The Legal Structure of Cooperatives

Legally speaking, what is a cooperative? It is an organization that is legally owned and mutually controlled by those who make up the cooperative. Members are most often producers, consumers, or employees related to the enterprise.

Cooperatives can exist in a variety of legal forms. They can be incorporated and limited by guarantee, shares, or partnerships, or they can be unincorporated. In some European countries, such as Sweden and Finland, these are the specific forms of incorporation that cooperatives may adopt, while in the United States, state-specific laws govern the legal structure of cooperatives. Under various state and federal legislation, cooperatives can either be unincorporated or structured as limited liability companies, partnerships, or non-capital stock corporations. In the case of incorporated co-ops, the variations allow for varying degrees of return and amounts of control, most often based on members’ participation in the co-op.

Economic benefits

The success of cooperatives and mutual enterprises may be due in large part to the creation of a competitive environment. What follows is an environment that has regulation, longevity, and the margins and underlying structure to allow for welfare objectives to be practiced. In this sense, the cooperative finds substantial benefit in a competitive environment, provided that maintenance of regulatory structures and adherence to basic principles.

There are other factors, however, in determining the health of a cooperative in the face of competition. In 1991, Llewellen and Holmes posited that mutuals must have a rather large efficiency advantage in comparison with Plcs. This allows them to create goals that significantly differ from those of the Plcs, however, without this efficiency advantage, the two forms of enterprise begin to lose their distinctiveness. From this perspective, competition and small margins are damaging to mutuals, as behavioral differences with Plcs are minimized.

There are definite ambiguities and questions of judgment in these areas, particularly in the case of building societies and mutual life insurers in the UK. If banks are distinct from building societies, then UK Plc and its mutual competition may not exhibit the same differentiation.

Building societies, for example mutual life insurers, can make choices on their objectives when in a regulated environment where capital returns are high. And of course, this ability to choose creates complications because those objectives relating to price levels can be set based upon the market, not only in terms of serving individuals who are denied access or given poor terms by another provider, but also in the presumed analysis of non-mutual competitors’ behavior.

Customers and their perspectives are also of great consequence when considering competition and its effects. If a consumer is well-informed and the market environment is very competitive, then consumers will demand only the best. On the other hand, when competition in markets is imperfect, and the consumer is uninformed, institutional policies can determine greatly how the consumer will be treated. Throughout cooperative history, sellers have either exploited or taken on an ethical responsibility for the consumer in such situations.

The importance of mutuals in the savings market may largely be due to small depositors’ generally uninformed decision making. According the Rasmusen’s Uninformed Depositor Model, banks typically operate on the basis of information asymmetry, where managers have an understanding of risks faced, whereas depositors are given relatively little information. Of course, this is explained by the high cost of meaningful involvement in building societies, where the benefits obtained by keeping in constant awareness of and participating in affairs do not justify the costs of maintaining that awareness, as illustrated by Ingham and Thompson. At one time in cooperative history, building society members were levied with fines for not showing up to yearly meetings, until such time as people began slipping off to the nearest bar once roll was called. Rasmussen asserts that depositors will show preference for a mutual where they perceive increased regulation and thus a lack of risk-taking behavior. They may also have an understanding of the propensity towards risk in bank managers versus prudence in mutual managers, as posited by both Rasmusen and Masultis.

The argument could be made that mutuals’ success is a result of simplified relationships due to the lack of external shareholders, or to the mutuals’ capacity for using surpluses to lower product prices. However, when a market for corporate control is in place, or when there are external claimants, there can be substantial pressure on cost economies. Prior to deregulation in the UK, building societies aimed for growth through increased and maintained earnings, which was in the managers’ interest. Such minutiae, however, is of little consequence to the uninformed depositor.

Masulis has proposed that the boards of directors of MS&Ls have access to only a portion of the earnings garnered by the Saving and Loan, therefore they are less compelled to take risks, where as Plc executives are able to sell their stocks are profit enormously from the company’s profits.

The Identity of Cooperatives

The values of “self-help, self-responsibility, democracy and equality, equity and solidarity” are what cooperatives are based on. This is in addition to the seven cooperative principles of open membership, fair control by all members, economic participation by all members, independence and autonomy, education, helpful and friendly relations with other cooperatives, and civic concern.

Cooperatives can be split into two categories: producer cooperatives or consumer cooperatives. They are closely related to collectives, although social wellbeing is placed before profit-making. The identifying suffix of cooperatives on the internet, and any organization using this must maintain the values of the cooperative.

Cooperative historyhas shown that, like their predecessors, members of cooperatives place high value in honesty, social responsibility, openness, ethical decision-making, and caring for the well being of others. There is a range of social characteristics that are attributed to such legal entities, however they all foster open memberships and proportionately distributed economic benefits based upon participation rather than capital investment.

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