Author: Jenni Mattila
Interest in renewable energy projects is growing, as communities choose to respond pro-actively to climate change. However, the success of these projects will depend very much on their legal and financial structures.
A corporate structure, with a sound business plan and financial model, is the starting point for any successful community venture. The law provides certain corporate forms as the means by which these projects can be established and we've outlined the main ones below.
Co-operatives
A co-operative can be owned and controlled by a community of people. It's usually established by the people who will benefit from using its services. Unlike a company, the objectives of the co-operative must align with those of its members in order for it to be successful.
A co-operative is similar to a company in that it's a ‘body corporate’. This means:
- liability is limited to any unpaid value on shares
- it has a separate legal identity from its shareholders
- it has all the powers of a legal person.
Co-operatives are governed by their own legislation, the Co-operatives Act, and the responsible regulator is the Registrar of Co-operatives. They are not governed by the Corporations Act and the relevant regulator is not ASIC.
The co-operative model can meet the needs of community-owned renewable energy projects. In fact, this model has a long history of success. There are irrigation co-operatives in Australia, which own and operate infrastructure worth hundreds of millions of dollars on behalf of local communities (Harvey Water and Coleambally Irrigation).
Communities generally establish co-operatives to benefit the community. For example, by bulk-buying goods, or buying and sharing equipment on behalf of members. Community members can achieve discounts through purchases made by the co-operative, and the co-operative can achieve higher prices for the sale of the members’ own goods and services.
You can also use co-operatives to set up community renewable energy projects that would not otherwise exist. These projects encourage community members to use green energy and cut their energy bills by offering rebates and group discounts. Or, the community may receive dividends from a project based on the amount of money invested.
The core values of a co-operative are quite different to those of a corporation. A corporation’s main objective is to create profit for its shareholders. This is unlike co-operatives who want:
- open membership
- democratic control
- co-operation among the members
- to benefit the community.
Before you form a co-operative, you need to provide the Registrar with a Disclosure Statement (this is a bit like a short form business plan) and draft rules. The rules set out how you intend to operate.
Once you've formed the co-operative, the proposed members apply for membership. They're allotted shares and elect the Board of Directors. Community infrastructure co-operatives are run by their board and management. The board sets policies and establishes the business plan and sinking funds while the management deals with the business day to day. Directors have the same duties, obligations and responsibilities as the directors of a limited company. That is, they:
- exercise care and diligence
- act in good faith
- avoid conflict with the interests of the co-operative.
Unlike a company, to be a director of a co-operative you must also be a member shareholder. There are a limited number of positions for independent directors as for every three member directors there may only be one independent non-member director.
Infrastructure co-operatives
Infrastructure co-operatives have to do asset maintenance and renewal forward planning over the entire life of the infrastructure. In the case of irrigation co-operatives, the plan is a 50 to 100-year forward projection of infrastructure costs. In the case of wind farms, the projections would be closer to 25 to 30 years. This is an important additional obligation placed on directors and management and therefore co-operative rules normally require infrastructure directors to undergo formal director training and ongoing industry education programs.
Trading and non-trading co-operatives
Co-operatives can be set up as a ‘trading’ or a ‘non-trading’ organisation. Renewable energy co-operatives tend to be trading co-operatives as they sell energy generated by the co-operative to third party distributors. A trading co-operative can share any unused or surplus funds with its members. However, to be classed as a co-operative for tax purposes, at least 90% of the business must be conducted with its members alone. Under the Income Tax Act 1936, the co-operative’s income distributed to the members can be deducted against its taxable income.
A non-trading co-operative will reinvest its profits or surplus funds back into the business to support the development of the co-operative. Provided the activities of the co-operative are not carried on for the profit or gain of its individual members, it will be classified as ‘non-profit’ for income tax purposes. Accordingly any profits or other funds in a non-trading co-operative should never be distributed to members. A non-trading co-operative is unlikely to be suitable for a trading entity such as a renewable energy producer.
Each state and territory has its own legislation governing co-operatives. The state legislation is consistent throughout Australia with the exception of Western Australia who will adopt consistent legislation later in 2010. The current law governing co-operatives is being revised and there are proposals for a Co-operatives National Law Bill to formally establish a national framework. The plan is that New South Wales will enact the national law in 2010. Other states and territories will then have 12 months to apply the national law or enact consistent legislation.
