WHAT IS A SOLE PROPRIETORSHIP?

Sole Proprietorship in simple words is a one-man business organisation. Furthermore, a sole proprietor is a
natural person (not a legal person/entity) who fully owns and manages this type of entity. In fact, the
business and the man are the same; it does not have a separate legal entity.

A sole proprietorship is an unincorporated business that has just one owner who pays personal income tax
on profits earned from the business. Many sole proprietors do business under their own names because
creating a separate business or trade name isn’t necessary.

A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government
regulation. As such, they are very popular among sole owners of businesses, individual self-contractors,
and consultants. Most small businesses start as sole proprietorships and either stay that way or expand and
transition to a limited liability entity or corporation.

A sole proprietorship is very different from a corporation, a limited liability company (LLC), or a limited
liability partnership (LLP), in that no separate legal entity is created. As a result, the business owner of a
sole proprietorship is not exempt from liabilities incurred by the entity.

For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of
the sole proprietorship are also the profits of the owner, as all profits flow directly to the business owner.

Features of Sole Proprietorship

1] Lack of Legal Formalities

A sole proprietorship does not have a separate law to govern it. And so there are not many special rules and
regulations to follow. Furthermore, it does not require incorporation or registration of any kind. In fact, in
most cases, we need only the license to carry out the desired business.
And just like in its formation, there is hardly any legal process involved in its closure. All in all, it allows
for ease of doing business with minimum hassles.

2] Liability

Since there is no separation between the owner and the business, the personal liability of the owner is also
unlimited. So if the business is unable to meet its own debts or liabilities, it will fall upon the proprietor to
pay them. For instance, he may have to sell all of his personal assets (like his car, house, other properties
etc) to meet the debts or liabilities of the business.

3] Risk and Profit

The business owner is the only risk bearer in a sole proprietorship. Since he is the only one financially
invested in the company. As a result, he must also bear all the risk. In other words, if the business fails or
suffers losses he will be the one affected.

However, he also enjoys all the profits from the business. He does not have to share his profits with any
other stakeholders since there are none. So he must bear the full risk in exchange for enjoying full profits.
4] No Separate Identity

In legal terms, the business and the owner are one and the same. No separate legal identity will be
bestowed upon the sole proprietorship. So the owner will be responsible for all the activities and
transactions of the business.

5] Continuity

As seen above the business and the owner have one identity. So a sole proprietorship is entirely dependent
on its owner. The death, retirement, bankruptcy, insanity, imprisonment e.t.c will have an effect on the sole
proprietorship. In such situations, the proprietorship may cease to exist and the business may come to an
end.

ADVANTAGES OF SOLE PROPRIETORSHIP

Less paperwork
No need to obtain an EIN from the IRS
Quick and easy setup compared with other business structures
Low fees and costs
Pass-through tax advantage
Easier banking

DISADVANTAGES OF SOLE PROPRIETORSHIP

Unlimited liability goes from business to owner

Difficulty in raising capital

WHAT IS A PARTNERSHIP?

A partnership is a formal arrangement by two or more parties to manage and operate a business and share
its profits.

There are several types of partnership arrangements. In particular, in a partnership business, all partners
share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-
called "silent partner," in which one party is not involved in the day-to-day operations of the business.

TYPES OF PARTNERSHIPS
In a broad sense, a partnership can be any endeavor undertaken jointly by multiple parties. The parties may
be governments, nonprofits enterprises, businesses, or private individuals. The goals of a partnership also
vary widely.

General Partnership
In a general partnership, all parties share legal and financial liability equally. The individuals are personally
responsible for the debts the partnership takes on. Profits are also shared equally. The specifics of profit
sharing will almost certainly be laid out in writing in a partnership agreement.

