DOWNLOAD PDF HISTORY AND ATTRIBUTES OF THE COOPERATIVE FORM OF BUSINESS

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1 Chapter 1 : 10 Important Characteristics of a Co-operative Organization One basic feature which distinguishes a cooperative organisation from other three forms of business ownership is that the primary objective of a co-operative society is to render services to its members rather than to earn profits. Beginnings[ edit ] The cooperative movement began in Europe in the 19th century, primarily in Britain and France. The concurrent labour and social movements and the issues they attempted to address describe the climate at the time. In the decades that followed, several cooperatives or cooperative societies formed including Lennoxtown Friendly Victualling Society, founded in While Schulze-Delitzsch is chronologically earlier, Raiffeisen has proven more influential over time â see history of credit unions. In Britain, the friendly society, building society, and mutual savings bank were earlier forms of similar institutions. Robert Owen Robert Owen â is considered as the father of the cooperative movement. A Welshman who made his fortune in the cotton trade, Owen believed in putting his workers in a good environment with access to education for themselves and their children. These ideas were put into effect successfully in the cotton mills of New Lanark, Scotland. It was here that the first co-operative store was opened. Spurred on by the success of this, he had the idea of forming "villages of co-operation" where workers would drag themselves out of poverty by growing their own food, making their own clothes and ultimately becoming self-governing. William King physician Although Owen inspired the co-operative movement, others â such as Dr. William King â â took his ideas and made them more workable and practical. King believed in starting small, and realized that the working classes would need to set up co-operatives for themselves, so he saw his role as one of instruction. He founded a monthly periodical called The Co-operator, [9] the first edition of which appeared on 1 May This gave a mixture of co-operative philosophy and practical advice about running a shop using cooperative principles. King advised people not to cut themselves off from society, but rather to form a society within a society, and to start with a shop because, "We must go to a shop every day to buy food and necessaries â why then should we not go to our own shop? The Rochdale Pioneers[ edit ] Main article: With lessons from prior failed attempts at co-operation in mind, they designed the now famous Rochdale Principles, and over a period of four months they struggled to pool one pound sterling per person for a total of 28 pounds of capital. On December 21,, they opened their store with a very meagre selection of butter, sugar, flour, oatmeal and a few candles. Within three months, they expanded their selection to include tea and tobacco, and they were soon known for providing high quality, unadulterated goods. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. December Main article: The Co-operative Group The Co-operative Group formed gradually over years from the merger of many independent retail societies, and their wholesale societies and federations. In, twenty years after the Rochdale Pioneers opened their co-operative, the North of England Co-operative Society was launched by individual co-ops across Yorkshire and Lancashire. CWS sold its factories to Andrew Regan in There were allegations of " carpet-bagging " â new members who joined simply to make money from the sale â and more seriously fraud and commercial leaks. Regan was cleared of charges. The episode recharged CWS and its membership base. Its headquarters complex is situated on the north side of Manchester city centre adjacent to the Manchester Victoria railway station. The complex is made up of many different buildings with two notable tower blocks of New Century House and the solar panel-clad CIS tower. Other independent societies are part owners of the Group. This League formally met for the first time during the Co-operative Congress in Edinburgh in a group of 50 women and established Acland as its organizing secretary. Raiffeisen and Schultz-Delitsch developed an independently formulated co-operative model in Germany, the credit union. This organization began to develop international programs, and by the s, a World Council formed. By the s Brigham Young had started applying co-operative ideas in Utah, [17] and by the s, the Knights of Labor and the Grange both promoted member-owned organizations. National Co-operative Business Association. He wrote extensively on co-operative history and philosophy. Mondragon Co-op was founded under the Page 1

2 oppressive conditions of Fascist Franco Spain after community-based democracy-building activities of a priest, Jose Maria Arizmendiarrieta. They have become an extremely diverse network of co-operative enterprises, a huge enterprise in Spain, and a multinational concern. There are also concrete proposals for the cooperative management of the common goods, such as the one by Initiative in Greece. An annual general meeting of a retail co-operative in England, In the UK, co-operatives formed the Co-operative Party in the early 20th century to represent members of co-ops in Parliament. UK co-operatives retain a significant market share in food retail, insurance, banking, funeral services, and the travel industry in many parts of the country. Deregulation of the electricity markets allowed energy co-operative social entrepreneurs to begin to create alternatives to the monopolies in various countries. In France, where an enormous percentage of the power is generated by nuclear sources, this occurred after In New York City, several food co-operatives were founded around, adding to others, some existing since the s. Electrical co-operatives became an important economic strategy for U. Employee-owned trusts have also been developed more or less independently, for example at an established iron pipe company [79] The Fair Trade certification movement established first in the Netherlands in with an international headquarters in Bonn nine years later requires member farmers to have established a co-operative. Page 2

