Co-operatives and partnerships: What small businesses need to know

Although most entrepreneurs opt to run small businesses alone, there are other models that can help lower operating costs and workload.

A sole proprietorship can be faster, easier and less expensive to set up than any other business structure. Still, it has its drawbacks. You're working alone and, should something bad happen, there is no one else to take responsibility or lend a hand.

That's why it's wise to research options, such as partnerships and co-operatives, before venturing out to register your business. Consider the benefits and disadvantages, and then determine which one is best suited for you.

What is a co-operative?

A co-operative, in its purest form, is a democratically controlled business owned by people with common needs. Each member is usually entitled to one vote regardless of their financial investment in the co-op.

Unlike private businesses, where profits are reinvested in the business or distributed to the owners, a co-op returns any earnings to its members in proportion to their contributions to the organization. Co-operatives are usually financed through membership fees, common stocks and bank loans. Many finance themselves by pooling members' resources, which avoids the need to go in search of outside capital.

Co-ops employ more than 150,000 people in Canada. According to the federal government's Co-operatives Secretariat, they are a particularly important component of the financial services, agriculture and food retail sectors.

A co-operative can help entrepreneurs achieve things they might not be able to do alone by combining their marketing and buying power with that of others, says Catherine Bolduc, communications advisor for the Co-operatives Secretariat.

Joseph Heath, a professor of philosophy and public policy and governance at the University of Toronto, is more reserved. He says co-ops are fine for some businesses, but adds that people should remember these egalitarian structures can fall apart easily.

Heath says one of the problems with cooperatives is that, "it's difficult to maintain a hierarchy and the workplace has always been hierarchal." All members within a co-operative usually have equal say, regardless of their investments, for example. As a result, conflicts of interest sometimes develop because those who make big investments find it unfair that their votes are equal to those with minimal financial investments.

Heath says small-business entrepreneurs who want to team up with others without facing this type of potential conflict often choose to form partnerships instead.

What is a business partnership?

A partnership, in its purest form, is a business that joins two or more co-workers. It is easy to form a simple verbal agreement is all that's needed under Canadian law. However, if money and property are at stake as they are in most businesses - a written formal and legal agreement should be made.

There are two types of partnerships. In a general partnership, all partners share in the gains and losses of the business. The drawback is that all members have unlimited liability for all partnership debts.

In a limited partnership, one or more general partners have unlimited liability and run the business for the limited partners. Limited partners' liability for business debts is restricted to their contributions to the partnership.

Co-operative or partnership?

Gisela McKay, managing director of BusinessPartnerships.ca, says there is no one-size-fits-all business model. What works best really "depends on the type of business," she says.

"If your business requires the skills of two people with different niches, then a partnership will work best for you," she says.

A business that requires a wide range of skills, on the other hand, might better be served by drawing on the expertise of a co-op.

However, one simple step can help a business succeed. Regardless of whether you're partnering with a business acquaintance, a long-time friend or a close family member, make sure your expectations are clearly stated in writing, McKay says. Don't assume you both have the same goals and management strategy.

"Spell it out up front," she says. "Let them know what your responsibilities are and what their responsibilities are, so each of you know your expectations and there aren't any gaps between what's in your head and what's in the other person's."