Introduction: Choose a BC Business Structure: Co-op, Corporation, or Community Contribution Company?
This Instructable is designed to help people in British Columbia decide what type of association to form that will best suit their business or social goals. It is relevant only for BC based corporation and is expressly NOT LEGAL ADVICE. What follows are merely broad principles that should be considered before registering a corporation, some are probably missing and some maybe over-represented. Do not use this as your only source of information. When you know what the purpose of your association will be I strongly recommend that you speak to a lawyer about the options available to you.
Bottom line: research broad principles so that you know your options. Talk to an expert about the details.
Art credit: http://www.freshbooks.com/blog/business-structure-choose-the-best-one-for-you
Step 1: Determine the Purpose of Your Business
People form associations with others for many reasons, some want to make money, others want to serve a need or improve something in their community, and some want to leave a legacy or address a particular issue. Whenever you consider forming an association of any kind you should devote some time to deciding what it is you want to achieve and how you want to achieve it; because there a number of structural options. Whatever you decide on is not final, but it might influence potential investors and members of your organization. It could also take significant effort and time to change the foundational principles, particularly after your association gains some momentum, so choose carefully.
Bottom line: association structures have different strengths and weaknesses
Art credit: http://imgbuddy.com/red-question-mark-clip-art.asp
Step 2: Learn a Little Bit About Each Structure
Legislation in British Columbia provides for four different forms of business entity, the Corporation, the Community Contribution Company, the Cooperative and the Non-Profit society. To get an idea of what these legal constructs look like in relation to each other picture them as points on a spectrum where the right hand side is all about making profit and the left hand side is all about charity. The further to the right an entity is, the easier it is for investors to be paid from profits and to divide up what remains if the business fails. The further to the left an entity is the harder it is for an “investor” or a donator to get money out of the entity, whether by payment or division on failure. This Instructable focuses on the three structures to the right of charities that have some overlapping characteristics, namely: the ability to offer money or rewards to their members or shareholders. This feature, which charities do not have, is a means of attracting investment. Charities issue tax receipts which creates an incentive to donate for some people, but registering a charity is much more difficult than registering a co-op or a community contribution company.
The corporate model is far and away the most well known business structure, but it is important to consider whether it is a good fit for your goals before you incorporate you business. The major purposes of a corporation are to limit liability and attract investment. The ease of giving profits back to shareholders, and the knowledge that assets are divided on failure is what makes corporations desirable investment vehicles for many people. However, many corporations are notoriously poor environmental and social stewards, although this certainly does not have to be the case. If the business you want to start requires substantial upfront investment and is all about making money, then the corporate model may be a good choice.
Using the spectrum we just visualized, the Co-op is somewhere in the middle but its exact position can be adjusted by the rules that govern it, which are known as the memorandum and the rules. Depending on the type of rules that the members agree to, a co-op can strive to earn income and distribute returns to members, or invest income back into the co-op and not pay returns to members, as long as the co-op is governed by the basic principles of the cooperative structure (see step 2) a wide range of businesses can be created. If you want to form an association of people where equality, education, and involvement are important, then a cooperative may be the structure for you.
The Community Contribution Company
The Community Contribution Company is closer to the corporation on the spectrum business spectrum. It is operated like a strictly for-profit business but it explicitly states at least one community purpose in its founding documents (s.51.911(1) BCBCA). This structure is quite new in BC and was created in response to demand for legal recognition of companies that contribute substantial portions of their profit to the community or charities. The purpose of the “CCC” designation that is included in the name is to attract investors that seek the benefits of both the corporate model and the cooperative model. If you want something structurally similar to a traditional corporation, but with an obligation to share profits more broadly than just investors then the community contribution corporation may be for you.
Bottom line: Corporations are best for attracting outside investment but they will miss out on philanthropic investment that Community Contribution Companies can take advantage of. Co-ops are best for community involvement and people-power.
Art Credit: http://crushtheninetofive.com/how-to-learn-affiliate-marketing/
Step 3: Bird's Eye View of the Differences Between a Corporation, a Cooperative, and a Community Contribution Company.
Corporations generate profits and limit liability
- Controlled by capital (invested money), because each share has a vote. There is much more complexity possible
- Profit sharing is based on the amount of investment, not the amount of use or involvement.
Co-ops meet the needs of members and may generate profits.
- Controlled by people, because each member has a vote. However, membership may require a significant upfront investment.