3 Chapter 2 : What are Cooperatives - theinnatdunvilla.com A co-operative enterprise is essentially a voluntary association of individuals seeking to improve their economic status through joint efforts. Individuals having common interest can join a cooperative enterprise as members of their own accord. They are also free to leave the enterprise after fiving. There is no single definition of a cooperative. Here is one definition of the term: The definition of cooperative varies depending on whether you are looking at it from the perspective of a cooperative enthusiast, a corporate lawyer, or a tax lawyer. A cooperative enthusiast would probably say that ANY organization that is committed to and practices cooperative principles is a cooperative. However, a corporate lawyer would probably say that a cooperative must be formed under a cooperative statute. It is clear that an organization may be formed under almost any kind of a state statute and still follow cooperative principles. However, most states have one or more statutes specifically designed for cooperatives. In many states, an organization that is not formed under a cooperative statute may not use the word cooperative in its name. From a tax law perspective, cooperatives are entitled to various beneficial tax treatments under Subchapter T for regular cooperatives, Section for agricultural cooperatives, and Section c 12 for tax-exempt cooperatives. The leading case is Puget Sound Plywood v. Democratic control means that a cooperative is governed by its members on a one-member-one-vote basis. Operation at cost means that any money left over beyond a reasonable reserve after expenses are paid is returned back to the members. Subordination of capital means that returns to investors must be limited. How Cooperatives Manifest Cooperatives manifest in a variety of ways. The legal requirements for forming a cooperative corporation vary from state to state. In California, cooperatives generally form as a corporation under the California Consumer Cooperative Corporation statute. The rules governing this type of corporation are found in the California Corporations Code provisions beginning with section Cooperatives, as a legal structure Many organizations operate like cooperatives, but, for a variety of reasons, chose an entity other than a cooperative corporation. For example, a group of tenants might create a housing cooperative, simply by adopting highly participatory and democratic ways of operating. Similarly, workers at a non-profit organization or fiscally sponsored project, may elect to operate through cooperative, democratic principles, such as one-person one-vote. This type of cooperative organization may or may not have the other cooperative attributes of joint ownership and cooperative distribution of earnings, described above. They are generally accepted as a framework for determining whether an organization is operating on a cooperative basis within the meaning of the tax code. Jimmy Kroger, The New Frontier: Men and women serve as elected representatives and are accountable to the members. In primary cooperatives members have equal voting rights one member, one vote. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital invested as a condition of membership. Members allocate surpluses for any or all of the following purposes: If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintaining their cooperative autonomy. They inform the general public â particularly young people and opinion leaders â about the nature and benefits of cooperation. Cooperatives are formed by consumers, producers, workers, and sometimes by a combination of those groups. So, for example, the patronage of a consumer cooperative is the purchase of goods from the cooperative; patronage of a producer cooperative is the transfer of goods to the cooperative to be marketed by the cooperative; patronage of a worker cooperative is the work performed for the cooperative. There is a great deal of flexibility for cooperatives to define patronage and how it is measured. For example, one worker cooperative might define patronage as the number of hours worked in a fiscal year while another might define patronage as the amount of money earned by a worker in a fiscal year. The cooperative may, for example, operate stands at various farmers markets. For example, REI, the cooperative recreational equipment retailer, is open to the public and anyone that shops there is a patron, but only some people that shop there are Page 3

4 members. Cooperative members get various benefits such as the right to share in excess revenues, discounts on products, invitations to member-only events, etc. The exact benefits of membership are generally up to the cooperative to decide. For example, most cooperatives distribute any excess revenues to their members at the end of a fiscal year. However, some cooperatives mostly food cooperatives with hundreds or thousands of members have decided that it would be too onerous to make cash distributions and therefore choose to provide other benefits such as product discounts. Technical Resource List Author: Center for Cooperatives, University of California Overview: This ten page article provides a list of accountants, attorneys and board advisors who specialize in the field of cooperatives. It categories cooperatives into: Includes the individual and organization name, address, phone number, and . Zeuli and Robert Cropp Publisher: A booklet on cooperative history international and domestic, classification, business structures, officers, personnel, communications, finances, formation, and overall benefits and limitations. Page 4

