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What is a Cooperative Society?

The cooperative type of business organization developed rather late and has assumed importance gradually. It started developing to mitigate the limitations of other forms of organization and substitute the profit-motive with service-motive.

Thus, it is a special form of business ownership that differs from all other forms we have discussed so far. In this type of organization, the capital is supplied by individuals who buy shares similar to those of the company. Each shareholder has one vote in the management of the business, regardless of the number of shares he owns.

Surplus earnings are distributed to the shareholders in the form of dividends, which are usually based on the volume of the shareholders’ purchases from the cooperative in the case of consumers’ cooperative store, or in proportion to the goods delivered for sale to the cooperative society in case of producer’s cooperative store.

The primary motive behind cooperatives is to supply goods and services at a cost lower than they could be obtained from businesses that are operated by the owner for profit.

The International Labour Office defines a cooperative as “an association of persons, usually of limited means, who have voluntarily joined together, to achieve a common economic end through the formation of a democratically controlled business organization, making equitable contributions to the capital required and accepting a fair share of risks and benefits of the undertaking”.

Features of Cooperative Society

The features of cooperative society are as follows:

1. Voluntary Association
2. Equal Voting Rights
3. Democratic Management
4. Service Motive
5. Limited Return of Capital
6. Separate Legal Entity
7. Equitable Distribution of Surplus
8. State Control

Voluntary Association

A cooperative organization is a voluntary association of persons. Its voluntary character is one of the guiding principles of a cooperative organization. It implies principles of cooperative organization.

It implies that every individual, irrespective of his caste, creed, religion, sex, etc. is free to become a member of the cooperative and leave it at any time, after giving proper notice. It also implies that one should be forced or coerced to join it.

Equal Voting Rights

In a cooperative form of organization, each member has equal voting rights. This means that every member irrespective of his holdings of shares or status is given one vote. A rich person cannot hold control of the cooperative organization on the basis of his wealth. All members have an equal voice in the management of the organization.

Democratic Management

Democracy is the rule of cooperatives. In a cooperative society, since each member has equal voting rights, its management is essentially democratic. All the members of a society elect a body of persons to conduct and control the work of the society.

The members frequently meet and give guidelines to their executives. Thus, a cooperative organization is an emblem of true democracy.

Service Motive

Unlike, earlier forms of business organization, the primary objective of establishing a cooperative form of organization is to render maximum service to its members. Here, the aim is not to earn profits.

The cooperative societies do earn a nominal amount of profit to cover administrative expenses. Thus, cooperatives promote social justice.

Limited Return of Capital

The capital invested in a cooperative is not given an undue preference. A limited rate of interest is allowed; because capital appreciation is not the main motto of co-operation.

Under the existing law in India, a maximum of 10 per annum can be given as a return on capital contribution to the cooperative. This is the first charge on surpluses of the society.

Separate Legal Entity

A cooperative society must get itself registered under the Cooperative Societies Act, of 1912, or under the Co,-Cooperative Societies Act of a State Government. Like a joint stock company, it is a separate legal person, it can own property, enter into contracts, sue, and be sued in its own name.

Equitable Distribution of Surplus

Unlike other forms, of business organization, the surplus earned by a cooperative society is distributed among its members equitably on a basis other than the capital contribution of the members.

As per the law governing Cooperative organizations, 25 percent of its profits after meeting its trading expenses and paying a fixed rate of dividend on capital not exceeding 10 percent is to be transferred to general reserves.

State Control

The activities of the cooperative societies are subject to certain rules and regulations framed by the Government. There are many formalities that are required to be completed to get the society registered under the Cooperative Societies Act, 1912, or the State C-operative Societies Act of the particular State.

The audited accounts and affairs of the society are inspected by the Government periodically. Besides this, a cooperative society has to submit annual reports and accounts to the Registrar of Cooperative Societies.

Advantages of Cooperative Society

The following are the advantages of a cooperative society:

1. Easy to Form
2. Democratic Management
3. Limited Liability
4. Perpetual Succession
5. Economic Operation
6. State Patronage
7. Social Benefits
8. Scope for Internal Financing

Easy to Form

As compared to a joint stock company, it is easy and simple to form a cooperative society. The legislative formalities required for its formation are not many. In addition to this, it is economical, as the expenses involved in its formation are comparatively less.

Democratic Management

A cooperative society is managed in a truly democratic way. All the members have a say in their work. They elect a managing committee on the basis of “one-man-one-vote”. This committee looks after the working of the organization in the general interest of all the – members. It is not controlled by vested interests only.

Limited Liability

The members’ liability remains limited to the extent of capital contributed by them.

Perpetual Succession

Unlike sole proprietorship and partnership, it does not cease to exist on the death, lunacy, insolvency, permanent incapability, etc. of its members. Like a company it has perpetual succession; because it has a separate legal entity that is not affected by the changes among its members.

Economic Operation

Working in a cooperative society is quite economical. Several expenses are reduced due to the elimination of the middlemen, voluntary services provided by its members, or services provided at lower salaries, and also because there is no need to maintain huge stocks.

State Patronage

The cooperatives have been adopted by the Government as an instrument of economic policy. Therefore, they are assisted in various ways by the Government so as to make them a success.

Social Benefits

Co-operation is a philosophy and a way of life. It helps to educate members to live together. It teaches them thrift, self-help, moral values, and self-government.

It promotes the spirit of cooperation in place of the spirit of competition. It enables them to serve others rather than exploit others. Thus, it raises the standard of living of the members and also raises the moral standards of the masses.

Scope for Internal Financing

Since a cooperative society has to create some compulsory reserves out of its profits, there is enough scope for plowing back profits in such organizations. This source of internal finance can be utilized for the modernization and growth of the cooperatives.

Disadvantages of Cooperative Society

The following are the disadvantages of cooperative society:

1. Limited Resources
2. Limited Size
3. Lack of Secrecy
4. Lack of Motivation
5. Inefficient Management
6. Internal Quarrels and Rivalries
7. Excessive Government Interference

Limited Resources

The cooperatives are not able to raise huge amounts of capital; because their membership comprises persons of limited means and is limited to local areas. The principle of one-man-one-vote and limit on division also subdue the enthusiasm of their investing members.

Limited Size

Since the principle of cooperation cannot be extended beyond a certain limit, the cooperatives are likely to fail if they choose to expand their organization like big joint stock companies. Large-scale production or distribution is not suitable for cooperative organizations.

Lack of Secrecy

A cooperative society, being a separate legal entity is required to disclose fuller information to its members. Thus, the secrets of the business cannot be maintained.

Lack of Motivation

Since there are restrictions on the rate of dividends, the members of the managing committee do not feel motivated enough to do their best to make the organization a success.

Inefficient Management

A cooperative society is managed by a managing committee which is composed of elected members who are not necessarily experts in management. Moreover, they are not in a position to attract professional managers; because they are not in a position to pay high salaries to them. Thus, the cooperatives in general, suffer from inefficient management.

Internal Quarrels and Rivalries

The members of a cooperative are very enthusiastic in the beginning; but after the initial zeal is over they start showing indifference towards their organization. Often, they quarrel on petty matters.

The normal working of the cooperative is affected due to factionalism among the members. His further weakened by power politics and castism, etc.

Excessive Government Interference

The cooperatives are exposed to a considerable degree of regulation by the cooperative department. A certain degree of control is welcome, but too much of it and unwanted interference acts as a deterrent to the voluntary nature of cooperatives; it goes against the operational flexibility of the cooperatives and, thus, affects the efficiency of management of the cooperatives.

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