cooperative organisation 11 class business studies

A cooperative form of business is a different form of business enterprise. It this form the main motive is not earning profit but the main motive of co-operative organisation is mutual help. It works with the principle of each for all and all for each.

The cooperative society or organisation is a voluntary association of persons who join together for mutual help. A minimum of 10 persons are required to form a co-operative society. The registration of co-operative society is compulsory and the capital of cooperative organisation is contributed by the members only in the form of share capital. The cooperative organisation can raise loan also from the banks.

Features of co-operative organisation

The common features of cooperative societies are given below:

Ø  Voluntary association

The cooperative society is a voluntary association of persons. Any person can join the cooperative society if he/she has common interest. For example, any farmer can join the agricultural society or any consumer can join the consumer society. The members can leave the society whenever they desire so by giving a notice. There is no restriction on entry or exit of members. They can join or leave the cooperative organisation of their own will and wish. The membership is open to all the members irrespective of their caste, creed and religion.

Ø  Equal voting rights.

The cooperative societies work with democratic principle of “one man-one vote”. All the members get only one voting right irrespective of capital contributed by them. The rich members by taking more shares cannot dictate their terms. A person who has 1000 shares a person who has 10 shares will get one voting right only.

Ø  Service mode

The main motive of cooperative society is to provide service to its members and not to earn profit. Earning profit is the secondary motive.

Ø  Separate legal entity

It is compulsory for a cooperative society to get itself registered under the Cooperative Society Act. After registration, the cooperative organisation gets a separate legal entity, which means the cooperative society is considered separate from its members. It can buy and sell property in its own name and can enter into contract in its own name. The death, insolvency and incapacity of any member does not effect the existence of cooperative society.

Ø  Distribution of surplus

Ø  The profit of cooperative society is not distributed in the ratio of capital contributed by each member but it is distributed according to dealings of members with the society. A member with less capital can get more share in profit by having more transactions or dealing with the cooperative organisation. For example, in a consumer cooperative the consumer who made purchase gets maximum benefit.

In the cooperative society a fixed rate of dividend is given on the capital and remaining surplus is distributed in the form of bonus, according to dealings of members with the cooperative organisation.

Merits of cooperative organisations

The advantages of cooperative organisation are:

Ø  Easy to form

The formation of cooperative organisation is very simple process. Only ten adult members having common interest are required to form it. The registration procedure for cooperative is very simple and does not involve any legal formalities.

Ø  The liability

The liability of members of cooperative organisation is limited to the extent of their capital contribution in the cooperative organisation. At the time of losses the creditors cannot have claim over the personal property of members.

Ø  Continuity

The cooperative society has a separate legal existence. The death, insolvency or incapacity of any member does not affect the existence of society. The cooperative life and exists for a long period of time.

Ø  Democratic set-up

The cooperative societies work with the democratic system. They are based on the principle of one-man-one-vote. All members have equal rights and equal chance to participate in the management irrespective of capital contributed by them.

Ø  Open membership

Any person having common interest can become the member of a cooperative organisation. There is no restriction on the basis of caste, creed or religion. The persons can join and leave the cooperative organisation whenever they desire so.

Ø  Economical functioning

The operation of cooperative organisation is quite economical. As most of the activities are performed by the members themselves and while purchasing goods or raw materials middlemen are eliminated so they can get the raw materials and goods at low cost. The cooperative organisations do not maintain large stocks. Due to cash trading there are no bad debts. There is saving in advertising and selling experience also.

Ø  State patronage

The cooperative organisations get various benefits from the government. The government provides various concessions and rebate in taxes. These organisations can get raw materials etc. at subsidised rates. Government offers loans at lower rate of interest and on easy terms and conditions of economic power to cooperative organisations.

Ø  Social utility

The cooperative organisations promote social justice and mutual cooperation. They promote self help, moral value among the members. These organisations also help to prevent concentration of economic power in few hands.

Demerits of Cooperative Organisations

Cooperative societies suffer from the following drawbacks.

Ø  Limited capital

The cooperative organisation is formed by the people who have limited resources and there is no compulsion to contribute some minimum amount of capital to become a member. The principle of one-man-one-vote also discourages people to invest more so cooperative organisations always face a shortage of capital due to low rate of return.

Ø  Inefficient management

The cooperative organisation is managed by its members only. Generally all the activities are performed by the members only. These members are not professional experts. They are inexperienced persons. The cooperative organisation cannot afford to pay high salary to professional and qualified people.

Ø  No motivation

In cooperative organisation there is no direct link between the efforts and reward. Hence members are not inclined to put their best efforts. There is no incentive for working efficiently.