5 Chapter 3 : What are the Characteristics or Features of Co-operatives? at their history. History of Cooperative not be familiar with the cooperative form of business. This series provides the characteristics of the cooperative. These businesses are different from other types of companies, because they are formed and operate for the benefit of their members. In that sense, they are nonprofits. These businesses run pretty much across the board in terms of size. Some are small buying clubs owned by members of local communities. Others are large Fortune companies. What Is the Main Purpose of a Cooperative? People usually join a cooperative for the benefits â to enjoy such things as the pooling of risk, the ability to make a large purchase in a group, to become empowered and feel like they are part of a meaningful company. What Is the Main Goal of a Cooperative? Cooperative businesses are organized for the purpose of improving the bargaining power of the individual members and the product or service quality provided by the members. They also aim to reduce costs incurred during the production process, to provide competition to larger companies with deeper pockets, to expand opportunities in the market and take advantage of them, and to obtain products and services that would otherwise be unavailable because for-profit companies see them as unprofitable. Regular business ownership is based on what percentage of the business is owned by individuals, so it is prorated. A cooperative business is somewhat different. Ownership of a cooperative is based on how much equity each member has contributed. This is what makes a cooperative business so different from other kinds of businesses. With a cooperative, you need to use the products and services of the cooperatives to be able to invest in the cooperative. Similarly, you cannot buy the products or use the services of the cooperative unless you are also an investor. It may seem like this is a chicken-and-egg problem, but it is typically solved upon the formulation of the cooperative. At that time, it is determined which comes first â the buying of shares or the purchase of products. As far as control is concerned, there is, again, a difference from a regular business. In a regular business, each share is allotted a single vote. That means investors can purchase as many shares as they need to gain a certain level of control in the business. In a cooperative, things are very different. Each member gets only a single vote, creating equality of voting rights. All the members then participate in the running of the cooperative business and share the responsibilities involved. There are many cooperative advantages and disadvantages that you need to consider before you decide whether it is the right type of business for you What Are the Advantages of a Cooperative? One of the greatest advantages of a cooperative company is the equality involved in its management and how democratic it is overall. The members can have all of their needs met without having to defer to a single person. This equitable type of organization makes the cooperative business a lot more stable than a regular business. Members will come and go without necessarily disrupting the way things work. In fact, whenever change is necessary, it will take the entire group of members to decide on it. Also, because each member has just a single vote, everyone has an equal footing in the business no matter how many shares they own. The cooperative is a body of its own. It is considered a legal individual, so it takes responsibility for its own debts rather than relying on the employees, directors or shareholders â with the exception of situations when there has been fraud or negligence. A cooperative business confers its own set of economic advantages to its members. Take consumer cooperatives, for example: The members of such cooperatives receive dividends for their patronage. Those dividends are determined by how much members spend on the products of the cooperative. Members who also happen to be employees of the cooperative are also entitled to discounts on merchandise. Cooperative businesses are owned and controlled by the members, so they are more autonomous compared to businesses controlled by their investors. Another factor that leads to more control within a cooperative is the fact that all the members of the cooperative need to be active within the cooperative so they can divide the workload equally among themselves. Cooperative businesses also exempt members from income tax, up to a point. The members will only be taxed based on the income they receive from the cooperative and not individually or on the corporate Page 5

6 level. Cooperatives that operate for profit are taxed just like regular businesses. However, they can reduce their exposure to taxation by paying their members in the form of patronage dividends in the form of refunds and discounts on products and services. Cooperatives also receive financial assistance in the form of loans and grants from the government. Cooperative businesses are based on the philosophy of mutual help. Membership instills a spirit of independence, cooperation and tolerance. What Are the Disadvantages of a Cooperative? Cooperative businesses have fewer incentives for large investors when attracting capital. They will mostly attract smaller investors, while the larger ones generally stay away after knowing that the size of their investment does not determine the size of their influence. Cooperatives also sometimes experience problems when they try to get debt capital from banks and other financial institutions. This makes cooperative businesses an ideal business model for those with low startup costs. Traditional businesses have centralized power, so they can make decisions quickly. With cooperative businesses, all of the members need to be involved, which makes it more time-consuming. When fast decisions are necessary, a cooperative may run into some issues. Because everyone has equal authority, deliberations may take a while. Most cooperative businesses do not have professional managers because they are just too expensive. Co-ops do not attract skilled professionals unless those professionals also happen to be members. Many do not have the necessary resources to support the high salaries. For this reason, the co-op can eventually fail because of poor management and organization. A business to be successful requires long-term effort. With a cooperative, the lack of a profit incentive may lead to lack of interest, which renders the cooperative inactive after a while. The steps involved should only be taken in light of this rule. This special group of people can identify the core values and mission of the cooperative as well as represent the potential members of the cooperative business. You can then develop a plan and do the necessary research to develop the organization. At this stage, you study the opportunities present in the market. You should consider market challenges, financing and operational costs as well. Look into the possibility of getting financial and technical assistance from the government. Draft the legal documents: All cooperatives are legal individuals and need to be incorporated. This is usually done by state statute and involves drafting the articles of incorporation and bylaws. Hire legal counsel to do that for you. Be very comprehensive about the scope of the business. The bylaws can start out basic and then grow with the business. Draft a business plan: Whatever your cooperative does, you will need financing. The initial financing can come from the members themselves. However, you can also look into the possibility of getting financing from the government and financial institutions. Have a cooperative business and staff. Start meeting the needs of your members, and your business is guaranteed to last. How Does a Cooperative Help the Community? Of course, the members of the local community who reap most of the benefits of a cooperative are those who also happen to be members. Since they are governed in a democratic fashion, they provide the benefit of local ownership. There is more local resilience, more accountability, more rootedness in the community, more local spending, more participation, more equity, more creativity and more relevant development. When a business is rooted in its community, it tends to last longer. Also, they do not give money to owners who are absent from the day-to-day running of the business. Because they are run in an equitable fashion, they are not likely to take advantage of local resources in a harmful way, since the members are also members of the community. The skills gained by the members in the democratic running of the business can be used to run other local affairs. Many cooperatives give back to the community and establish good ties through sponsorships and fundraising. A few of them even use their resources to create new enterprises or services that will meet the specific needs of the areas where they operate. Cooperatives occupy a unique space in the context of their wider communities. These organizations are viable enterprises that put the needs of their members and communities first. Because of their humanistic approach to things, they tend to transform the industries within which they operate and lead them toward being more responsive and humane in their practices. Mutual life insurance companies, a type of cooperative business, were the first to bring true accountability to their business. The government took notice of this and mandated guarantees for all insurance companies, whether profit-driven or not. Consumer food cooperatives led the movement away from processed Page 6

