Understanding co-operatives: How they work, types and contributions

From: Innovation, Science and Economic Development Canada

Table of contents

About

This section provides Canadians with essential information on the co-operative business model.

It is intended to:

  • introduce you to several aspects of the co-operative business model in Canada;
  • provide key information to better understand co-operatives;
  • support entrepreneurs interested in the co-operative business model, but who are not fully aware of its legal structures, specific features (such as democratic governance, surplus sharing, or obligations towards members) or the necessary steps to bring their projects to life.

The information and resources presented here are primarily for non-financial co-operatives. Financial co-operatives such as credit unions and insurance mutuals are governed by separate legislation and regulations.

Federal government

The federal government, through Innovation, Science and Economic Development Canada (ISED), is responsible for applying the Canada Cooperatives Act. This Act governs the creation and operations of co-operatives at the federal level, setting out specific rules for the incorporation of co-operatives, composition of capital (membership shares, investment shares, loan capital), and holding of meetings (annual, special or meetings of investment shareholders).

It also governs the composition of the board of directors, official records keeping (such as articles and lists of members), and sets out requirements for the audit and filing of financial statements. It also defines the terms and conditions governing the amalgamation, liquidation and dissolution of a co-operative.

Corporations Canada, a federal agency, regulates federal corporations in Canada, including non-financial co-operatives. Detailed information and forms are available on their website.

This federal legislative structure provides a solid and consistent framework for Canadian co-operatives, to ensure sound management, transparency, and compliance with the standards established by the Canada Cooperatives Act.

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What is a co-operative?

A co-operative is a business founded by an association of persons seeking to satisfy common needs, such as accessing goods and services, selling products, or improving their quality of life. Unlike traditional businesses that pay out their profits to shareholders, co-operatives redistribute their profits to members in proportion to their participation. This model is based on a key principle: each member gets one equal vote in decisions, regardless of their financial contribution.

Co-operatives enable their members to pool resources (for example: expertise, capital, infrastructure, etc.) to create new opportunities, encourage growth, and strengthen their competitiveness. While their primary motivation is often social, they are also economically viable and profitable.

Mutuals: Are they co-operatives?

Mutuals share certain principles with co-operatives, such as collective management and member solidarity, but they are not governed by ISED. They are intended primarily to meet their members' needs in areas such as insurance and financial services. For more information about mutuals, see the resources specific to your province or territory.

Types of co-operatives

There are multiple types of co-ops, each of which meets the specific needs of its members:

  1. Consumer co-ops: These co-ops enable members to purchase goods or services at a better price. They often support local products and redistribute profits to members in proportion to their purchases. Examples: community grocers, funeral services, recreation.
  2. Producer co-ops: These co-ops enable producers to share resources and infrastructure, thereby reducing costs and improving efficiency. Examples: agricultural, fishing or artisan co-operatives.
  3. Worker co-ops: These co-ops allow employees to also be owners and participate in management of the business, thereby creating stable and equitable jobs. Examples: forestry services, information technology.
  4. Multi-stakeholder co-op: These co-ops enable diverse groups (consumers, workers, local organizations) to meet specific social or environmental needs. Examples: home care, renewable energy.
  5. Financial co-ops: These co-ops offer banking and financial services under advantageous conditions for their members, with democratic participation in decision-making. Examples: caisses populaires, credit unions.

Legal framework for co-operatives in Canada

In Canada, a co-operative must incorporate under a specific co-operative Act at the provincial, territorial or federal level. These Acts govern all types of co-operatives, except for credit union institutions (financial co-operatives), which are governed by separate legislation. The nature of the co-operative business model and how they operate is defined by these Acts.

Understanding the co-operative model: Principles and types of shares

Co-operatives are businesses jointly owned by their members who use its products or services. They combine social and economic objectives while embodying principles such as equality, solidarity and sustainability. This model is based on collective and participatory management, where each member has an equal vote in decisions, and on equitable redistribution of any surplus generated.

Characteristics of co-operatives

Co-operatives have three key characteristics:

  1. Joint ownership: Members are both owners and users of the co-operative's products and services. Some members, such as investor members or support members, may participate in the co-operative's development without using its products or services.
  2. Democratic governance: The "one member, one vote" principle ensures participatory management. Each member actively participates in the annual general meeting (AGM), where important decisions are made and the board of directors is elected.
  3. Surplus management: Surpluses generated by the co-operative are distributed or reinvested based on the members' needs. At the AGM, they decide the best way to distribute any surplus, whether in the form of patronage returns or by contributing to the co-operative's reserves to ensure its long-term stability.

Types of shares: Member and investment

Co-operatives use two main types of shares to fund their projects and operations: membership shares and investment shares. These financial instruments align with the democratic principles of co-operatives and play an essential role in their development.