When drafting a partnership agreement, an expulsion clause should be included, detailing what events are
grounds for expelling a partner.
Limited Liability Partnership

Limited liability partnerships (LLPs) are a common structure for professionals, such as accountants,
lawyers, and architects. This arrangement limits partners' personal liability so that, for example, if one
partner is sued for malpractice, the assets of other partners are not at risk.

How Does a Partnership Differ From Other Forms of Business Organization?

A partnership is a way of structuring a business that involves two or more individuals (the partners). It
involves a contractual agreement (the partnership agreement) between all of the partners that set the terms
and conditions of their business relationship, including the distribution of ownership, responsibilities, and
profits and losses. Partnerships outline and clearly define a business relationship and responsibility.

Unlike LLCs or corporations, however, partners are personally held liable for any business debts of the
partnership, which means that creditors or other claimants can go after the partners' personal assets.
Because of this, individuals who wish to form a partnership should be extremely selective when choosing
partners.

If Partners Don't Have Limited Liability Why Set Up a Partnership?

Partnerships have several benefits. They are often easier to set up than LLCs or corporations and do not
involve a formal incorporation process through a government. This has the added benefit of not being
subject to the same rules and regulations that apply to corporations and LLCs. Partnerships also tend to be
more tax-friendly.

What About Limited Partnerships?

In limited partnerships (LPs), there are general partners who maintain operations of the firm and have full
liability, whereas limited (silent) partners, who are often passive investors or otherwise not involved in
day-to-day operations, enjoy limited liability. A limited liability partnership (LLP) is different from an LP.
In an LLP, partners are not exempt from liability for the debts of the partnership, but they may be exempt
from liability for the actions of other partners. A limited liability limited partnership (LLLP) is a relatively
new business form that combines aspects of LPs and LLPs.

Limited Partnership
Limited partnerships are a hybrid of general partnerships and limited liability partnerships. At least one
partner must be a general partner, with full personal liability for the partnership's debts. At least one other
is a silent partner whose liability is limited to the amount invested. This silent partner generally does not
participate in the management or day-to-day operation of the partnership.

Finally, the awkwardly-named limited liability limited partnership is a new and relatively uncommon
variety. This is a limited partnership that provides a greater shield from liability for its general partners.

What Types of Businesses Are Best-Suited for Partnerships?

Partnerships are often best for a group of professionals in the same line of work where each partner has an
active role in running the business. These often include medical professionals, lawyers, accountants,
consultants, finance & investing, and architects.
ADVANTAGES OF A PARTNERSHIP
Forming a partnership presents unique advantages that can affect every aspect of your business — from
finances and taxes to work-life balance and productivity.

1. No Additional Businesses Taxes

Although partnerships must file information with the FIRS about their annual financial performance
(revenue, profits, losses, gains, etc.), they don’t have to pay income tax at a business level.

Instead, a partnership “passes through” any profits — or losses — to the individual partners. In turn, all
partners must include their share of profits or losses incurred by the business on their tax returns.

2. Access to Complementary Skills and Knowledge

A partnership can provide access to essential skills and experience — especially in areas you personally
lack. Most successful partnerships work well because partners have complementary skill sets and help each
other fill gaps in expertise.

For example, you may be experienced in sales and business development, whereas your other partners
might be certified accountants or expert marketers.

3. Less Financial Burden

Overhead expenses are among the biggest challenges of building a new business. Sharing startup costs and
other expenses with business partners is an attractive aspect of a partnership.

Additionally, having multiple partners enhances the company’s borrowing capacity as the risk is distributed
among partners. Banks and other financial institutions are more inclined to extend credit to partnerships
than to sole proprietorships.

4. Increased Business Opportunities

If your business partner is financially strong, they can help get more funding and cash for your business to
explore new business opportunities. If your partners are experienced, they usually have important industry
and community contacts that can benefit your business.

5. Better Work-Life Balance

A partner can help you shoulder a new business’s workload and other responsibilities. In this way, having
a partner can improve your work–life balance — which studies have shown leads to increased productivity.