7 foods and toward local foods and fair trade practices. These trends are becoming more popular in grocery stores. Worker cooperatives have raised standards for work conditions for employees in all industries. Cooperatives are bound by their nature to consider the well-being of the communities where they operate, and most of them do. Page 7

8 Chapter 4 : Cooperative Corporation Digital Media Law Project A cooperative is a specialized form of business. Having more in common with a traditional business than, say, a nonprofit organization, a cooperative distinguishes itself by a member ownership. A cooperative is intended to be community-based, giving those whom the entity serves or employs a direct say in the operation of the entity. You might be familiar with cooperative corporations in the form of local food cooperatives or credit unions, in which control of the cooperative is vested in the patrons of the organization; however, many states allow for the formation of other kinds of cooperatives as well, including journalism cooperatives. Although the manner in which cooperatives function can vary from state to state see State Law: Forming a Cooperative Corporation, most states seek to enhance the community-based nature of cooperatives by limiting the power that individual stakeholders can wield in the cooperative. This helps to ensure that no single voice in a community dominates the operation of the cooperative. Like other forms of corporation, operating as a corporation offers limited liability to shareholders, transferability of ownership interests shares, and perpetual existence of the corporation, even after original shareholders have left the business. Some states alternatively or additionally allow for the creation of non-profit cooperatives, which generally follow cooperative rules with respect to control of the organization by members of the cooperative, and the rules for non-profit corporations with respect to other issues. Forming as a cooperative can also provide significant tax benefits over other forms of corporation. For-profit cooperatives that distribute their profits to their patrons as a special "patronage dividend" which is similar to a refund will not be taxed on those profits at the federal level so long as the distributions follow specific statutory rules. This can reduce or eliminate the "double taxation" issue faced by regular corporations. Non-profit cooperatives will by default be treated the same way, but, like other non-profit corporations, might be able to apply for an exemption from federal taxation under Section c 3 of the Internal Revenue Code. However, the rules governing taxation of cooperatives can be complex, and you will likely require the assistance of a tax professional to take maximum advantage of these benefits. In determining whether you want to operate as a cooperative corporation, you may want to consider the following factors: Shareholders of a cooperative enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other shareholders and employees. For instance, if a fellow shareholder writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the cooperative. However, limited liability does not relieve you from personal liability for your own unlawful actions. Cooperatives, like other forms of legal entity, are subject to the legal doctrine known as " piercing the corporate veil," which can result in shareholders losing limited liability protection in extremely rare circumstances. If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is a cooperative and even if there is no basis for piercing the corporate veil. Forming a cooperative is moderately complex in terms of burden and cost. In general, the specific steps will depend on whether you are forming a for-profit cooperative, in which case the steps will resemble those for forming a corporation, or a non-profit cooperative, in which case the steps will resemble those for forming a non-profit corporation. In addition to the normal steps required to form a corporation, forming a cooperative will likely require you to decide up front when and on what basis to distribute profits in the form of patronage dividends. This will require an understanding of the tax consequences of these decisions. Some states may impose additional steps or requirements. As with formation, the management structure of a cooperative depends on whether it is a for-profit cooperative with shareholders, as in a corporation or a non-profit cooperative with members, as in a non-profit corporation, generally tracking the management structures of regular for-profit and non-profit corporations. The primary difference between a cooperative and a corporation is that each shareholder or member in a cooperative is entitled to no more than a single vote, regardless of the stake that an individual holds in the cooperative. Some states might Page 8

