Advantages and Disadvantages of Cooperative Society

Everything you need to know about the advantages and disadvantages of cooperative society.

A co-operative form of business organization is different from other forms of organizations. It is a voluntary association of people with collectively owned fund, organised on the democratic principle of equality, who join together to supply for their requirements through mutual action, and in which the objective is service rather than profit.

The primary objective of forming a co-operative is to protect the economically weaker sections of the society from the oppression of the economically organised strong segment of the society.

The principle underlying a co-operative organization is mutual help, i.e., “each for all and all for each”.

“It is an association of the weak who gather together for a common economic need and try to lift themselves from weakness into strength through business organisation.” -TALMAKI

Some of the advantages of a cooperative society are:-

1. Easy to Form 2. Open Membership 3. Democratic Management 4. Limited Liability 5. Stability 6. Economical Operations 7. Government Patronage

8. Low Management Cost 9. Mutual Co-Operation 10. No Speculation 11. Economic Advantages 12. Service Motive 13. Internal Financing 14. Income Tax Exemption

15. Durability 16. Cheaper Goods 17. State Patronage 28. Elimination of Middleman 19. Equality 20. Perpetual Existence 21. Scope for Self-Government.

Some of the disadvantages of a cooperative society are:-

1. Limited Capital 2. Inefficient Management 3. Absence of Motivation 4. Differences and Factionalism among Members 5. Rigid Rules and Regulations 6. Lack of Competition 7. Cash Trading 8. Lack of Secrecy 9. Weightage to Personal Gains 10. Lack of Incentive and Initiative

11. Corruption 12. Limited Consideration 13. High Interest Rate 14. Undue Government Intervention 15. Differences of Opinion 16. Lack of Expertise 17. State Control 18. Lack of Loyalty 19. Lack of Understanding of Principle of Cooperative Societies 20. Lack of Universal Applicability.

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Advantages and Disadvantages of Cooperative Society

Advantages and Disadvantages of Cooperative Society – 12 Points

Advantages:

The cooperative form of organization offers the following advantages:

1. Easy to Form- A cooperative society is a voluntary association and may be formed with a minimum of ten adult members. Its registration is very simple and can be done without much legal formalities.

2. Open Membership- Membership in a cooperative organisation is open to all people having a common interest. A person can become a member at any time he likes and can leave the society at any time by returning his shares, without affecting its continuity.

3. Democratic Management- A cooperative society is managed in a democratic manner. It is based on the principle of ‘one man one vote’. All members have equal rights and can have a voice in its management.

4. Limited Liability- The liability of the members of a co-operative society is limited to the extent of capital contributed by them. They do not have to bear personal liability for the debts of the society.

5. Stability- A co-operative society has a separate legal existence. It is not affected by the death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly stable life and continues to exist for a long period.

6. Economical Operations- The operation of a cooperative society is quite economical due to elimination of middlemen and the voluntary services provided by its members.

7. Government Patronage- Government gives all kinds of help to co-operatives, such as loans at lower rates of interest and relief in taxation.

8. Low Management Cost- Some of the expenses of the management are saved by the voluntary services rendered by the members. They take active interest in the working of the society. So, the society is not required to spend large amount on managerial personnel.

9. Mutual Co-Operation- Cooperative societies promote the spirit of mutual understanding, self-help and self-government. They save weaker sections of the society from exploitation by the rich. The underlying principle of co-operation is “self-help through mutual help.”

10. No Speculation- The share is always open to new members. The shares of co­operative society are not sold at the rates higher than their par values. Hence, it is free from evils of speculation in share values.

11. Economic Advantages- Cooperative societies provide loans for productive purposes and financial assistance to farmers and other lower income earning people.

12. Other Benefits- Cooperative societies are exempted from paying registration fees and stamp duties in some states. These societies have priority over other creditors in realising its dues from the debtors and their shares cannot be decreed for the realisation of debts.