Active membership
Being a member shareholder of a co-operative requires something more than the equivalent shareholder of a public company. Co-operatives are unique in that they generally require 'active membership' on the part of the member. In this respect, the member is obliged to undertake active participation, support or a relationship with the primary activity of the co-operative. The ‘primary activity’ of the co-operative needs to be specified in its rules in order to identify the aim of the co-operative’s business or the community goal to be achieved. The manner and extent of the participation required of each member will usually be set out clearly in the rules of the co-operative as tests to gauge 'active membership'.
If a member fails to maintain an active membership with the co-operative, the board has to cancel that person’s membership and that person’s share in the co-operative will be forfeited. In practical terms, the definition of 'active membership' depends on the project itself. For example, it may be that a member simply needs to buy from the co-operative on a regular basis (that is, buy water from an irrigation project or electricity from a wind farm project).
Co-operatives are democratic institutions and each member has one vote only, irrespective of how many shares they hold. This is because the benefit to members is not primarily a return on share capital. The benefit is derived from the link between the objectives of the co-operative and the interests of the members.
Public companies
A public company is another way to establish, own and operate a project on behalf of community members. The main advantage, as with the co-operative model, is that the liability of each member is limited to the extent of the value of their shareholding in the company.
With limited companies, an important factor to consider is membership. A private or proprietary company can have no more than 50 non-employee shareholders. If there are more than 50, the company must be a public company. On the basis that most community renewable energy projects would require capital from over 50 memberships, public companies are often the more appropriate form of corporation.
Structurally, co-operatives and public companies can be quite similar but their operating principles are very different. The principal aim of a public company is to provide a return on share capital to its member shareholders.
In general terms, a public company is free to raise capital from anyone and there is not necessarily a link between the company’s business and its shareholders. There are no 'active membership' provisions in a public company, which essentially allows the member shareholders to engage with the company or the project as often or as rarely as they desire. This may be an important consideration for those members of the community who wish to take a less involved approach.
In terms of reporting obligations and filings, public companies have quite onerous and costly requirements to make ongoing administrative filings with ASIC, and to prepare financial, auditors and directors' reports in relation to the activities of the company. Co-operatives do have similar reporting obligations with the Registrar of Co-operatives, but they tend not to be as costly or onerous. There's also a significantly higher cost involved in meeting the requirements of the Corporations Act in relation to preparing company disclosure information for the allotment of shares to prospective shareholders. Company disclosure documents tend to cost around $50,000 to $100,000 in legal and financial advisory fees, which is significantly higher than the costs for the equivalent co-operative disclosure documents.
Public companies can carry on their business within and between states in Australia, however at present a co-operative has to register in each state it intends to operate. The proposed Co-operatives National Law is likely to reduce these restrictions on co-operatives operating across borders.
With respect to tax, companies are not entitled to the same tax relief as co-operatives. A trading co-operative, as long as it qualifies as a co-operative for tax purposes under the 90% rule, can make a deduction against its taxable income in respect of distributions to its members.
Trusts
A trust can be established by members of a community or the ‘beneficiaries’ to own and operate a particular community project. The intended participants will need to enter into a trust deed and the deed will contains details of how the trust is to operate. Property, assets and equipment involved with the project may be held by the trust on behalf of the beneficiaries. The trustees are appointed and given specific powers under the trust deed, outlining how they may exercise control over the assets and operations of the project on behalf of the beneficiaries.
There are some difficulties with this model:
- Trustees are appointed and not elected by the beneficiaries. Although the trustees have responsibilities to the beneficiaries, beneficiaries have little direct input in how the trust is operated.
- There are limited tax breaks involved in trusts.
- Beneficiaries cannot easily amend the trust deed as it requires the unanimous agreement of the beneficiaries.
Incorporated associations
Incorporated associations are separate legal entities under the relevant State Associations Incorporation Act. Members of an incorporated association are, subject to the powers of the association's constitution, capable of entering into contracts and doing things on behalf of other people in the association. However, because an incorporated association has limited powers and is prohibited from trading and distributing surpluses to members, it's considered to be an unsuitable corporate form for a renewable energy project.
Conclusion
An important first step for the community is to agree the corporate structure which would best advance your community project, at the same time as meeting the requirements of your participant members. You can adapt each structure to meet the individual needs of your project, but it's important to get professional financial, legal and tax advice with this. Co-operatives and public companies tend to provide the most successful outcomes for community projects, however each has benefits and drawbacks. In general, the co-operative structure has been popular with local communities, who seek benefits other than simply a return on share capital. However, corporate or institutional investors often prefer the public company structure, as it focuses on generating a return on their share capital.
Important note
This article is for informative purposes only, and is not intended as legal advice. If you're looking into forming and incorporating a co-operative, seek independent legal advice regarding any aspects of this article.
More information
Australian Government page on choosing a business structure