9 allow for the existence of non-voting members or shareholders. Apart from this even distribution of voting power, shareholders or members in a cooperative generally vote on the same type of issues as their counterparts in regular corporations, while the day-to-day affairs of the cooperative are handled by a board of directors and the officers and employees of the cooperative. Operating a cooperative is moderately burdensome and costly, somewhat more so than other corporate forms. State corporate laws provide for cumbersome formalities governing things like the election and removal of directors, filling vacancies on the board, holding board and shareholder meetings, keeping minutes of those meetings, recording board resolutions, and shareholder approval of major management decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements and fees, all of which tend to drive up the cost of operating as a corporation. Forming a Cooperative Corporation section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. If you contemplate issuing shares to more than ten people, or to people not actively involved in the business, you should consult an attorney regarding potential securities laws obligations. In a for-profit cooperative, shareholders own the business itself, but their direct financial interest is in the shares of stock that they own. Shares entitle their holder to a portion of corporate profits, distributed by the company in the form of stock dividends. Cooperatives do not have to distribute stock dividends every year; rather, the board of directors decides whether to distribute them or to invest proceeds back into the business. Cooperatives that issue stock dividends will be "double taxed" on the amount of the dividends at both the corporate and personal levels. In this respect, stock dividends are different from " patronage dividends," another type of distribution that a cooperative can make. In general, a "patronage dividend" consists of a refund to the patrons of a business proportional to the amount that each patron has paid to the cooperative during a given year. Although a cooperative can limit the patrons that receive "patronage dividends" to people who are also shareholders or members, they are generally not required to do so. Unlike stock dividends, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income. Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section. One of the major at least perceived disadvantages of operating as a corporation including a cooperative corporation is " double taxation. However, unlike other corporations, cooperatives can avoid double taxation by distributing profits as a " patronage dividend " as opposed to a stock dividend. As discussed above, a cooperative may deduct the amount of any patronage dividends from its gross income before calculating its taxable income; this means that only the individual patrons receiving the patronage dividend might be taxed on those amounts. Any profits not distributed as a patronage dividend will be taxed at the applicable corporate rate, and then taxed again at the individual level if distributed as a stock dividend. For some cooperatives, paying reasonable salaries to shareholders who participate in running the business can also help ameliorate the potential burdens of double taxation. Shareholders of a cooperative cannot deduct business losses to offset income from other sources. Cooperatives are ideally suited to responding to situations where market forces in a given industry have failed to serve a particular community. In the journalism context, such a situation might be a "news desert" in which local coverage is not available from traditional news outlets. A cooperative allows a community in such a situation to come together and raise funds to provide necessary goods or services that are not otherwise available. On the other hand, the fact that shareholders in a cooperative are limited to a single vote regardless of the number of shares held might discourage institutional investors, who usually seek significant control over a corporation in return for their investment. Similarly, the fact that cooperatives will normally issue patronage dividends to dispose of their profits, as opposed to stock dividends, might make a cooperative a less attractive investment vehicle. This can limit the growth of a cooperative beyond the means of a particular community. However, this corporate form offers full transferability of shares, which can make it easier for a company to raise capital from outside investors, and it also makes it somewhat easier for individual shareholders to "get out" of the business by selling their shares to Page 9

10 other shareholders or outsiders. If you are interested in operating a small business with others that you know and trust, the free transferability of shares may be a disadvantage to adopting the corporate form. If you want your cooperative to "do business" in states other than the one in which it is incorporated, you need to register as a "foreign" corporation doing business in the other states. You do not need to do this simply because your website or content reaches the residents of other states. It might be an issue, however, if one of the officers or employees of the cooperative works i. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of incorporation and a certificate of good standing from your state. There will also be a registration fee. A number of organizations exist to support cooperative corporations in various sectors, including: Page 10