Disadvantages:

As against the advantages of co-operatives, the following limitations and drawbacks of this form of organization must also be noted:

1. Limited Capital- Cooperatives are usually at a disadvantage in raising capital because of the low rate of return on capital invested by the members.

2. Inefficient Management- The management of a co-operative society is generally inefficient because the managing committee consists of part-time and inexperienced people. Qualified managers are not attracted towards a cooperative on account of its limited capacity to pay adequate remuneration.

3. Absence of Motivation- A cooperative society is formed for mutual benefit and the interest of individual members is not fully satisfied. There is no direct link between effort and reward. Hence, members are not inclined to put their best efforts in a co­operative society.

4. Differences and Factionalism among Members- Once the initial enthusiasm about the co-operative ideal is exhausted, differences and group conflicts arise among members. Then, it becomes difficult to get full co-operation from the members. The selfish motives of members begin to dominate and service motive is sometimes forgotten.

5. Rigid Rules and Regulations- Excessive Government regulation and control over co-operatives affect their functioning. For example, a co-operative society is required to get its accounts audited by the auditors of the co-operative department and to submit its accounts regularly to the Registrar. These regulations and control may adversely affect the flexibility of operations and the efficiency of management in a co-operative society.

6. Lack of Competition- Cooperatives, generally, do not face any stiff competition. Markets for their goods and services are more or less ready and assured. Hence, there is possibility of slackening of efforts.

7. Cash Trading- The members of the societies are generally from poor sections of the society. These persons need credit facilities. On the other hand, private traders extend credit facilities to the consumers. Though the societies sell goods at lower prices but absence of credit facilities compel them to go to private traders for meeting their requirements.

8. Lack of Secrecy- The affairs of a co-operative society are openly discussed in the meetings of the members. Every member is free to inspect the books and records of the society. Therefore, it becomes difficult to keep the secrets of business.

9. Weightage to Personal Gains- Mutual co-operation erodes away over a period of time and the members start giving weightage to their personal gains.

10. Lack of Incentive and Initiative- In a cooperative society form of organisation everybody is the owner of the society and over a period of time it becomes lifeless due to a lack of incentive and initiative as everybody is the owner, but business does not belong to any one of them.

11. Corruption- It is the worst demerit from which co-operative societies suffer, it is the biggest hindrance in the development and growth of business.

Other drawbacks:

(a) Groupism in Management,

(b) Inflexible Operations,

(c) Absence of Motivation.

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Advantages and Disadvantages of Cooperative Society (with notes)

Advantages of a Cooperative Society:

The advantages of a cooperative society have been identified as under:

1. Easy to Form:

Forming a cooperative society is a no-brainer. Minimum 10 adults are needed to form a cooperative society. The funds and time required is minimal to get the society registered. The legal formalities are bare minimum.

2. No Restriction on Membership:

The membership of cooperative society is open for all and the members can walk out of the organisation of their own free will. No discrimination is made on the basis of gender, caste, creed and political association. The shares of a cooperative society are so affordable that even the low income groups can purchase them.

3. Limited Liability:

The liability of the members is limited to the extent of the capital contributed by them. Therefore, not only the members are absolved from the fear of attachment to their private property, in case the society goes through financial losses; the share of risk of each member is also known beforehand.

4. Service Motive:

Cooperative societies are meant for serving their members. Unlike other business organisations, they are not profit-driven. They aim to provide finer goods and services at reasonable rates. Further, cooperative societies render financial help to their members at a concession. They prevent the concentration of economic power and wealth in a few hands. They are also a breeding ground for mutual cooperation, brotherhood, moral values, service and many other virtues.

5. Democratic Management:

In a cooperative society, the representatives are elected on the basis of ‘one member one vote.’ Therefore, the management is totally democratic. Each member has the right to equal say or equal vote regardless of the capital contributed by him or her.

6. Low Cost of Operations:

The operational or administrative expenses of cooperative societies are low because the members offer their services in exchange for nothing. There is no loss due to bad debts because the goods and services are being sold in cash. Moreover, there is no need for massive advertisement to promote the stock. Absence of middlemen is another factor that regulates unnecessary expenditure.

