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Cooperative Form of Business


In this article we will discuss about the cooperative form of business.

Definition of Cooperative Form of Business:

Single ownership firms, partnership firms and the joint stock companies are described as capitalistic form of business organisation. All these forms of business organisation are operated with a view to making profits. The society, as a whole, loses in many ways because of the profit motive.

Large sums are spent for advertisement, propaganda, etc., the workers are exploited, the consumers are forced to pay high prices, the production of luxuries is encouraged and that of necessaries neglected. In the opinion of many writers, production may be carried on without these evils through a form of business organisations which is called cooperation. A business organisation modelled on the principle of cooperation is called a cooperative society.


A cooperative society has been defined in various ways. One such definition is as follows- When some people voluntarily combine together for achieving an economic objective on the basis of equality, they form a cooperative society. Another definition states that through a cooperative society weak and unorganised poor people can enjoy some of the economic advantages of rich people. As a result of this, poor people can develop their faculties properly.

Principles of Cooperative Form of Business:

In analysing the above two definitions, we discover some principles or characteristics of cooperation. Prima facie, the fundamental cause of the birth of the cooperative movement is the oppression of the poor by the rich.

The economically handicapped poor people can combine in a cooperative society for improving their financial position. Poor people do not possess much capital, nor can capital be a prime factor of production in a cooperative society. The members of a cooperative society join hands, not as owners of capital but as ordinary people.

Secondly, the members of a cooperative society combine together on the basis of equality. The owners and the labourers, the managers and the ordinary employees are not two groups of people. Since the members of a cooperative society combine together voluntarily for achieving some eco­nomic objectives, every member is at once a labourer and an owner, a manager and an employee. There is no inter personal discrepancy as man­agers and labourers. Since they have united to achieve common goals, each one is both an owner and a labourer, simultaneously director and employee.


Thirdly, as people join co-operative societies voluntarily, they can also leave them at any time. The principle of co-operation is — each must work for all and all must work for each. This principle cannot be enforced if membership is not voluntary. A man cannot be made to work for others forcibly.

Finally, the most important objective of a cooperative society is to further the economic interests of the members. So, a cooperative society considers the interests of the members only and such interests must also be economic in nature.

It is thus seen that cooperation is an important way of improving the economic condition of the people. This form of business organisation is very appropriate for those people who, due to lack of adequate capital, cannot form joint stock companies or partnership firms.

In a country like India, cooperation is almost indispensable in the field of agriculture. In our country the farmer is the poorest and the most helpless of all persons. The size of his holding is too small to make agricultural operations profitable. In most cases, due to remoteness of the markets the farmers do not get a fair price for their products. They are often forced to sell their produce to the middlemen at cheap prices.


This leaves no surplus for them and, therefore, the farmers have to borrow money from the village moneylenders. The moneylenders charge very high rates of interest and exploit the farmers in various ways. The farmers are sometimes forced to sell their land and become landless labourers. Under these circumstances the importance of the cooperative movement for the improvement of agriculture can hardly be denied.

Cooperation can also be successful in small industries, because such industries do not require much capital and organising skill. Cooperative organisation is also very appropriate for retail stores. If the consumption goods of day-to-day necessity are purchased through a cooperative society they can be obtained at cheaper prices and the profits of the society can also be distributed among the members.

A co-operative credit society, from which money can be borrowed on easy terms, is the most important type of cooperative business. This is particularly advantageous not only for the farmers but also for the middle class people. The cooperative movement began in India 1904 mainly with this objective.

Advantages of Cooperative Form of Business:

A cooperative organisation usually commands the follow­ing advantages:

1. Cost saving:

The voluntary service rendered by members themselves reduces the operating cost to a great extent. Consequently, the managerial cost is practically nil in most cases. Middleman’s profit is also very low as the consumer members control their own supplies.

2. Avoidance of wastes:

There is no danger of speculation due to mis­matching of demand and supply and losses arising there-from. Since de­mand and supply are well-matched, excess production and accumulation of unnecessary stocks can be avoided. These result in smaller working capital requirement, lower risk and ensuring high liquidity.

3. Fiscal concessions:


It enjoys various advantages associated with tax exemptions, financial assistance, lower stamp and registration fees largely due to its social character. State control gives it a sense of stability and enables it to hold its operation in check.

4. Economy:

Overhead expenses including marketing costs virtually do not exist. This very fact enables cooperative societies to act as a cheap source of supply of certain essential commodities.

5. Development of human value:


Emphasis on moral character and development of personal qualities in cooperatives make them ideal organ­isations for the development of human value. It imparts moral and educa­tive values to the everyday life of members and fosters a sense of fellow-feeling among them, an essential pre-requisite for better living.

6. Democratic management:

Cooperative societies also boasts for demo­cratic management, thereby reducing inequalities and carrying on a sense of welfare for all its members. This, in its turn, enables such societies to achieve a pragmatic compromise between radical communism and extreme capitalism.

7. Consumer protection:


Co-operative forms of organisations are suitable both for poor people as also the backward classes. This very fact provides them an opportunity to satisfy their own needs and wants, and protect them from the exploitation of traders, speculators and black-marketers.

Disadvantages of Cooperative Form of Business:

Although enjoying so many advantages, the cooperative form of organisation like all other forms have certain limitations or draw­backs.

These are the following:

1. Lack of efficiency:


On account of lack of business experience and managerial skills among the members, the business of a co-operative is not conducted efficiently. It is handicapped by the fact that there is often need to seek help from experts.

Such help is needed for two reasons:

(a) Limited means and

(b) Social character (i.e., promoting the welfare of members).

2. Personal gain:

Cooperative organisations live on the spirit of coopera­tion which unfortunately gets diluted with the passage of time and members are often found to indulge in activities promoting their personal gains behind the veil of such societies. Common interest gradually recedes in the background and individual interest takes its place.

3. Lack of funds:

Cooperative societies also suffer from lack of funds and capital raising ability as enjoyed by big business houses.

This is attributable to a number of factors such as:

(i) Non-transferability of shares,

(ii) Limits to dividends,

(iii) Limits to the number of shareholding, and above all,

(iv) Non-profit seeking objective.

These factors count a lot at the end inasmuch as investors are interested in maximising their own gain.

4. High cost:

Moreover, most cooperative organisations operate on a very small scale. They also adopt labour-intensive technique of production. So they cannot enjoy economies of scale and reduce cost even in the long run’ Moreover, due to lack of managerial expertise they cannot introduce mod­ern methods of cost reduction and cost control.

5. Internal rivalries:

Internal rivalries and factions often transform such organisations into a debating body instead of a united, joint and cohesive front which forms the very basis of cooperation.

6. Lack of incentives:

Furthermore, the complete absence of monetary motivation also acts as a constraint or the growth of cooperatives in the long run. So, the society gradually become a system devoid of financial incentives — in-acting, lifeless and lethargic. All these act as a growth-retarding factor and make a cooperative society a static entity. Moreover, the limited size of the market for the products of cooperatives creates inefficiency and keeps production cost high.

7. Erosion:

In such organisations, there is no provision for maintaining business secrecy. This very fact makes such organisations prone to erosion in the face of strong competition.

In India, cooperation has failed but it must succeed. This form of business organisation must be encouraged as advantages far outweigh disadvan­tages. Some of the abuses of the co-operative societies can be removed if members act sincerely and with a true spirit of cooperation.

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