11 Chapter 5 : History of the cooperative movement - Wikipedia A cooperative business, also known as a co-op, is a type of organization that is both owned and controlled by its members, who also happen to use the services and products of the cooperative. Advantages of Cooperative Society 1. The formation of a cooperative society is very simple as compared to the formation of any other form of business organisations. Any ten adults can join together and form a cooperative society. The procedure involves in the registration of a cooperative society is very simple and easy. No legal formalities are required for the formation of cooperative society. No obstruction for membership: Unless and otherwise specifically debarred, the membership of cooperative society is open to everybody. Nobody is obstructed to join on the basis of religion, caste, creed, sex and colour etc. A person can become a member of a society at any time he likes and can leave the society when he does not like to continue as ; member. In most cases, the liabilities of the members of the society is limited to the extent of capital contributed by them. Hence, they are relieved from the fear of attachment of their private property, in case of the society suffers financial losses. In Cooperative society members are provided with better good and services at reasonable prices. It assists in setting up production units and marketing of produces c small business houses so also small farmers for their agricultural products. The cooperative society is managed by the elected members from and among themselves. Thus all member are equally important for the society. A cooperative society cannot be dissolved by the death insolvency, lunacy, permanent incapability of the members. Therefore, it has stable life are continues to exist for a longer period. It has got separate legal existence. The operation carried on by the cooperative society economical due to the eliminations of middlemen. The services of middlemen are provided by the members of the society with the minimum cost. In the case of cooperative society, the recurring and non-recurring expenses are very less. Further, the economies of scale-ma production or purchase, automatically reduces the procurement price of the goods, thereby minimises the selling price. Surplus shared by the members: The society sells goods to its members on a nominal profit. In some cases, the society sells goods to outsiders. This profit is utilised for meeting the day-to-day administration cost of the society. The procedure for distribution of profit that some portion of the surplus is spent for the welfare of the members, some portion kept reserve whereas the balance shared among the members as dividend on the basis of this purchases. Government provides special assistance to the societies to enable them to achieve their objectives successfully. Government also extends many type of subsidies to cooperative societies strengthening their financial stability and sustainable growth in future. Disadvantages of Cooperative Society: Despite many an advantages, the cooperative society suffer from certain limitations c drawbacks. Some of these limitations, which a cooperative form of business has are as follows: Cooperative societies financial strength depend on the cap contributed by its members and loan raising capacity from state cooperative banks. The membership fee is limited for which they are unable to raise large amount of resources as their members belong to the lower and middle class. A cooperative society is managed by the members only. They do not possess any managerial and special skills. This is considered as major drawback of this sector. Inefficiency of management may not bring success to the societies. The cooperative society does not maintain any secrecy in business because the affairs of the society is openly discussed in the meetings. But secrecy is very important for the success of a business organisation. This paved the way for competitors to compete in more better manner. The cooperative societies sell their products to outsiders only in cash. But, they are usually from the poor sections. These persons require to avail credit facilities which is not possible in the case of cooperatives. Hence, marketing is a shortcoming for the cooperatives. Government put their nominee in the Board of management of cooperative society. They influence the decision of the Board which may or may not be favourable for the interest of the society. Excessive state regulation, interference with the flexibility of its operation affects adversely the efficiency of the management of the society. The members may not feel enthusiastic because the law governing the cooperatives put some restriction on the rate of return. Absence of Page 11

12 relationship between work and reward discourage the members to put their maximum effort in the society. The management of the society constitutes the various types of personnel from different social, economical and academic background. Many a times they strongly differs from each other on many important issues. This becomes detrimental to the interest of the society. The different opinions and disputes may paralyses the effectiveness of the management. Page 12