Ø  Conflict among the members

Quite often, the disputes arise among the managing committee and members in cooperative organisation. The members are from different sections of society. They may have difference of opinion and if any member follows rigid attitude it can lead to conflict and disputes. Generally the selfish motive of members starts dominating and they forget the service motive.

Ø  Excessive government control

As cooperative organisations get various concessions and benefits from the government, in return there is excessive government regulation and control by the government. It is essential for a cooperative organisation to get its accounts audited by the auditors of the cooperative department and to submit its accounts with the registrar. All these regulations, restrict the flexibility and efficiency of cooperative organisation.

Types of Cooperative Organisations

On the basis of nature of activities performed, the cooperative organisations can be classified into following categories:

1.       Consumers’ cooperative society

2.       Producers’ cooperative society

3.       Cooperative marketing society

4.       Cooperative credit society

5.       Cooperative farming society

6.       Cooperative housing society

Ø  Consumers’ cooperative society

This society consists of consumers who join together to eliminate the middlemen. The consumer cooperative societies purchase goods directly from manufacturer and sell them to the members at reasonable price. The profit of the store is distributed among all the members as dividend on capital and bonus in proportion to their purchases during the year. The main objectives of forming consumer cooperative are:

                                 i.            To ensure steady supply of essential goods

                               ii.            To supply the goods at reasonable price by eliminating the profit margin of middlemen

                              iii.            To supply the goods and services of high quality.

Ø  Producers’ cooperative society

This society consists of small producers who individually find it difficult to procure the inputs and get the machinery and latest technology. There are two types of producers’ cooperatives:

a)      The one which provides raw material, inputs, machinery, etc. so that producer can concentrate on production.

b)      The one which sells the goods produced by these producers.

The profit of producers’ cooperative is distributed in proportion to the goods sold by each member of the society. The main objectives of producers’ cooperative are:

         i.            To ensure steady supply of raw material, input etc. at reasonable price

       ii.            To provide latest machinery of production

      iii.             To ensure smooth distribution and sale of goods produce by members

     iv.            Helping the producers to concentrate their attention on production of goods.

Ø  Cooperative marketing society

The cooperative marketing society consists of small producers who find it difficult to sell their products at profit. The output of all the small producers is brought together and sold at the best price. Such a society helps to improve the bargaining power and competitive position of its members. It performs various marketing functions such as transportation, warehousing, packaging, grading etc. the profit and the sale proceeds are diributed among the members according to their respective share in sale proceeds are distributed among the members according to their respective shares in the common sales pool. The main objectives of marketing cooperative society are:

                                 i.            To ensure a steady and favourable market for the output of its members

                               ii.            To ensure the best price for the output

                              iii.            To provide facilitate transportation, warehousing, packaging, etc., which individually cannot be afforded the members

                             iv.            To ensure honest trading practices in weighting, measuring and accounting

                               v.            To eliminate the middlemen and have direct dealing with the customers

Ø  Cooperative credit society

Ø  It consists of people with limited means who find it difficult to arrange credit and loans. These societies provide financial assistance to its members and promote habits of saving among the members. The funds of these societies consist of share capital contributed by the members and deposits made by members and outsiders. The fund are used for giving loans to needy members on easy terms. The credit cooperative formed by farmers is known as rural credit cooperative, credit cooperatives formed in urban areas are known as urban banks. The main motives of credit cooperative organisations are:

                                 i.            To protect the members from the exploitation of moneylenders

                               ii.            To ensure loans on easy terms and low rate of interest

                              iii.             To develop the habit of saving among the members.

Ø  Cooperative farming society

These consist of small farmers who join together to avail the benefits of large scale mechanised farming. Such societies are particularly important in the case of countries such as India, where agriculture suffers from excessive subdivision and fragmentation of land. The farming cooperative society is also known as an agricultural cooperative. The main objectives of farming cooperatives are:

                                 i.            Helping the small farmers to get the benefits of mechanized farming

                               ii.            Providing improved seeds, fertilizers, irrigation and other modern techniques

                              iii.            Proving social and economic security to peasants.

Ø  Cooperative housing society

These societies are formed to provide residential accommodation to their members. These societies purchase a big plot of land, construct flats on that and sell these flats to its members on installment and easy terms. Some housing cooperatives provide loans to their members for building houses. These societies are very popular in urban areas. The main objectives of housing cooperative societies are:

                                 i.            Proving residential accommodation to their members

                               ii.            Helping members to purchase houses at lower cost

                              iii.            Providing civic amenities such as roads, parks, streetlights, parking etc.

Join stock company

The company form of organisation is considered to be most suitable for organising business activities on a large scale. It has advantage of attracting huge capital from the public. With adequate capital it can employ trained and experienced managers to run the business activities efficiently.