- Profit sharing is based on usage of membership and is distributed in the form of reduced prices or rebates to members
Community contribution companies generate profits, but they cannot return all of their profits to shareholders.
- Controlled by capital (invested money), because each share has a vote. There is much more complexity possible
- Profit is distributed based on investment, but there is a cap on the amount of money that can be paid out to investors.
Art credit: http://www.canstockphoto.com/illustration/street-performance.html
Step 4: Understand the Corporate Structure: Pros and Cons
From the perspective of the owner(s) of corporations there are a number of advantages to the corporate model.
1. Its ability to attract investment. Investors find this model desirable because it provides an opportunity to earn boundless returns with the only liability being the initial investment, and very little time required
2. Its ability to limit liability of ownership. A corporation is legally a person, so if it goes bankrupt the owner's personal property is protected from creditors, only the corporation's assets will be sold.
3. It is a fairly liquid entity, because ownership is easily determined.
4. It does not cease to exist if the owner(s) cease to exist, it is perpetual.
There are some significant disadvantages as well:
1. Large scale investors may seriously limit the freedom of the corporation to protect their investment
2. If too many shares are sold, or if shareholders form a voting block, control can be lost
3. There are substantial reporting requirements, this can be quite expensive and time consuming
4. There is a potential for double taxation since the corporation must pay tax on the money it makes and you must pay tax on the money the corporation pays you
Art Credit: http://keyin.ca/program/business-management/
Step 5: Understand the Community Contribution Company: Pros and Cons
The Community Contribution Company is a brand new structure designed to allow entrepreneurs to reinvest some of their profits back into the communities that their businesses use. This legal entity is still governed by its shareholders like a corporation but it has a cap on the amount of money that can be paid back to the investors. The advantages of the Community Contribution Company are:
1. Allow the entity to improve the quality of the community
2. Access investors that want both community responsibility and some returns
3. The ability to conduct business as a corporation would
4. Makes traditional funding sources more available for socially focused businesses
Disadvantages of the Community Contribution Company are:
1. It is an untested (in Canada) structure
2. An investor could substantially limit the freedom
3. An additional year-end report detailing how the community purpose has been fulfilled
3. May not attract as much investment as planned.
4. Potential for double taxation on dividends
Step 6: Understand the Cooperative: Pros and Cons
The cooperative is quite a different structure from the corporation and the community contribution company. There are many advantages and disadvantages, this basic list lays out the main benefits, but a quick google search will turn up more a more detailed list of advantages.
1. Contribute to the health and the autonomy of the community.
2. Involve and empower members allowing them to have input on what happens in their community.
3. Flexibility - as long as the basic principles are followed they can be crafted to suit many goals.
4. Fewer reporting obligations than corporation or community contribution companies.
1. It can be difficult to attract outside investment.
2. They tend to be unwieldy to manage because of the horizontal leadership structure.
3. Often demand time commitment from members, can limit potential membership.
Step 7: The Basic Principles of a Co-op in BC
Co-ops in British Columbia must be operated on the following principles:
1. Membership is non-discriminatory*
2. Each member has one vote (various structures can be created so that there are different levels of membership and voting rights)
3. Members contribute to the capital of the association (this can be a small contribution)
4. Members receive little or no return on the money they pay to become members
5. Surplus funds from the operation can be used for a broad range of practices
6. Education about cooperative principles is provided to members
*Co-ops may restrict who can become a member if the restriction does not violate applicable human rights laws, the rules of the co-op itself, or the co-op’s ability to provide services to members and prospective members.
^If your co-op is going to be a marketing board, it is not bound by these principles
Art Credit: http://hungryhollow.coop/membership/7-cooperative-principles/
Step 8: You've Made Your Choice, Now What?
You have taken a big step towards creating an association that will serve your goals. By informing yourself about the options available and keeping the alternatives in mind you have already improved the administration of your organization.
So, go forth and start it up! None of the structures we have talked about require a lawyer to create, although I strongly recommend you speak to one to make sure that the goals you considered so carefully are expressed in the formative documents.
Some links for further information about the structures we have been talking about:
Starting a Cooperative
Starting a Community Contribution Company
Starting a Corporation
Disclaimer: this is not legal advice, do not consider it as such. This instructible is designed to get you thinking about what different corporate structures exist and which one fits your goals best. The law referred to can be found in the British Columbia Cooperative Association Act (BCCAA) and the British Columbia Business Corporations Act (BCBCA).