13 Chapter 6 : Membership Is Ownership: The Cooperative Advantage Co-op Grocer Network The cooperative form of organization can be applied to any business area, including manufacturing, services, shipbuilding, food products, restaurants, computer software, engineering, reforestation, construction, and many other industries. This is the first cardinal principle of co-operation. A person who has a common interest and is prepared to be abide by the rules of the society has the right to join the society as and when he wishes to do so, continue in it as long as he likes, and leave it at his will. On leaving the society, shares are not transferable to other persons, although they are automatically transmitted to heirs on the death of a member. Within that particular group, no distinction can be made on the basis of race, colour, creed, caste, or sex. For example, a housing society of teachers of a particular school or university may be formed and non-teachers may be denied membership in it. Also, unlike the practice of a company organisation, the subscription list of the society is not closed after a fixed period. 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 the society. The finances of a co-operative society are contributed by members through the purchase of shares. Since co-operatives are generally formed by the weaker and poorer sections of the society, their capital collections are meagre. Also, there is limit to the maximum shares that a member can buy in a co-operative society. The government also lends financial support in the form of loans from the State and Central Co-operative Banks. Like company organisation, a co-operative society may be organised on the basis of either limited or unlimited liability. The limited liability societies, of course, are more popular. Co-operation is democracy in action. The business of co-operative society is generally managed by a committee elected by the members at annual general meeting. 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. It is man that counts and not the money. Further, maximum shareholding for an individual member may be prescribed so that none may be able to exercise undue influence by virtue of his holdings in a cooperative or may resort to blackmailing by threatening withdrawal of his substantial holdings. Again, to strengthen democracy, some issues are not decided by a bare majority alone, but by two- thirds or three-fourths majority. Democracy is to be preserved through a regular system of membership education, frequent meetings of general membership, managing committee, and sub-committees with which maximum number of members are to be associated. Limited interest on capital: Co-operation recognises the capital is useful and necessary for running a business, but it should be relegated to the level of a servant, not a master. Many foreign co-operative movements do not believe in paying anything for the use of capital. Unlike profit-oriented enterprises, the surplus i. Under the provisions of the law, at least 25 percent of the profit must be transferred to the general reserve. Likewise, a certain percentage not exceeding 10 may also be utilized for the general welfare of the local community. A co-operative society is formed with the basic objective of providing useful service â be it credit, consumption goods, or input resources â to its members and the society. In other words, the objective of a co-operative society should not be to maximise profits at the cost of others, as is usually the case with other types of business enterprises. Also, it does not mean that a co-operative society should sustain losses. Registration and legal status: In India, co-operatives desiring to be registered may do so under the Co-operative Societies Act,, or relevant State Co-operative Societies Acts, as the case may be. The minimum essential conditions for getting a co-operative society registered are: There is a set of model byelaws available with the Registrar which the promoters of the co-operative society may adopt, iv The Registrar after the scrutiny of the application, which must be duly signed by at least 10 members, and satisfying himself about the correctness of the co-operative society may issue a certificate, under his seal and signature, and the society will now come into existence and acquire the legal status. Once the society is registered, it can admit new members and also issue its shares. It may be pointed out that unlike a company, a co-operative society can issue shares without a prospectus. But, like a Page 13

14 company, every co-operative society is subjected to a lot of government supervision â for instance, it has to get its accounts audited by an auditor from the co-operative department, regularly submit its accounts to the Registrar, and in some cases like the co-operatives of Madhya Pradesh it has to get the appointment of managerial personnel approved by the Registrar. Apart from the characteristics, discussed above, a co-operative society also exhibits the feature of education and training to its members with the purpose of developing co-operation into a well-organized movement. Co-operation is an idea which is simple in theory, but difficult in practice. All of us agree that co-operation is good, useful, and essential, but when we translate the concept into action, bottlenecks block our paths, views clash, and sentiments come in the way. Co-operative education, therefore, is considered to be a basic principle in the absence of which seeds of co-operative democracy fail to germinate. Page 14

15 Chapter 7 : How can cooperative activities be financed? Cooperative tax rules are a logical combination of the unique attributes of a cooperative and the income tax scheme in the Internal Revenue Code. The single tax principle is applied to earnings from business. Ownership Considerations Both incorporation and taxation reflect how an entity operates, and both recognize cooperatives as one of an array of organizational entities. As noted above, however, many situations exist where the cooperative organization does not fully fit into the existing cooperative categories for incorporation and tax filing. In these cases, to determine if an organization can be classified as a cooperative requires other criteria. Patron ownership is a defining characteristic of a cooperative, and data indicating ownership can identify an additional universe of cooperatives. The right to residual returns also belongs with patron members, who receive benefits based on use, including patronage refunds. Survey questions about membership criteria, member voting rights for board elections, patronage refund allocation, and non-participation on the board by management can provide additional data on ownership for identifying cooperatives. Boundary Issues Organizations that are owned and controlled by patron members who receive benefits proportional to use can be identified as cooperatives through incorporation, tax filing, and member activity information. As with any taxonomy, however, questions arise when organizations meet some, but not all, of the criteria for classification of a cooperative. These variations can blur the definition of a cooperative, and pose questions about the boundaries of cooperative activity. Nonprofit Entities Many cooperatives are incorporated as nonprofits. This designation encompasses two different subsets. Incorporation statutes that are specific to cooperatives, but that classify them as nonprofit entities, also make provisions for member ownership rights including member voting rights for board of directors, distributions, and rights to residual returns. In contrast, cooperatives incorporated under general nonprofit statutes are not statutorily bound to follow organizational and operational criteria specific to cooperatives, making the cooperative character for such organizations more difficult to identify. This type of nonprofit cooperative frequently appears in traditional nonprofit sectors such as education, arts and crafts, and childcare. General nonprofit statutes permit member organizations, but may not guarantee the right of members to vote. Membership organizations incorporated under a nonprofit statute may exhibit varying levels of democratic control by member patrons; whether such an organization is a cooperative is debatable. General nonprofit statutes also prohibit distributing residual earnings to those who control the organization, including members. The distribution of benefits to patron members based on use is a central concept to the cooperative operation. This prohibition on distributions would seem to disqualify all nonprofit membership organizations as cooperatives. However, this type of nonprofit cooperative typically operates in sectors commonly designated as not-for-profit and where residual earnings are uncommon. Member benefits in these cooperatives are the services provided; the member receives these benefits in proportion to how frequently the cooperative entity is used. Whether the statutory prohibition of distributions should exclude from a cooperative census a member-controlled organization providing services to its patrons poses another boundary question for this study. Federal tax-exempt status designations present related boundary issues in identifying cooperatives. For example, IRC c 12 exempts benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, mutual or cooperative electric companies, and "like organizations". The IRC outlines specific organizational and operational cooperative principles that an organization must follow to be eligible for this Federal tax exemption. These principles center on democratic control, subordination of capital, and operation at cost, which includes the distribution of any savings to members based on their patronage. Clearly a nonprofit organization with such a tax-exempt status can be categorized as a cooperative. Tax-exempt designations specific to cooperatives in other sectors exist as well. In contrast, cooperatives organized under general nonprofit statutes that provide services may qualify for Federal tax-exempt status under IRC section c 3. This tax-exempt designation supports, among others, Page 15