7. Internal Financing:

Cooperative societies transfer a part of their profits to the general reserve every year. The dividend to the shareholders on profit cannot be more than 10 percent. Consequently, the ‘retained earnings’ are ploughed back into the company for diversification of its business.

8. Income Tax Exemption:

Cooperative societies enjoy the privilege of paying no taxes to the government on their earnings. They are also exempt from paying Stamp Duty and Registration Fees.

9. Durability:

After getting registered, a cooperative society becomes a distinct legal entity. The death or bankruptcy of the members has no effect on its functioning. For this reason, it is a durable enterprise.

10. Cheaper Goods:

The cooperative societies directly buy goods from wholesalers and producers. Thus, they are able to procure goods at a cheaper rate.

11. State Patronage:

The aim of cooperative societies is to serve and strengthen the weaker sections of the society. Therefore, the government helps them by offering them loans on easy terms and conditions. They also offer special grants and subsidies to the cooperative societies.

Disadvantages of a Cooperative Society:

The disadvantages of a cooperative society have been defined below:

1. Limited Resources:

The financial strength of cooperative societies is low due to limited supply of capital. The membership fee is less as most members belong to middle and low income groups. The face value of shares is also very nominal. In addition, the loan raising capacity from state cooperative banks is also limited. Thus, cooperative societies are incapable of striving for expansion due to shortage of funds.

2. Incapable Management:

The managerial board of a cooperative society is elected by the members. These members may not possess adequate qualifications and skills to run a business organisation efficiently. This can prove to be a major drawback for the success of the cooperative society.

3. Lack of Motivation:

Honorary office bearers of the society may lack enthusiasm to perform their office duties as they get little or no incentive to work hard. Due to absence of link between efforts and material rewards, the members may lack the zest to serve the organisation to the best of their abilities. The results of such negatives are bound to show up in the functioning of the cooperative society.

4. Rigid Business Practices:

Cooperative societies follow conventional modes of sale. They cannot embrace new-age selling methods such as credit sale, home delivery, discount sales, etc. Therefore, their rigid business techniques fail them in competing with private business establishments.

5. Limited Consideration:

The cooperative societies are established for the purpose of serving their members. Profits earned by them are very low. As a result, the low return on investment is a factor which demotivates people from becoming the member of these enterprises.

6. High Interest Rate:

The cooperative societies enjoy the privilege of credit options from banks. Yet, the high rate of interest eats away a big chunk of their earnings. Thus, they are unable to save much as a large part of their income is spent on paying the high interest and principle amount to the financial institutions.

7. Lack of Secrecy:

The affairs of a cooperative society are openly discussed in meetings. The members can independently audit the books and records. Due to lack of secrecy in the business affairs, a number of loopholes are created within the organisation.

8. Undue Government Intervention:

The daily operations of a cooperative society are subject to government rules and regulations. Regular book-keeping, auditing and inspection of accounts by the government officials are mandatory aspects of the organisation. The reports have to be submitted to the registrar. All these legal formalities take a lot of time and consequently inhibit efficiency.

9. Conflict among Members:

The members of cooperative society come from different walks of life. Often, their views on important issues may differ from each other leading to strong resentment and disharmony among them. Some ambitious members also want to control the functions of the organisation. Blinded by the society, thus, crippling its efficiency.

10. Miscellaneous Drawbacks:

Apart from the disadvantages mentioned above, a cooperative society has to endure the following problems:

(i) Members may misuse funds for selfish motives.

(ii) Groupism, favoritism and casteism in management.

(iii) Erroneous maintenance of the books.

(iv) Hindrances created due to the conservative and illiterate mindset of the members.

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Advantages and Disadvantages of a Cooperative Society: 5 Points

Advantages of a Cooperative Society:

(i) Equality in Voting Status – The principle of ‘one man one vote’ governs the cooperative society. Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights.

(ii) Limited Liability – The liability of members is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts.

