January 11, 2013 12:43
by Brenda Stefanson, PAg
Regional Farm Business Management Specialist
Over the years, groups of farmers have worked together to capture business opportunities, allowing the group to accomplish what the individual group-members cannot do on their own. One of the first of many decisions the group must make as they undertake a business venture, is whether they will form as a corporation or a co-operative. Each of these business structures has advantages and disadvantages.
A corporation is a legal entity that has a separate legal existence from its shareholders and directors. Shareholders and directors are not generally personally liable for the debts, obligations or acts of the corporation. Private corporations are formed by one or more people and cannot sell shares or securities to the general public. Public corporations can issue securities to the public but the corporation must file a prospectus with the Saskatchewan Securities Commission, employ outside auditors and distribute semi-annual financial statements.
There are many advantages to operating as a corporation.
• Limited Liability: Generally speaking, a shareholder is only liable to the extent of his/her investment in the corporation.
• Continuity of Existence: The existence of a corporation is not affected by the death or bankruptcy of a shareholder or director.
• Ownership is transferable: Shareholders can sell or transfer shares to others.
• Tax advantages: Accountants and tax professionals are best equipped to assess the tax advantages or disadvantages of the business structure.
Some of the disadvantages of a corporate structure include:
• Corporations can be costly to form.
• Corporations are closely regulated and require extensive record keeping.
• Shareholder control is based on size of investment.
• A large investor could assume control of the corporation.
• Conflict may develop between shareholders and/or between shareholders and management.
A co-operative is a corporation organized and controlled by its members. Co-operatives are separate legal entities and therefore, share the limited liability and other characteristics with corporations. The democratic principle of “one member, one vote” is the characteristic that sets co-ops apart. Profits of the co-operative are distributed among members as patronage dividends.
The advantages of the co-operative structure include:
• Democratic control: The one member, one vote principle ensures co-operatives are owned and controlled by the people who use them.
• Limited Liability: Members are not liable for the debts, obligations or acts of the co-operative.
• Patronage Dividends: Surplus earnings are distributed as shares or cash to members in proportion to use.
There are some disadvantages to using the co-operative structure:
• Member participation determines the success of the venture.
• Decisions may take longer.
• As with corporations, record keeping is extensive.
• There is the potential for conflict between members and/or between members and management.
• There is less incentive for members to invest additional capital.
Corporations and co-operatives share many characteristics and both have been used successfully by groups of farmers to capture opportunities or solve problems.
For more information on this topic contact your Regional Farm Business Management Specialist at 306-946-3214 or the Agriculture Knowledge Centre at 1-866-457-2377.