16 organizations established for educational and charitable purposes and can be a major incentive for incorporating as a nonprofit. Such organizations are eligible to receive grants and tax-deductible contributions. Cooperatives organized to provide public sector-type services, such as education or childcare services, may have difficulty financing start-up or ongoing costs. For them, the ability to receive grants or contributions may be essential for survival. This mirrors the prohibition on distributions in general nonprofit incorporation statutes, and raises similar boundary issues for interpretation. Quasi-governmental Entities Cooperative activity within the public sector presents significant boundary issues. Governmental, quasi-public, nonprofit, and private entities may all provide public sector goods and services using public revenue. They may also share cooperative characteristics, such as a user-based representative governance system, and supply benefits that aggregate with use. Some entities are incorporated as stand-alone nonprofit agencies, may self-identify as cooperatives, or have member control characteristics that might allow them to be classified as cooperatives. However, most of these organizations spend public revenue and they typically have some mandated control or reporting requirements that are external to board control. One method for determining whether a cooperative organization is a government entity is to consider whether the organization is included in U. Census of Governments, Individual State Descriptions, and whether revenues and outlays are included in state government finance statistics. In the Census definition, governmental character exists if the organization has a high degree of responsibility and accountability to the public, as evidenced by public reporting or open records requirements. This classification is independent of the tax or incorporation status. The degree to which the cooperative board is autonomous and subject to public oversight and reporting, can differentiate these entities from cooperatives that may have publicly funded entities as members, and that may use public revenues to purchase goods or services. These characteristics may be indicated by incorporation status, tax filing status, or bylaw provisions. Boundary questions can also develop because public accountability can characterize both governmental character and recordkeeping and reporting requirements for cooperatives in regulated industries, such as mutual or cooperative telephone or electric companies. Limited Cooperative Associations The limited cooperative association LCA is a newer type of business entity that has characteristics of both the traditional cooperative and the limited liability company LLC. Although few in number, this hybrid form poses a unique set of cooperative boundary questions around issues of investor control. In five states, new statues address problems associated with cooperative capital formation. While variations exist among the statutes, all permit distribution of net earnings on the basis of investment contributions as well as on patronage, and do not set limits on investor returns. Investor voting rights and election to the board of directors are allowed. The statutes protect patron-member interests through mandated minimums for patronage-based earnings distributions, and special provisions for patron-member voting and majority representation on the board. The extent that this potential for conflicting ownership interests should exclude an organization from a cooperative census is debatable. Besides limited liability for its members, the LCA may elect to be taxed as either a partnership or as a corporation. To be eligible for the single-tax treatment afforded to cooperative corporations, the LCA must meet the IRC-specified organizational and operational principles for operating on a cooperative basis. These principles include subordination of capital and distribution of savings based on patronage, which might not apply to an LCA making investment-based distributions. Whether Federal tax status should disqualify an organization that also encompasses patron member ownership and control requirements is another cooperative boundary question. Partnerships, associations and clubs, and employee stock ownership plans ESOPs are good examples. Professional partnerships are "labor-managed firms," much like worker cooperatives. Unlike most worker cooperatives, however, control is offered only to a restricted set of workers. Many associations and clubs operate according to democratic principles and are controlled by their patrons. Like nonprofits, there are no residual returns; therefore not providing members residual returns on a patronage basis is likely irrelevant. In contrast, ESOPs do provide residual returns to workers typically on the basis of seniority in the organization, which can be considered a form of patronage, but only limited control rights through an intermediate trust. Coverage for This Study So where do these boundary issues leave us in our effort to Page 16