This article is written by Karan Jayesh Shah, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com. Here he discusses “When should you Incorporate Co-operative Society”.
Cooperative Society is not a new concept. It is prevailing worldwide and is represented in all the sectors. It is an organisation that is made by the people for the people and of the people which has joint ownership and is controlled democratically. It is also known as co-operative, co-op, or coop.
The Indian Co-operative Societies Act, 1912 defines a cooperative under its Section 4 as “a society which has its objective the promotion of economic interest of its members in accordance with co-operative principles”.
Examples of Cooperative Societies in India are Pratibha Mahila Sahakari Bank, Vasudhara Dairy, Karnataka Milk Federation (KMF), Indian Farmers Fertiliser Cooperative Limited, etc.
Types of Cooperative Society
Before discussing the reasons behind incorporating a cooperative society, it is important to discuss types of co-operative societies that exist in our country:
- Consumers’ Co-operative Society
This society buys goods in bulk from the manufacturer or producer and eliminates the middleman thereby help in procuring the goods for its members at a reasonable price. The society is formed to protect the interest of the general consumer. Kendriya Bhandar, Apna Bazar and Sahkari Bhandar are examples of consumers’ co-operative society.
- Producers’ Co-operative Society
They are usually formed to protect the interest of the small producers by making available items of their need for a production like raw materials, tools and equipments, machinery, etc. This society helps in bargaining the price of the items as they would be in a position to do the same due to ordering the items in a bulk. Handloom societies like APPCO, Bayanika, Haryana Handloom, etc., are examples of producers’ co-operative society.
- Co-operative Marketing Society
This society is formed by small producers and manufacturers who find it difficult to sell their products individually. It would be the duty of the society to collect all the products from the member and to sell them in the market. Gujarat Co-operative Milk Marketing Federation that sells AMUL milk products is an example of a marketing co-operative society.
- Co-operative Credit Society
The cooperative society is formed to provide financial assistance and support to the members. The society provides the loan to the members who are in dire need to get one and the rate of interest is also relatively low then the private banks and non banking financial companies. The loan is provided from the deposits of the members. Village Service Co-operative Society and Urban Cooperative Banks are examples of co-operative credit society.
- Co-operative Farming Society
These societies are formed by small farmers to work jointly and thereby enjoy the benefits of large-scale farming. Lift-irrigation cooperative societies and pani-panchayats are some of the examples of the co-operative farming society.
When should you Incorporate a Cooperative Society?
The following are the reasons for incorporating a cooperative society:
- Open Membership
Individuals with a common interest can come together and form a cooperative society. The minimum number of people required to form a cooperative society is 10 and the maximum number of people is not specified in the Cooperative Societies Act. However, after forming a cooperative society, the participants can limit the number of people by prescribing it while registering the cooperative society.
Hence, if people have a common goal and interest then they can come together and incorporate a cooperative society. The number of participants to the society would also be not an issue as the upper could be decided by them mutually.
- Voluntary Association
It is a voluntary association of people whereby the person can join by choice as and when he likes, continue for as long as he likes, and leave the society at will. The condition on leaving is that pre-notice be served to the cooperative society. An individual joining cooperative society should accept all the responsibility of membership, without gender, social, political or religious discrimination.
Hence, incorporating a cooperative society would be a good option who wants entry and exit to society effortlessly but before leaving or joining the society, the person has to fulfil all the obligations on him prescribed and mandated by the cooperative society.
- State Control
While registering a cooperative society, it is placed under the state control whereby each detail about the members and the business to undertake needs to be submitted. The Books of Accounts need to be maintained by the cooperative society, which is required to be submitted periodically and needs to be audited by the auditors appointed by the government authority.
Hence, if the parties want to secure their investment and keep a tap on everything then incorporating a cooperative society would be a great option as the society will fall under the state control which will help in transparency and effective functioning of the society.
- Sources of Finance
In a co-operative society, capital is contributed by all the members. However, it can easily raise loans and secure grants from the government after its registration.
It’ll be really difficult for each person to get a loan for themselves owing to the issue of nothing to keep as security/ mortgage/ collateral. Therefore, they can come together and incorporate society and thereby can easily raise money for themselves.
- Separate Legal Entity
A separate legal entity means the distinct identity of the entity from its members. The society can enter into contracts and hold property in its name, sue and be sued by others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members. A cooperative society will become a separate legal entity only after it gets registered under the Cooperative Societies Act and thereby limiting the liability of the members.
Hence, if the association of persons doesn’t want to have unlimited liability then incorporating a cooperative society is a sound option.
- Democratic Management
The society is managed on democratic lines by a group of people known as “Board of Directors”. They are the elected representative of the society and are liable to run and manage society smoothly without any problem or hindrance. Each member of the board has a single vote, irrespective of the number of shares held. For example, in a village credit society, the small farmer having one share has an equal voting right as that of a landlord having 20 shares.
Hence, if an association of persons wants a proper hierarchy to be followed and that the decision should be taken by voting then incorporating a cooperative society is a sound option.
- Distribution of Surplus
The Cooperative society also generates profits in addition to providing services to its members while conducting business. Profits are not earned at the cost of its members. The profit generated is distributed on the basis of member’s participation in the business of the society and not on the basis of the number of the shares held by each member (like in the form of a company). For example, in a consumer cooperative society, the major part of the profit is paid as a purchase bonus and is distributed among the members who purchase the good from the society and only small part of the profit is distributed to the rest of the members as a dividend on their shares.
Therefore, when an association of person wants to earn better return on the investment at a lower risk incorporating a cooperative society would be a sound option, as it would be better than investing in the shares where the risk is comparatively high.
- Service Motive
The motive behind incorporating a cooperative society is not to maximize profit like in any other form of business organization. The main purpose of the society is to provide service to its members. For example, in a Consumer Cooperative Store, goods are sold to its members at a reasonable price by retaining a small margin of profit. It also provides better quality goods to its members and the general public.
- Self-help through mutual cooperation
Society is formed with the motto or on the principle of self-help through mutual cooperation. They are the organisations of financially weaker sections of society. It converts the weakness of its members into the strength by cumulative the resources and using it for the benefit of the members. It is only by working jointly on the principle of “Each for all and all for each”, the members can fight exploitation and secure a place in society.
For Example, People living in an area are facing problems in procuring a supply of some material as their individual order doesn’t match the minimum requirement. So what they can do is that they can come together and incorporate a cooperative society and it will not only solve the problem of getting the supply of the material but also would help in bargaining the price of the material and getting discount on bulk order.
The above mentions are few of the reasons when cooperative society needs to be incorporated. The section of people that would be most benefited via cooperative society is poor and weaker sections of the society. The cooperative society is incorporated by the people for the people and of the people. The ultimate goal of the society is to safeguard the interest of the members.
- CO-OPERATIVE SOCIETIES (December 30, 2019, 5:45 PM IST), http://mospi.nic.in/sites/default/files/Statistical_year_book_india_chapters/CO-OPERATIVE%20SOCIETIES-WRITEUP.pdf
- Characteristics of Co-operative Society (December 30, 2019, 11:34 AM IST), http://old.nios.ac.in/Secbuscour/cc09.pdf
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