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Cooperatives and the Nonprofit Sector in South Africa

Monday, July 2, 2007 - 14:34
A Guide to Understanding Co-op RegistrationThis document has been prepared by the Non-Profit Consortium as a commentary on cooperatives and the nonprofit sector.



A Guide to Understanding Co-op Registration

This document has been prepared by the Non-Profit Consortium as a commentary on cooperatives and the nonprofit sector. It should not be used as a substitute for qualified legal advice.

Increasingly important as a vehicle of sustainable economic development, cooperatives represent a practical form of legal incorporation for a number of community organisations that wish to return benefits to their membership.

Though cooperatives do not operate in the same way as a company, they are not nonprofits; there are different implications for organisations that register as nonprofits and those that choose the cooperative model as well as critical differences in their membership, structure, and distribution of resources.

What is a cooperative?
A cooperative is in broad terms a voluntary, democratic enterprise in which members with a common economic, social, or cultural purpose pool their resources to provide for their own benefit. Cooperatives are sometimes described as businesses owned by their beneficiaries. Cooperatives are often formed on the basis of ideals of self-help, democracy, self-responsibility, equality, and solidarity. Membership is open to anyone satisfying non-discriminatory membership requirements, though many cooperatives are formed around common goals or sectoral interests. To join, a member either donates resources or purchases shares in the cooperative. The purchase of shares affords each member a vote in the management of the cooperative; cooperatives are democratically organised and therefore follow a one-member, one-vote model. Governed by the will of the majority of shareholders, the cooperative invests its pooled resources and then returns profits to its members and to the cooperative reserves for future investment.

There are many different types of cooperatives, including agricultural cooperatives, consumer cooperatives, marking and supply cooperatives, housing cooperatives, financial services cooperatives, social cooperatives, burial society cooperatives, service cooperatives, and workers’ cooperatives.

What is the purpose of a cooperative?
Cooperatives are recognised as a viable form of economic growth and sustainable development for disadvantaged, vulnerable, and marginalised groups as well as those with limited resource capabilities. The creation of an economy of scale in a cooperative improves the odds of success and establishes a separate legal personality to represent 3 the members’ interests, minimising the financial risk involved in starting a small enterprise and providing a means for members to achieve long-term ownership of the company’s sustainable activities.

What governs cooperatives in South Africa?
South African cooperatives are subject to the Cooperatives Act of 2005. The provisions of this Act aim to create a legal and institutional framework that encourages the registration and development of cooperative enterprises and increased support for cooperatives from government agencies. The Cooperative Policy aims to promote the ideals of self-help and social responsibility through the cooperative model. In countries like Italy and the United Kingdom, cooperatives have improved the sustainability of community enterprises and opened the economy to disadvantaged and vulnerable social groups.

The Cooperatives Act sets out the following principles for the establishment of a cooperative in the Republic of South Africa

1. Membership must be open to all those who can use the services of the cooperative and are able to accept the responsibilities of membership
2. Members must have democratic control of the cooperative.
3. As far as possible, the members of the cooperative must provide its resource capital.
4. Returns are to be paid out to members in respect of investment must be limited to a maximum percentage outlined in the cooperative constitution.
5. Five per cent (5%) of the cooperative’s surplus per annum must be set aside as reserves for future cooperative investments; this surplus may not be distributed to any members.
6. Cooperatives must provide education and training for their members.

Cooperatives in South Africa may incorporate on either primary, secondary, or tertiary levels. Primary cooperatives are made up of individuals and provide employment or services directly to their members. Secondary cooperatives consist of primary cooperatives that incorporate on a sectoral basis. Tertiary cooperatives combine several secondary cooperatives performing similar activities in order to liaise with government bodies responsible for their sector of enterprise.

How do cooperatives register?
Persons wishing to register a cooperative regardless of its type or level must submit an application to the Registrar of Cooperatives located at the Companies & Intellectual Properties Registration Office (CIPRO). This application should include a constitution, a listing of founding members and directors, and a fee covering the registration process.