(iii) Stable Existence – Cooperative Society existence isn’t affected by death, bankruptcy or insanity of the members. A society, therefore, operates unaffected by any change in the membership.

(iv) Economy in Operations – Cooperative society is generally managed by the members themselves on an honorary basis. The focus is on elimination of middlemen, which helps in reducing costs. The customers or producers themselves are members of the society, which also reduces the risk of bad debts.

(v) Support from Government – As it is based on democratic pattern, the cooperative society enjoys support from the Government in the form of low taxes, subsidies, and low interest rates on loans.

(vi) Ease of Formation – The cooperative society can be started with a minimum of ten members. The registration is simple involving a few legal formalities. Its formation is governed by the provisions of Cooperative Societies Act, 1912.

Disadvantages of a Cooperative Society:

(i) Limited Resources – A cooperative society faces shortage of resources as it is run by members, who have limited means. The low rate of dividend offered on investment also acts as an obstacle in attracting membership or more capital from the members.

(ii) Inefficiency in Management – Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. The members who offer honorary services on a voluntary basis are generally not professionally equipped to handle the management functions effectively.

(iii) Lack of Secrecy – Affairs of cooperative society are openly discussed in the meetings of members and its accounts are published. So, it is difficult to maintain secrecy about the operations of a cooperative society.

(iv) Government Control – Cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc.

(v) Differences of Opinion – There are often internal quarrels due to differences of opinions and lack of cooperation among members. It leads to difficulties in decision-making. Some members attempt to give preference to personal interest at the cost of welfare motive.

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Advantages and Disadvantages of Cooperative Society – Explained!

Merits:

1. Ease of Formation – Any ten persons can come together and form a cooperative society. The legal procedures for registration are very simple. There is no complexity as in case of Joint Stock Company.

2. Economical – Registration of cooperative society is exempt from registration fees. Stamp duty also need not be paid. Hence, even people with very limited means can also start a cooperative society.

3. Democratic Management – The affairs of the cooperative society are managed by a Board of Directors duly elected by the members. The elected members can also be removed from office. Thus, there is no single person having complete control of the management.

4. Equality – All the members are equal to each other. Each member has only one vote irrespective of his shareholding. Thus, all opinions are given due weightage and a segment is not allowed to dominate.

5. Limited Liability – The liability of member is restricted to the total contribution made by him towards the capital of the cooperative society. The private property of members is not affected.

6. Elimination of Middleman – A cooperative society takes up activities that bring the members in direct contact with customers. Middlemen are eliminated but producers and consumers gain from the more.

7. Perpetual Existence – A cooperative society is an independent legal entity. It has perpetual existence and is unaffected by death, insolvency etc. that may have led to closure of business.

8. State Assistance – Cooperative societies are encouraged by Governments on account of the various objectives attained by them. Grants from state are one of the major sources of finance for the cooperative societies. This ensures better financial health of the cooperative and greater chances of growth.

9. Privileges – Cooperative societies are granted exemption from payment of Income Tax, Stamp Duty, Registration charges etc. Finance is made available at concessional rates of interest.

10. Internal Finance – Cooperative societies act limits the amount of divided that can be declared by the society to 6.25% of capital. ‘The Undistributed Profits’ or ‘retained earnings’ are reinvested for further growth of the society.

11. Service Motive – Cooperative societies are guided by service motive rather than profit motive. They are not competitive in nature and do not attempt to maximize profits at the expense of others. The aim of the society is mutual benefit.

12. Economy in Operation – Cooperative societies spend little on expenses such as establishment charges, advertisements etc. Management and Employees also offer their services at a nominal charge. Thus, a co­operative is able to offer its products at a lower price on account of lower price on account of lower expenses of operation.

13. Personal Liberty and Social Justice – Cooperative society is a voluntary organisation that can flourish under capitalist as well as communist economic systems. It not only ensures that the members of the society are able to earn more, but society is also benefited. It ensures both personal liberty and social justice.

14. Presents Contribution of Wealth – The profits of a cooperative society are distributed on the basis of individual transactions of members with the society. This recognises the value of economic justice and presents concentration of wealth in a few hands.