  • Membership shares: Mandatory for becoming a member, they allow access to the co-operative and confer governance rights, granting one vote per member. These shares are reserved for members and establish their participation in the governance and surplus of the enterprise.
  • Investment shares: These shares allow the co-operative to raise additional funds, including from non-members, while respecting the principle of democratic governance. Unlike membership shares, they do not confer additional voting privileges, thereby maintaining equity between members. They are a financial tool often used to support growth and strengthen the financial position of a co-operative.

Not-for-profit co-operatives: An important distinction

In Canada, a not-for-profit co-operative is foremost a business model designed to meet its members' needs while respecting the principles of co-operatives. While it is not intended to generate profits for third parties, it must nevertheless be cost-effective to be sustainable. The difference between a co-operative and a not-for-profit organization (NPO) is the co-operative's democratic management under the "one member, one vote" principle and joint ownership by its members.

Surpluses generated by a not-for-profit co-operative are not redistributed to members as patronage returns. They are fully reinvested in the organization to fund new projects, support collective initiatives, or strengthen its financial stability.

In this respect, not-for-profit co-operatives embody a unique approach that combines economic efficiency, democratic management, and commitment to the common good.

The Canada Cooperatives Act governs co-operatives, but different provinces, such as Quebec, may have specific rules.

How is a co-operative different from other business forms? Comparison table

Co-operative corporations Share capital corporations Not-for-profit corporations
Ownership
Members hold membership shares, which they buy to contribute to the co-operative and participate in decisions. Shares must be issued in the name of the person who holds them, representing a portion of ownership in the business. Not-for-profits do not issue shares. Their members may play an active role in decision-making and governance but are not owners.
In general, the value of a membership share remains stable and it can only be bought back by the co-operative at its original price. Some co-operatives also issue investment shares, which may have a different value and may be issued to members or non-members. A common share may increase in value, and a shareholder may sell his or her shares to another person at an agreed upon price, unless restricted by articles of incorporation. Generally, anyone can be a member on payment of a fee and in accordance with the requirements of the articles and by-laws. Members' shares or contributions have no market value.
A member's ownership is limited to the amount of the membership shares he or she holds in accordance with the co-operative's articles. A shareholder's ownership is limited to the value of the shares he or she holds. Members do not have ownership in the not-for-profit organization but may be involved in management in accordance with the articles.
Directors
A co-operative must have at least three directors or any greater minimum number that is set out in the articles, who must hold membership shares. The articles may set out a greater number of directors and may include non-members. A corporation's board of directors consists of one or more directors. Corporations that report to a securities commission shall have not fewer than three directors, two of whom are not officers or employees of the corporation or its affiliates. A not-for-profit corporation's board of directors shall have one or more directors. A soliciting corporation shall not have fewer than three directors, two of whom are not officers or employees of the corporation or its affiliates.
Members elect directors. The articles of the co-operative may permit holders of membership shares, or in some cases, investment shareholders to elect certain directors, or to determine a percentage of directors to be elected. Directors are elected by shareholders as prescribed by the type of share that they hold. Members elect directors.
Directors must act with integrity and in good faith, and in the best interests of the co-operative, by exercising care, diligence and skill. Every director must act with integrity and in good faith, and in the best interests of the corporation, by exercising care, diligence and skill. Directors must act with integrity and in good faith, and in the best interests of the corporation, by exercising care, diligence and skill.
Voting
Each member is entitled to only one vote at a general meeting, regardless of the number of shares he or she holds. A shareholder has a number of votes based on the type of share they hold in the company. Generally, each member of the organization is entitled to one vote.
To facilitate representation, some co-operatives use a delegate structure where one delegate can represent multiple members from a district. Legislation does not permit delegates. Legislation does not permit delegates.
No proxy voting allowed. A shareholder may be permitted to vote by proxy for other shareholders. Proxy voting is permitted for absent members.
Holders of investment shares have restricted voting rights compared with holders of membership shares. Shareholders have voting rights in accordance with the terms of the shares they hold. All members have the right to vote during meetings.
Sharing in the surplus
Co-operative legislation may limit or prohibit the payment of interest on membership share capital, because they represent member participation. However, it is possible to pay interest on investment shares, which are intended to generate financial performance. There is no limit on share dividend. Not-for-profit corporations are not authorized to issue dividends or payments of capital to members.

Surpluses may be paid into the reserve or to members in the form of patronage returns proportional to each member's use of the co-operative.

Interest may be paid on investment shares, with a ceiling set out in the articles.

 Profits may be distributed in the form of dividends according to the provisions for each specific class of shares. They can also be reinvested in the company. The value of shares reflects the net value of the corporation. Surpluses may not be distributed to members. They must be allocated to the indivisible general reserve of the organization.
Some co-operatives (housing, health and day-care) are structured as non-profit entities and do not distribute surpluses to members. N/A N/A
Some provincial legislation may stipulate that the general reserve is indivisible and inalienable, meaning that it cannot be shared among members. In case of dissolution, a portion of this reserve can be transferred to other co-operatives. Shareholders may benefit from the distribution of assets if the corporation is liquidated, in accordance with the rules and regulations in effect. In case of dissolution, the remaining assets must be used for similar purposes or transferred to other not-for-profit organizations, but not redistributed to members.

