Key aspects to consider before creating a cooperative
Some entrepreneurs get carried away by the fiscal attractiveness of the cooperative legal form and decide to choose it as their corporate form without delving into all the conditioning factors involved.
However, setting up a cooperative requires a good understanding of its fundamental principles, especially the open-door principle, which guarantees voluntary membership without discrimination of members. This principle, which is inherent to any cooperative form, has a direct impact on the control that members exercise over their business project, and should therefore be thoroughly analyzed before opting for this type of legal form.
The following is a summary of the key aspects that any entrepreneur should take into account before setting up a cooperative.
1. Define the appropriate cooperative model
There are different types of cooperatives: state or regional, first degree (formed by individuals or legal entities) or second or subsequent degree (formed by other cooperatives). In turn, these are divided into subtypes according to their purpose or activity (worker cooperatives, consumer cooperatives, agricultural cooperatives, housing cooperatives, etc.). Each type of cooperative has specific regulations and a different operation, so it is essential to choose the one that best suits the needs of the entrepreneurial group.
In this regard, it should be noted that the minimum number of founders required varies according to the type of cooperative society chosen, as well as its territorial scope. In general, the minimum number of founders required for a statewide, first-degree cooperative society (i.e., not participated by other cooperatives) is three persons.
2. Open-door principle and free membership in the creation of a cooperative.
A fundamental and sometimes unknown aspect of cooperatives is that they operate under the “open door” principle, coined by the ICA. This principle obliges them to admit as members third parties that meet the legal and statutory requirements. By virtue of this, it could be said that applicants with a profile homogeneous to that of current members (provided they meet the objective requirements for entry) would have a subjective right to join the cooperative, except in the following cases:
- When there is a cause for denial of membership justified by law or the bylaws (which may not be contrived).
- When there is a technical or structural impossibility, or one derived from the economic-financial conditions of the cooperative that prevents or hinders the adhesion of new members. This assumption makes it possible to deny the entry of third parties in family or small cooperatives. However, as the project grows, this justification will lose its validity as an escape route from the obligation to admit new members.
Restrictions and protection of founder’s control
As we have indicated, this “open door” principle cannot be restricted by unjustified internal clauses or by requirements that could be considered artificial restrictions to prevent the entry of new members. For example, a statutory clause denying entry to interested third parties would not be valid if it could be considered discriminatory or if it lacked grounds and a reasoned admission agreement. In other words, any person who meets the established conditions (which must be able to be defended in court as necessary for the good purpose of the activity) could join the cooperative. This might not be convenient for the founders, since the greater the dispersion of members, the less direct control they will have over the project.
To protect the control of the founders, there is some leeway to include subjective requirements for new members in the bylaws. However, these will only be valid if all current members meet them and they are justifiably related to the development of the cooperative activity (e.g., requiring certain financial means or technical knowledge, not being attached to another similar entity for risk of sharing internal know-how, not having been unjustifiably terminated or expelled from the same or similar cooperatives, not having committed serious infractions, etc.).
In short, the open-door principle allows anyone who meets the established requirements to join the cooperative. While this encourages inclusion and growth, it also implies that the founding members’ control over the project may be diluted with the entry of new members, making it essential to rethink whether this model is the most appropriate for undertaking the project.
3. Democratic management in the creation of a cooperative
The cooperative model establishes that decisions are made democratically, under the “one person, one vote” scheme. This system could, under certain circumstances, compromise the founders’ control over projects and strategic business decisions. Moreover, if information is not shared in a fully transparent manner, the rights of the partners could be violated, conditioning the use of their vote and, consequently, invalidating the decisions taken. This could even lead to changes in the governing bodies, including the termination of the founders as members if the majority of the partners so decide.
4. Profit sharing in the creation of a cooperative
Another relevant aspect is the distribution of profits. In a cooperative, the entry of new members not only implies the possibility of their participation in decision-making, but also in the distribution of the profits generated. This distribution must be proportional and equitable, based on criteria such as professional category, efficiency and performance, and always prioritizing the cooperative’s activity over the personal benefit of one or more members.
In other words, the distribution of profits should not be artificial and should seek the common good, ensuring an equitable distribution of profits. Therefore, if partners with roles similar to those of the founders or other senior managers are incorporated, this could significantly dilute the former’s share of the profits, regardless of whether they have been the generators and promoters of the projects in question.
Conclusion
As discussed in this article, these principles are fundamental pillars of cooperativism and their application may affect the control that the founding members have over their project. Therefore, before creating a cooperative, it is essential to balance the tax benefits with the possible risks of loss of control. If this model is chosen, professional advice is highly recommended to ensure the stability and direction of the project.
As in any other case, detailed planning and knowledge of regulations will help build a sustainable cooperative aligned with the objectives of its founders.
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