15. Presents Speculation – The membership of the society is always open. Any person can become a member or quit being a member at any time. The shares belonging to the members are not tradable on the market, it is thus free from the evils of speculation.

16. Scope for Self-Government – Cooperatives provide scope for self-government workers, consumers, farmers etc. receive training in these societies in different fields of business.

17. Social Virtues – Cooperative society encourages in its members, the virtues of self-reliance, mutual help, honesty and discipline amongst its members.

18. Social Benefits – Cooperative societies inculcate a feeling of brotherhood amongst the members. There is better understanding of viewpoints of others, resulting in reduction of social friction.

Limitations:

1. Limitation of Capital- Cooperative societies are mainly started by people with limited means. Moreover, capital earns only a small rate of return. Hence, there is no incentive to contribute capital. Thus, the total capital of the society is likely to be much less, inspite of having a large number of members.

2. Management Commitment- Members elect their representatives to manage the affairs of the society. Normally, lot of members will be given a chance to participate in management. The people elected also may not be keen to continue for a long period, as remuneration is only honorary. Thus, the management might be weak, unstable and lacking in commitment.

3. Lack of Expertise- On account of limited resources and small scale of operations, cooperatives cannot afford to avail of the services of experts. The staff is largely inefficient and unaware of basic principles of co­operative societies.

4. State Control- The operations of cooperatives are largely being controlled by the state, on account of the amount of funds provided by the Government to the society. There is very little that the members can actually do on their own without consulting the Government. This destroys flexibility, hampers the growth of the business.

5. Lack of Loyalty- The bulk of transactions of a cooperative is with its members. The success of the cooperative depends on the loyalty of the members to the cooperative. For example, farmers in Gujarat are fiercely loyal to their cooperative, resulting in the success of “Amul’. However, in Andhra Pradesh, the ‘Vijaya’ brand of milk and milk products is not so successful, as many farmers shifted their loyalties to private companies.

6. No Secrecy- The membership of a cooperative is always in a state of new members keep joining, while old members might withdraw. Since the affairs of the society need to be made known to all the members, there is no secrecy of business matters. This results in surrender of competitive advantage.

7. Difference of Opinion- The cooperatives give equal weightage to the opinion of all its members. In case of serious difference of opinion between any two groups, it becomes difficult to resolve the issue. The resultant friction may spillover to other issues also.

8. Cash Trading- Cooperative societies transact with members, who are mostly people with limited means. They need credit facilities. By insisting only on cash transactions, cooperatives are losing a sizeable portion of the market.

9. Lack of Understanding of Principle of Cooperative Societies- Many members of a society join the society on peer pressure or on advice of local leaders, without fully understanding the principles on which the society has been founded. Since their members have an equal voice on any issue, they are likely to create confusion and problems for other members.

10. Lack of Public Confidence- The performance of Cooperative societies in many parts of the world does not inspire confidence. The initial optimism of collective effort for mutual gain is being questioned. A greater proportion of members of such societies is opting out of such arrangements.

11. Lack of Universal Applicability- A cooperative society form of business cannot be applicable in all circumstances. They are particularly unsuitable for large-scale industries.

12. Other Problems- Inefficiency, ignorance of principles of cooperation, misappropriation of funds, pursuing sectional goods and political propaganda have resulted in recurring losses and also relative inefficiencies in the cooperative study.

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Advantages and Disadvantages of a Cooperative Society: 6 Points

Advantages of a Cooperative Society:

The various merits of a cooperative society form of organisation are described below:

1. Equality in Voting Status – A cooperative society is constituted on the principle of ‘one man one vote’. It’s every member enjoy the equal voting status regardless of the capital invested by him/ her.

2. Limited Liability – The liability of the members of the cooperative society is limited to the extent of capital invested by them. The personal assets of the members cannot be used to settle the claims of the business against outsiders.

3. Stable Existence – It is a stable form of a business organisation. The existence of a cooperative society is not affected by the death, insolvency or insanity of its members.