Features of joint stock company

Following are the chief characteristics of the company form of organisation.

Ø  Separate legal existence

A company has a separate legal entity. A company can carry on business in its own name, it can buy and sell assets in its own name, it can enter into contract with outsiders in its own name; the company and its members are separate individuals.

Ø  Artificial person

A company does not have a physical body like a natural human being. It is an artificial person created by law. Its operations are performed by the elected representatives of members, known as directors, although business is run in the name of the company.

Ø  Registration

It is legally compulsory to get itself registered under the Companies Act, 1956. Without registration no company can come into existence.

Ø  Perpetual succession

A company has continuous existence independent of its members. A company is created by law and only law can bring an end to its existence. The death, insolvency or incapacity of any member does not affect the existence of company. Members may come and members may go but the company goes on forever. The life of the company can come to an end through legal procedure of winding up.

Ø  Common seal

Being an artificial person the company cannot sign, therefore there is need for common seal with its name engraved on it. The activities of the company are carried through a group of people. Anyone acting on behalf of the company can use common seal in place of signature of the company to bind the company. Any document which does not bear the common seal of the company is not binding on the company.

Ø  Transferability of shares

The capital of the company is divided into shares. The shares of the company are feely transferable by its members. A shareholder is free to withdraw his membership from the company by selling his shares. The shares of private limited companies cannot be easily transferred.

Ø  Separation of ownership and control

The company form of business is owned by the shareholders. These shareholders elect their representatives who are called directors of company. The directors manage the activities of the company by appointing professional experts.

Ø  Limited liability

The liability of members of the company is limited to the extent of their share capital contribution in the company. For example, if a person has purchase 1000 share of value ₨.10 each, then his liability is limited upto ₨.10000 only.

Merits of Joint Stock Company

The important advantages of joint stock company are :

Ø  Large amount of capital

The biggest advantage of company form of business is that it can collect a large amount of capital by issuing of shares to general public. The people having small savings can also buy the shares of company because the value of share is very small. Apart from share capital, the company can collect funds by raising loans from financial institutions and by issue of debentures and other securities.

Ø  Limited liability

The liability of members of the company is limited to the extent of their share capital contribution in the company. The limited liability attracts many people to invest their money in company form of business, as in case of loss the creditors cannot have claim over the personal property o the members.

Ø  Continuity/Stability

The company form of business enjoys perpetual succession. As it has separate existence, it is formed by law and can end by legal procedure of winding up only. The death, insolvency and incapacity of any members do not affect the existence of the company.

Ø  Efficient management

Company form of business has huge funds at its disposal. It can easily afford to hire professional experts to perform managerial and other activities of the organisation. The expert and specialised people improve the efficiency and working of the company.

Ø  Growth and expansion

In company form of business there is more scope for growth and expansion. The company has large financial resources and their rate of profit is also high. They can easily use large amount of accrued or retained profit for expansion and growth.

Ø  Easy transferability of shares

The share of the company can be easily bought and sold in the market. It the owner of share is in need of cash, he can easily sell the share and get cash. The easy transferability of shares brings liquidity of investment. At any time the share investment can be converted into cash and the same amount can be used to buy the shares of other company.

Ø  Public confidence

General public has more trust and confidence in company as compared to partnership. The reason for that is companies publish their annual accounts, annual reports, future plans etc. based on the financial soundness and profit earning rate, public can plan to invest in the securities of different companies.

Ø  Democratic management

Company form of business is managed by the directors, who are elected by the shareholders. All the decisions are taken by calling board meetings where all the directors get voting rights. In this way, the company can run in the best interest of majority of shareholders.

Ø  Dispersal of ownership

All the shareholders of the company are considered as the owners of the company. There are a large numbers of people who buy shares of the company. Thus the benefits of the company operations are distributed among a large number of people and it is not restricted In a few hands.

Ø  Social responsibilities

Large companies generally perform social responsibilities by contributing a large fund for welfare activities such as by establishing schools, colleges, hospitals, training centres etc.

Demerits of a company

The following are main limitations of a company:

Ø  Lengthy and expensive legal procedure

The formation of company involves a lengthy and complicated procedure. Many legal formalities have to be completed, many documents have to be prepared and submitted. Various permissions have to be obtained. To perform these activities experts are hired, who charge high fees. Even registration fees have to be paid to the registrar.

Ø  Lack of motivation

Company is not managed by owners but is managed by the professional managers. These managers get salary for their services so there is no direct relation between the efforts and reward. The increase in company’s profit will not increase the income of managers. Hence there is lack of motivation and incentive to perform efficiently.

