We've already seen over the course of the last two articles that a co-operative needs a business idea and plan and some clear structure to organise its members. Once these are in place, you're ready to move on to the next stage and look at financing your new business and making it a legal entity.
Profit
Whatever an organisation is doing, and whoever the members are, it's likely to require some form of cash injection to allow the business to function and grow before it generates a profit. No business is too small, too simple or too homespun not to require finance.
Some of the co-operative and community owned businesses we speak to are wary – at first – of the term 'profit' and associated financial terms. The goal of such undertakings is to develop and maintain a viable business able to deliver a service, not to be driven by a need to maximise profits.
However, clearly any business needs to generate a profit in order to keep the business alive and invest in its own future. Profit is essential to the sustainability of an organisation; without a profit, an organisation will cease to exist.
Co-operatives want to make a profit – they are businesses, not charities, after all. But it is members, such as the employees, customers or local residents, who have an equal say in what the business does and a share in any profits generated. It is how a co-operatives makes its profit and what it does with it that is important.
Profits can be reinvested in the business to do more of the good thing that it exists for. And a co-operative can choose to distribute profits to its members as it is their money in the first place; after all, they helped generate it.
A potential pitfall many community and social enterprises face is being set up to rely on grant income and funding – often to get a particular grant. This can change the enterprise in such a way that it becomes unsustainable and not a viable business. It is much better to create the business the members want and need and then see if there is grant funding to fit the criteria.
The legal form
At this stage in the process an organisation often needs to open a bank account, submit funding applications, make an application for a loans, etc…
As a result, many will need to adopt a more formal structure and register some sort of legal form around the business. There are many different choices of legal form that can be adopted and many businesses deciding that their structure needs to be more formal will begin to consider their choice of legal form.
Businesses can become stuck at this point due to the range of legal forms available to co-operatives. But it is important not to be downhearted. There are many people out there who can help. There's little point in you becoming an expert on legal forms when there are experts who deal with this on a dailybasis, so take professional advice at this point.
This advice can often be subsidised or even free to enterprises considering setting up a co-operative. Across the UK, the Co-operative Enterprise Hub, offers free advice to new start co-operative businesses.
It's worth thinking carefully about which structure best suits the aspirations of your business, as it affects the tax you pay, the records and accounts that you have to keep, as well as the ways your business can raise money.
That said, you also need to be wary of getting bogged down or creating something more complicated than needed; the more complicated the legal form, the more likely it is to be ignored. The legal form is simply a vehicle, a structure to allow you to achieve what you want.
What you should have at the end of this stage
By the end of this stage, it's useful to have six things in place:
1. Is the business model really financially sustainable?
2. Do the figures add up and are you being realistic in your projected costs and earnings?
3. What is the most appropriate structure for the organisation?
4. Where's the start-up money coming from?
5. Where's the income going to come from?
6. What are we going to do with any profit?
Ged Devlin is legal officer at Co-operatives UK, the trade association for co-operatives.
Next month Co-operatives UK will launch its new online support service for anyone wanting to start, grow or advise a co-operative business.
Previous pieces in this 4 part series can be red here (part 2) and here (part 1).
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