6. A Second Perspective

Business owners often get tunnel vision, focusing only on immediate challenges and missing out on
potential solutions. A partner not only brings a fresh set of eyes but also their unique experiences and ideas,
which can be invaluable.

This diversity in thought and approach can lead to innovative solutions and significant growth, helping
your business evolve in ways you might not have imagined.
7. Fewer Formalities and Obligations

There are also fewer ongoing requirements to comply with.

8. Easy to Convert to Other Business Structures

If you decide you need more protection for your business later on, converting your partnership into a
limited liability company is fairly straightforward due to their similar structures of shared decision-making
and flexible management.

9. More Control

While the operator of a limited company or corporation might be subject to the demands of shareholders or
a board of directors, a business partnership involves more freedom. Members answer only to one another
and don’t need to worry about external decision-makers.

10. Privacy and Confidentiality

Partnerships aren’t required to disclose their financial and organizational information publicly. Companies
and corporations, on the other hand, must make this information available to the FIRS and shareholders.

For example, a publicly traded company must distribute an annual report to its shareholders and post it on
its website for the public to view.

DISADVANTAGES OF A PARTNERSHIP

While partnerships enjoy certain freedoms, there are disadvantages as well. The disadvantages of a
partnership highlight why selecting a trustworthy partner is vital.

1. Increased Liability

One of the major disadvantages of a general partnership is the equal liability of each partner for losses and
debts.

Each partner has an unlimited personal liability, which means every partner is responsible for any bad
business dealings the partnership enters into. Every decision your partner makes has potential
consequences for your assets and finances.

For example, if the business has been unprofitable and you can’t make payments on a loan your partner
took out, creditors might sue you and take your personal assets such as bank accounts, cars, and houses.

2. Less Autonomy

Partners have equal decision-making power (unless otherwise specified in the partnership agreement).
Most decisions are made jointly, so you sometimes have to compromise.

To avoid this issue, some partners decide to allow each individual partner have the sole authority to make
decisions on behalf of the partnership on specific subjects (e.g. hiring; borrowing money).
3. Potential for Conflict

Partnerships, like most relationships, can quickly become complicated when associates disagree. This is
especially true if there are only two partners without anyone else as a tie-breaker in a disagreement.

It’s important to outline how disputes will be solved in your partnership agreement.

4. Complications with Future Sale

When forming a partnership business, work an exit strategy into the documentation. Issues can arise when
one partner wants to sell and the other doesn’t.

Typically, if an associate is interested in leaving the partnership, they use an assignment of partnership
interests to transfer the right to receive benefits to a new partner. However, this can introduce a range of
complications that affect the dynamics within the business.

The existing partners may not have an existing working relationship with the new partner, who could be a
complete stranger to the team. Differences in work ethic, management style, and business philosophies
between the existing partners and the new partner can create friction.
If that’s something you’d like to avoid, make sure your partnership agreement contains the right of first
refusal so that the original partners have a right to purchase the interest before an outside party.

5. Lack of Stability

Partnerships, known for their flexibility, lack the inherent stability of incorporated organizations. The
business’s reliance on its partners means that life events like death, birth, illness, or departures can
significantly impact its operations.
Make sure you discuss with your partner how to handle such life events and address them clearly in the
agreement.

6. Perceived Lack of Prestige

For many, a formal business entity structure is a sign of prestige. While some informality can be attractive
for those involved in the organization, it can worry investors looking to put money in or collaborate with
the business.

7. Shared Profits

Partners must share profits like they share labor and overhead expenses. While a partner means more
opportunity to generate increased revenue, it also means that revenue must be shared according to the terms
of the agreement.

WHAT IS LIMITED LIABILITY?