Once registered, a cooperative will receive a certificate and registration ID number from the Registrar and must submit any changes or amendments to its constitution to the Registrar for approval. Cooperatives are required to keep records of their constitution, 4 accounts, minutes, members, directors, and other details available for members or government officials at all times.

What is the difference between a cooperative and a nonprofit?
There are a number of differences between cooperatives and nonprofits, but the essential distinctions refer to their intended class of beneficiaries, their funding, and their legal status with regards to taxes and public benefit. Cooperatives primarily provide benefits, employment, services, and revenues to their membership; a member of a cooperative is entitled to a portion of all of the cooperative’s resources and profits and invests in the enterprise with the expectation of receiving returns. This may mean access to health and financial services, education, or other benefits, but those benefits are only available to members of the cooperative and will be governed by the democratic interactions of its members. A nonprofit organisation (NPO) provides its services to a broad class of beneficiaries that, by definition, does not include its members. Where the bulk of a cooperative’s resources would come from pooled member capital or loans, nonprofit organisations often fund their operations through public donations and grants. Cooperatives are not eligible for approval as public benefit organisations. Only voluntary associations, charitable trusts and section 21 companies can in terms of the Income Tax Act be approved as public benefit organizations.

The Cooperatives Act says that social cooperatives are “nonprofit;” does this mean that a social cooperative can be registered under the NPO Act (1997)?
The wording of the Cooperatives Act with regard to social cooperatives mentions that these organisations are “nonprofit,” but this seemingly refers to the fact that they provide services to their members such as care of children, the sick, and the elderly. A cooperative does not qualify for registration in terms of the NPO Act. Under the NPO Act, a “nonprofit organisation” means a trust, company or other association of persons

(a) established for a public purpose: and
(b) the income and property of which are not distributable to its members.

Are cooperatives eligible for public benefit status?
No. Public benefit status in South Africa is conferred upon organisations that fall under the provisions of Section 30 of the Income Tax Act.

To qualify as a public benefit organisation (PBO) under Section 30, an association must meet the following criteria

1. It must be a Section 21 Company, a charitable trust, or a voluntary association, .
2. Its objectives must be to carry on one or more public benefit activities; it cannot pursue any other objectives.
3. The activities must be carried on in a not-for-profit manner and with altruistic or philanthropic intent. No activity can promote the economic self-interest of any fiduciary or employee, other than reasonable remuneration to employees or officers.
4. Finally, at least 85 percent of such activities, measured either by cost or by time, must benefit persons in South Africa. Under ITA §30(1)(b)(iii), out-of-country activities can be offset by out-of-country donations. Specifically, an organization can subtract donations received from non-residents (as well as receipts and accruals derived directly or indirectly from those donations) from costs incurred to benefit persons outside the Republic, when determining whether its in-country activities fall below the 85 percent threshold.
5. Each of the organization's activities is for the benefit of, or widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups); or
As cooperatives provide benefits primarily to their membership they are not eligible for PBO status.

Are there tax benefits for cooperatives?
Cooperatives are not tax exempt and may access tax benefits as small business corporations. A co-operative is treated in the Income Tax Act as if it is a company. It may accordingly access the taxation rates for small business corporations which are currently as follows:

Tax rates from 1 March 2007:
The first R0- R40 000 0%
R40 001- R300 000 10%
R300 000 and above R 26 000 plus 29% of the amount by which taxable income exceeds R300 000

The main qualifications for small business corporations are

  • Members must be natural persons and must hold the entire shareholding during the entire year of assessment.

  • Gross income for the year of assessment may not exceed R6-million.
  • Not more than 20% of the gross income (receipts, accruals and all capital gains) of the company or close corporation must consist collectively of investment income and income from the rendering of a personal service.

    • Shareholders or members may not at any time during the year of assessment hold any shares or interest in any other company or close corporation (other than a listed company, unit trust, share block company or sectional title body corporate).

 - By Catherine Parnell for the Non-Profit Consortium.