Cooperative Society

Management > General Management > Forms of Business Organizations > Cooperative Society

Cooperation is the process of groups of individuals working or acting together for common, mutual, or some underlying benefit or purpose, as opposed to working in competition for selfish benefit. The cooperative society is a voluntary association of persons, who join together with the motive of the welfare of the members. The aim of a cooperative society is to protect the economic interests of members in the face of possible exploitation at the hands of middlemen obsessed with the desire to earn greater profits. The working of a cooperative society is governed by the Cooperative Societies Act, 1912.

Features of Cooperative Society:

• Easy Formation: The process of setting up a cooperative society is simple.  A voluntary consent of at least ten adult persons is required to form a cooperative society. The capital of a society is raised from its members through the issue of shares. The society acquires a distinct legal identity after its registration. Document required for registration of a cooperative society is easy to compile and comply.
• Voluntary Membership: This is the first cardinal principle of co-operation. The cooperative society itself is a voluntary association, hence the membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. There cannot be any compulsion for him to join or quit a society. As per the procedure, a member is required to serve a notice before leaving the society, there is no compulsion to remain a member. Membership is open to all, irrespective of their religion, caste, and gender. On leaving the society, shares are not transferable to other persons, although they are automatically transmitted to heirs on the death of a member. The right of membership, however, is not absolute. This can be denied if it is likely to be prejudicial to the interests or the existence of society. Similarly, any member can be expelled by the managing committee for similar reasons, and this will not be considered a breach of the principle of open membership.
• Legal Status: The setting up and working of a cooperative society is governed by the Cooperative Societies Act, 1912. Registration of a cooperative society is compulsory. Hence a cooperative society has a separate identity and it is distinct from its members. Due to separate identity, the society can enter into contracts and hold property in its name, sue and be sued by others. Similarly, it is not affected by the entry or exit of its members.
• Finances: The finances of a cooperative society are contributed by members through the purchase of shares. Generally, cooperative societies are formed by the weaker and poorer sections of the society, their capital collections are meager. The government also lends financial support in the form of loans from the State and Central Co-operative Banks under some schemes.
• Limited Liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear.
• Control: Co-operation is democracy in action.  In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. Since most of the co-operatives operate on a local scale, the meetings of the members are well attended, and this puts the managing committee under a lot of close supervision.  The right to vote, the concept of one man one vote and no proxies at the time of election give the members a chance to choose the members who will constitute the managing committee and this lends the cooperative society a democratic character. Again, to strengthen democracy, some issues are not decided by a bare majority alone, but by two- thirds or three-fourths majority. Regular training programs and frequent meetings of all members, managing committee, and subcommittees are conducted so that the maximum number of members is to be associated.
• Service Motive: The main objectives of the formation of a cooperative society are mutual help and welfare and not of maximizing profit. This motive of service dominates its working and provide useful services like credit, consumption goods, or input resources to its members and society. If any surplus is generated as a result of its operations, it is distributed amongst the members as a dividend in conformity with the bye-laws of the society.
• Education and Training: Many cooperative societies arrange education and training programs for its members with the purpose of developing co-operation into a well-organized movement.

Merits of Cooperative Society:

• Easy Formation: The process of setting up a cooperative society is simple compared to the formation of a company.  A voluntary consent of at least ten adult persons is required to form a cooperative society. The capital of a society is raised from its members through the issue of shares. The society acquires a distinct legal identity after its registration. Document required for registration of a cooperative society is easy to compile and comply. Similarly, it does not involve long and complicated legal formalities.
• Equality in Voting Status: The principles of ‘right to vote’ and ‘one man one vote’ govern the cooperative society. Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights. This gives a democratic nature to the cooperative society.
• Limited liability: The liability of members of a cooperative society is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts. This defines the maximum risk that a member can be asked to bear.
• Stable Existence: As a cooperative society has a separate identity, it is not affected by the entry or exit of its members. Death, bankruptcy or insanity of the members do not affect the continuity of a cooperative society. A society, therefore, operates unaffected by any change in the membership. Thus cooperative society has perpetual existence.
• Economy in Operations: The members generally offer honorary services to the society. As the focus is on the elimination of middlemen, this helps in reducing costs. The customers or producers themselves are members of the society, and hence the risk of bad debts is lower.
• Tax Advantage: Unlike other forms of business ownership, a co­operative society is exempted from income-tax and surcharge on its earnings up to a certain limit. Besides, it is also exempted from stamp duty and registration fee.
• Government Assistance: Cooperation is an effective tool of socio-economic change and it exemplifies the idea of democracy. Hence, the Government offers a number of grants, loans and financial assistance to the cooperative societies to make their working more effective.

Demerits of Cooperative Society:

• Limited Resources: The finances of a cooperative society are contributed by members through the purchase of shares. Generally, cooperative societies are formed by the weaker and poorer sections of the society, their capital collections are meager. Therefore the funds available with the co-operatives are limited. The low rate of dividend offered on investment and one man one vote principle act as a deterrent in attracting membership or more capital from the members. Therefore the funds available with the co-operatives are limited.
• Inefficiency in Management: Co-operative societies are managed by the managing committee elected by its members. The members of the managing committee who offer honorary services may not have the required qualification, skill or experience.  They may not able to give time to the organization. Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. The lack of managerial skill results in inefficient management, poor functioning and difficulty in achieving objectives.
• Lack of Secrecy: A cooperative society has to submit its annual reports and accounts with the Registrar of Cooperative Societies.  Similarly, open discussions in the meetings of members as well as disclosure obligations as per the Societies Act (7), it is difficult to maintain secrecy about the operations of a cooperative society.
• Government Control: Co-operative societies are subject to excessive government regulation which affects their autonomy and flexibility. In return of the privileges offered by the government, cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc. Interference in the functioning of the cooperative organization through the control exercised by the state cooperative departments also negatively affects its freedom of operation. Adhering to various regulations takes up much of the management’s time and effort.
• Differences of Opinion: Cooperative societies are based on the principles of co-operation and therefore harmony among members is important. Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision making. Personal interests may start to dominate the welfare motive and the benefit of other members may take a backseat if the personal gain is given preference by certain members. Such disputes affect the functioning of the co-operative societies.
• Lack of Interest: The members of the managing committee who offer honorary services may not have much interest in the functioning. The paid office-bearers of cooperative societies do not take an interest in the functioning of societies due to the absence of profit motive. Thus there is no motivation and accountability. As a result, the cooperatives become inactive and ultimately cease to work.
• Corruption: Due to the lack of profit motive there is a possibility of fraud and corruption in management. If the members of the managing committee are corrupt they can swindle the funds of the co-operative society. There may be misappropriations of funds by the committee members for their personal gains. Many cooperative societies closed down because of corruption and misuse of funds.

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