co-operatives and co-owned businesses are the same as traditional businesses. However, in certain areas, such as employee trust funds and share structures, there are fundamental differences. CDS can help you understand those issues, and can recommend specialists in these areas.