4. Economy in Operations – The operations of a cooperative society are economical in nature. This is due to multiple factors like the members may work on honorary basis, elimination of middlemen, etc.

5. Support from Government – A cooperative society seeks to work towards social welfare and follow a democratic pattern, it gets constant support from the government in the form of taxes, subsidies, loan on interest is low, etc.

6. Ease of Formation – A cooperative society comes into existence through a simple registration process which is governed by the Cooperative Society Act 1912. A minimum of ten persons is required to start a cooperative society.

Disadvantages of a Cooperative Society:

A cooperative society form of business organisation suffers from certain limitations as outlined below:

1. Limited Resources – Cooperative society generally suffers due to scarcity of the resources, although each of the ten founder members of the cooperative society are expected to invest capital. The inclination to invest large capital may not be there among the members as the rate of return on investment is low.

2. Lack of Secrecy – Since the business is governed by the regulations of the Cooperative Societies Act, it is difficult to maintain secrecy in its operations. Moreover, all the related matters are discussed openly in the meetings.

3. Government Control – The cooperative societies are provided constant support from the government through grant of subsidies. Consequently they are subject to government control in the form of compliance with various rules and regulations related to both submission and auditing of accounts.

4. Inefficiency in Management – Usually the members of the cooperative society are neither professionally qualified nor can the business afford to hire professionals on high salaries. As a result, the management of such forms of organisation may not be very efficient.

5. Difference of opinion – Sometimes, the conflicts among the members on various issues may have an adverse effect on the working of the business. Moreover, some members may tend to propagate their personal interests at the cost of common good.

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Advantages and Disadvantages of Cooperative Society: 5 Points

Merits of a Cooperative Society:

1. Ease of Formation:

Only ten adult persons having common interest are required to form a cooperative society. The registration procedure is very simple involving very few legal formalities. It is governed by the provisions of Cooperative Societies Act 1912 or any State Cooperative Act which are very simple to understand.

2. Democratic Management:

The principle of ‘one member one vote’ is followed irrespective of the number of shares held by a member.

3. Limited Liability:

The liability of the members of a cooperative society is limited to the extent of the share capital contributed by them. The personal property of the member cannot be used to repay the business liabilities.

4. Continuous Existence:

Death, lunacy and bankruptcy of any of its member does not affect the functioning of a cooperative society. It enjoys a stable existence. This is because it has a separate legal entity independent from its members.

5. Economical Functioning:

The aim is the elimination of middleman. It helps in reducing costs. Moreover, members often offer honorary services to the society. The members are either customers or producers or both, so it reduces the risk of bad debts also. Thus, its functioning is very economical.

6. Government Support:

Government provides all kinds of help to cooperative societies in the form of relief in taxation and subsidies. It offers loan to them on low rates of interest.

7. Social Uplift:

These cooperative organisations prevent concentration of wealth and economic power in few hands. They encourage self-help and self-reliance. The social values of justice, equality and mutual cooperation are encouraged.

Demerits of a Cooperative Society:

1. Limited Financial Resources and Shortage of Capital:

There is shortage of funds. It is run by members who have limited means. The low rate of dividend paid to members on their investment also acts as a disincentive for attracting more capital from the members. The principle of ‘one man one vote’ even if a member holds more shares, also discourages investment.

2. Inefficient Management:

The cooperative societies are unable to afford services of expert professionals because they can’t pay high salaries or fees. The members, offering honorary services, are not professionally efficient to supervise the operations and management functions effectively.

3. Lack of Secrecy:

Affairs of a cooperative society are freely discussed in the general meetings of members. Its accounts are also published due to compulsory requirement of disclosure as per the Societies Act. It is difficult to maintain secrecy.

4. State Control:

Cooperative societies have to work under several rules and regulations relating to audit and submission of accounts. Thus, the management has lesser autonomy to function.

5. Difference of Opinion and Conflict:

There are bound to be difference of opinion among members. This leads to conflicts and problems in decision making. Members give preference to personal benefit over the society’s benefit.

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