What is a cooperative?
A cooperative or cooperative society is a business organisation that is formed to promote the interests of its members. It may be formed by producers or consumers who pool their resources and buy in bulk at reduced prices.
Unlike a company, a cooperative is not registered with the registrar of companies. It is usually registered with a government agency so that it can have a separate legal existence from its members. Without such registration, it will be difficult to protect members’ personal assets if the business becomes insolvent. This means that once it is registered, members can enjoy limited liability.
The features of a cooperative include:
No profit motive
A cooperative aims to promote the economic interests and activities of its members. If profit is made, it is shared equitably among the members. Dividend distribution is based on participation or patronage but not based on capital investment.
Equal voting rights
It adopts the principle of democracy whereby every member has one vote irrespective of the number of shares bought in the cooperative. In a company, however, a shareholder’s voting right is determined by how many shares he has in the company.
Equal participation in management
All the members are involved in running the cooperative. They appoint committees from the members to run the organisation effectively. Large cooperatives do employ qualified people from outside the organisation to run the organisation in accordance with its bylaws. The bylaws are rules agreed upon by the members for the effective management of the cooperative.
Types of cooperative
Producer cooperative
A producer cooperative is formed by producers who are determined to lower their costs by pooling resources to buy raw materials in bulk or buy equipment at lower prices. By coming together, they can enjoy economies of scale and improve their profit margins. The coming together of small producers also gives them market power in the distribution of their products. An agricultural cooperative is an example of a producer cooperative; it enables farmers to easily access high-yield seeds, fertilisers and farm machinery.
Consumer cooperative
A consumer cooperative is formed by consumers who bypass middlemen to buy directly from manufacturers. The middlemen between the producers and consumers are the wholesalers and retailers. Consumers end up paying higher prices because of the middlemen. By buying directly from manufacturers, the consumer cooperative secures lower prices. Subsequently, the products are distributed to members at comparatively low prices. Any profit made by the cooperative is distributed to members based on their patronage, not based on how much they have invested in the cooperative.
Worker cooperative
A worker cooperative is formed by its workers. The workers, who are also the owners, are actively involved in running the business. If profit is made, it is equitably distributed to members.
Credit and thrift cooperative
A credit and thrift cooperative encourages members to save regularly and gives loans at low or no interest rates to its members. Unlike banks, it is easier for members to obtain loans from cooperatives because they do not have to meet stringent conditions such as providing collateral. Profits made by the cooperative are shared by members on the basis of their patronage.
Advantages and disadvantages of a cooperative
Advantages of a cooperative
Better prices through bulk buying
A cooperative buys in large quantities, thereby enjoying purchasing economies of scale. When members come together, they have more negotiating power when buying raw materials or products. For example, farmers negotiate better prices for equipment when they come together than when each farmer acts alone.
Cooperatives support members’ economic activities such as distribution, storage, transportation, branding, and product promotion. Together, small manufacturers can reach bigger markets that would be challenging for them to access on their own.
Lending to members
A credit and thrift cooperative gives financial assistance to its members. Loans are granted at little or no interest rate. Unlike banks, cooperatives do not require the provision of collateral before giving loans to members.
Promotes the habit of saving
Members of a cooperative save regularly. By pooling their savings, they have resources they can draw upon in times of need. The savings also provide the fund that is given out as loans to members.
High level of motivation
Because each member has only one vote, there is fairness and active participation by all members. Besides, there is no discrimination in membership admission. Profits are distributed according to participation or patronage. These increase the motivation level.
Formation is relatively easy
Compared with a limited company, the legal formalities involved in forming a cooperative are less stringent. It is easy for people with similar interests to register and manage a cooperative.
Limited liability for members
If a cooperative is registered, its members have limited liability. The maximum each member can lose, if there is a problem, is limited to the amount invested in the cooperative. Members’ personal assets cannot be used to settle the debts of the business.
No profit-making motive
Cooperatives are not formed primarily to make profit. They promote the welfare of their members through healthcare, education, housing, etc. This reduces reliance on government or non-government organisations for assistance.
Disadvantages of a cooperative
Capital is inadequate
The major source of finance for the cooperative is members’ contributions. Unlike a limited company, it cannot raise large capital by issuing shares to members of the public. Consequently, there is inadequate capital for investment or expansion.
Poor management
Many cooperatives are managed by members who do not have the skills to make the business successful. The different functions, from marketing to purchasing, accounting, and administration, are handled by people without the requisite qualifications and expertise. The continued existence of many cooperatives is also threatened because they are fraught with mismanagement, fraud and embezzlement.
Delayed decision-making
Democratic decision-making is slow because members have to approve important decisions. This makes it difficult for the business to quickly respond to opportunities and threats.
Limited capacity to compete
Cooperatives do not have the resources-both human and financial- to compete with large companies.
Low commitment
The lack of commitment by members can lead to the demise of the business. Some members do not take part in the activities due to persistent absence.