Note: This comparison table is generally based on federal corporate statutes (Canada Cooperatives Act, Canada Business Corporations Act, and Not-For-Profit Corporations Act) and may vary by jurisdiction. The purpose of this tool is solely for general comparison and is not intended to be used as legal advice on corporate structures. It is recommended to seek legal counsel for your specific business needs.

Converting a business into a co-operative: An option for succession and business acquisition

What is co-op conversion?

Co-op conversion is a process where an existing business chooses to become a co-operative. This model makes it possible to meet the needs of stakeholders, such as employees, clients and community members, by giving them democratic control over the business while preserving its economic model.

There are many reasons for converting a business into a co-operative: to ensure its sustainability, to encourage more inclusive and democratic management, or to give employees and other stakeholders the opportunity to actively participate in management. This model is particularly suitable for businesses that want to uphold social objectives while remaining economically viable.

Conversion process

The conversion process involves a number of steps, including assessing the benefits of a co-operative, mobilizing stakeholders, and drafting adapted articles and by-laws. Businesses that convert into co-operatives must also meet specific legal requirements, such as governance and financing.

Co-op conversion is an excellent option for ensuring sustainable and equitable management adapted to the needs of the community while preserving the economic aspect of the business.

 

Values and principles of co-operatives

Core values of co-operatives

Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. They believe in the ethical values of honesty, openness and respect for others, with a human-centred economic model.

Operating principles of co-operatives

Co-operatives follow principles for equitable and democratic management. These principles, which guide how co-operatives put their values into practice, were adopted in 1995 in the International Co-operative Alliance's Statement on the Co-operative Identity. They are:

1st principle: Voluntary and open membership

Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.

2nd principle: Democratic member control

Co-operatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Each member has equal voting rights ("one member, one vote") and elected representatives are accountable to the membership.

3rd principle: Member economic participation 

Members contribute equitably to, and democratically control, the capital of their co-operative. Part of that capital is usually the common property of the co-operative. They usually receive limited compensation, if any, on capital subscribed as a condition of membership. Surpluses are used to develop the co-operative, set up reserves (at least part of which would be indivisible), distribute patronage returns to members in proportion to their transactions, and support other activities approved by the membership.

4th principle: Autonomy and independence

Co-operatives are autonomous organizations controlled by their members. They maintain their autonomy even when entering into agreements with other organizations or raising capital from external sources, by doing so on terms that ensure democratic control by their members.

5th principle: Education, training and information

Co-operatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their co-operatives. They inform the general public – particularly young people and opinion leaders – about the benefits of co-operation.

6th principle: Co-operation among co-operatives

Co-operatives serve their members most effectively and strengthen the co-operative movement by working together through local, national, regional, and international structures.

7th principle: Concern for community

Co-operatives work for the sustainable development of their communities through policies approved by their members.

Source: International Co-operative Alliance, 2024.

Structure of a co-operative: A democratic and participatory business model

A co-operative is a democratically managed economic enterprise, where members participate actively in decision-making. They influence how the enterprise is managed by participating in general meetings, where they elect representatives and propose changes.

Articles of incorporation

The articles of incorporation are foundational documents establishing the legal basis of a co-operative. They set out essential information such as the name of the co-operative, the location of its headquarters and the rights of its members. If major changes must be made, such as a merger, member approval is required.

The articles include information such as:

  • The name of the co-operative and the location of its headquarters.
  • Any restrictions of business or membership classes.
  • Membership shares capital and member rights.

Articles and by-laws: The legal basis

The articles and by-laws define the internal rules of the co-operative. They explain:

  • Requirements for becoming a member and for terminating membership.
  • The decision-making process, including mechanisms such as general meetings and the role of the board of directors.
  • The responsibilities of members and managers, to ensure clear joint governance.

The democratic structure of a co-operative

The co-operative model is based on a fundamental principle: one person, one vote. This guarantees transparent management and ensures member participation.

  • The annual general meeting (AGM) is the opportunity for members to get together and make key decisions for the co-operative, such as:
    • Amending by-laws.
    • Electing members of the board of directors.
    • The future strategic direction of the co-operative.
  • The board of directors is responsible for defining broad strategic objectives and ensuring that decisions are in line with the co-operative's values and mission.
  • The general management handles day-to-day operations, ensuring continual oversight under the supervision of the board.

With this structure, co-operatives combine economic efficiency and democratic governance. The articles and by-laws define not only the operating framework, but also how members can actively contribute to decisions. This creates an environment where transparency and inclusion are at the heart of each decision, giving every member an important voice in the future of the co-operative.

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