Ø  Delay in decisions

In company organisation all the important decisions are taken in the board meeting or after consulting various persons. And once decisions are taken, these have to be communicated to everyone which is again a lengthy process as large number of people are working in company at different levels. So taking and implementing decisions is a lengthy process in a company.

Ø  Excessive government control

The company form of business has to comply with various legal formalities at different stages and there is penalty if the company fails to meet any of the formalities.  A company has to file return and annual reports with the registrar. This legal interference in day-to-day operations results in lack of secrecy and a lot of time and money is spent.

Ø  Conflicts in interests

In company various groups of people are involved such as shareholders, debenturehoders, employees, directors etc. Each group has different interests, for example debenturehoders want their rate of interest to increase whereas shareholders want to reduce it so that leftover income is more. There is possibility of conflicts between various groups.

Ø  Oligarchic management

Although we say that there is a democratic set-up in the company form of business but this democratic set-up exists only on paper. In real practice, company is in the hands and control of a few people i.e. the directors. The directors have complex control over the company. These people take all the decisions keeping in mind their personal interest and benefit, ignoring the interest of shareholders and the company.

Ø  Social evils

A company has large financial resources at its disposal. So there are chances of concentration of wealth in the hands of few on monopolistic activities. The concentration of economic power will result in exploitation of the consumer and employees.

Ø  Interference and influence in government decisions

The big business houses and industrialists are in a position to influence the government decisions. They often bribe the officials to take decisions in company’s favour ignoring the interest of general public. They influence the decisions of government by offering huge amount of donation during election time.

Types of companies

On the basis of ownership, the companies can be classified into following categories:

1.       Private company

2.       Public company

3.       One person company

Ø  Private company

According to the Companies Amendment Act (2000) , a private company is one which:

                                 i.            Has a minimum of two and maximum of 50 members excluding the employees:

                               ii.            Restricts the right of members to transfer their share;

                              iii.            Does not offer its share to general public;

                             iv.            Does not invite general public to invest deposits in the company; and

                               v.            Has minimum paid-up capital of ₨one lack;

It is ideal form of organisation for the people who wish to run a large-scale business without involving large shareholding groups.

Change in the section providing for the definition and no change in the definition.

Ø  Private company

“Private Company” means a company which by its articles-

                                 i.            Restricts the right to transfer its share;

                               ii.            Except in one person Company, limits the number of its members to two hundred; (provide that where two or more persons hold one or more share in a company jointly, they shall, for the purpose of this clause, be treated as a single member:

Provided further that

a)      Persons who are in the employment of the company, and

b)      Persons who having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,

c)       Shall not be included in the number of members.

                              iii.            Prohibits any invitation to the public to subscribe for any securities of the company.

Ø  Public Company

A public company is the one which:

                                 i.            Has a minimum of seven members and maximum no limit;

                               ii.            Permits easy transfer of its share;

                              iii.            Invites general public to subscribe to its deposits;

                             iv.            Invites general public to subscribe to its share and debentures;

                               v.            Has minimum paid-up capital of five lakhs; and

                             vi.             any private company which is subsidiary of public company.

Public company means a company which is not a private company;

Provided that a company which is subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.

Company limited by guarantee means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

Company limited by share means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

Note a company is a subsidiary of another company if the other company controls the composition of its Board of Directors, or if the other company holds more than 50 percent of its equity share capital.

Ø  One person company

The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act].

Requirement- one Person Company

Rule 3(1) provides that only a natural person who is an Indian citizen and a resident in India shall be eligible to incorporate OPC.

§  No person shall be eligible to incorporate more than one OPC or become nominee in more than one such company

§  OPC to compulsory convert itself into public or private company in certain cases. Where the paid up share capital of an OPC exceeds fifity lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company

Benefits of private company over public company

Ø  A private company can be formed with only two numbers whereas at least seven members are needed to form a public company.

Ø  A private company must have at least two directors, whereas a public company must have minimum three directors.

Ø  It is not compulsory for a private company to maintain index of its members, whereas it is mandatory for public company to maintain the index.

Ø  A private company can issue loan to its directors without prior permission of government, whereas public company must take permission of government before giving loans to its directors.

Ø  It is not compulsory for a private company to hold a statutory meeting and file a statutory report with the registrar, whereas it is essential for public company.

Ø  There are no restrictions on the members, appointment and remuneration of directors of a private company, whereas there are many restrictions on the appointment, number and remuneration of directors of public company.

Ø  It is not necessary for a private company to issue a prospectus, whereas it is essential for a public company.

Ø  Private company can commence its business after getting certificate of registration whereas public company can start business only after receiving the certificate for the commencement of business.