Limited liability is a type of legal structure for an organization where a corporate loss will not exceed the
amount invested in a partnership or limited liability company (LLC). In other words, investors' and owners'
private assets are not at risk if the company fails. In Germany, it's known as Gesellschaft mit beschränkter
Haftung (GmbH).
The limited liability feature is one of the biggest advantages of investing in publicly listed companies.
While a shareholder can participate wholly in the growth of a company, their liability is restricted to the
amount of the investment in the company, even if it subsequently goes bankrupt and has remaining debt
obligations.
Without limited liability as a legal precedent, many investors would be reluctant to acquire equity
ownership in firms and entrepreneurs would be wary of undertaking a new venture.
Several limited liability structures exist, such as limited liability partnerships (LLPs), limited liability
companies (LLCs), and corporations.

How Limited Liability Works

When either an individual or a company functions with limited liability, this means that assets attributed to
the associated individuals cannot be seized in an effort to repay debt obligations attributed to the company.
Funds that were directly invested with the company, such as with the purchase of company stock, are
considered assets of the company in question and can be seized in the event of insolvency.

Any other assets deemed to be in the company’s possession, such as real estate, equipment, and machinery,
investments made in the name of the institution, and any goods that have been produced but have not been
sold, are also subject to seizure and liquidation.

Without limited liability as a legal precedent, many investors would be reluctant to acquire equity
ownership in firms, and entrepreneurs would be wary of undertaking a new venture. This is because
creditors and other stakeholders could claim the investors' and owners' assets if the company loses more
money than it has. Limited liability prevents that from occurring, so the most that can be lost is the amount
invested, with any personal assets held as off-limits.

Limited Liability in Incorporated Businesses

In the context of a private company, becoming incorporated can provide its owners with limited liability
since an incorporated company is treated as a separate and independent legal entity. Limited liability is
especially desirable when dealing in industries that can be subject to massive losses, such as insurance.

What Is Unlimited Liability?

While limited liability separates and protects personal assets from business assets. Some countries allow
the creation of unlimited liability corporations, which means that the shareholder or partner assumes all
liability for the company's success. If the company becomes insolvent, the unlimited liability partner would
be responsible for repaying all debts to creditors.

Benefits of forming an LLC

ADVANTAGES OF LIMITED LIABILITY COMPANY

Tax Option

LLC has an option of taxation that whether they want to be taxed like a partnership or corporation; single
taxes or double taxes depending on their choice. Usually LLC prefers single taxes.
Unlimited Members

LLC doesn’t have a restriction on the number of its members. They can have as many members as they
want. They also have flexibility over the membership style like trusts, estate, organization, etc.

Flexible Management

The management of LLC also has the flexibility of choosing the management style whatever they choose.
Like corporations, they don’t have to follow the pre-decided set of rules.

Fewer Formalities

Another for the flexible management style of LLCs that they involve fewer formalities. They don’t have to
conduct monthly and annual meetings, prepare reports, calling all the shareholders for the meetings, and
record and documenting everything.

Safe Personal Asset

One of the most important benefits of LLCs, that your assets like house, car, and bank balance remain safe
like corporate shareholders. In case of bankruptcy like sole proprietorship and partnership, you have to
liquidate your asset to meet the demands of creditors. But it doesn’t happen in the case of LLC.

DISADVANTAGES OF LIMITED LIABILITY COMPANY

Expensive

Although LLC has many tax and liability benefits; but it is very difficult to raise capital for the company.
People prefer investing their capital in corporations rather than LLC because they see LLC as a risky
investment.

Ownership Transfer

It’s very difficult to transfer your ownership in LLC than corporations. That’s why people prefer
corporations, where transferring ownership is much easier.

Limited Life

Factors like no board of directors and difficulty in transferring ownership make the life of LLC limited.

WHAT IS A CORPORATION?

A corporation is a legal entity that is separate and distinct from its owners. Under the law, corporations
possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and
borrow money, sue and be sued, hire employees, own assets, and pay taxes.

A distinguishing characteristic of a corporation is limited liability. Its shareholders profit through dividends
and stock appreciation but they are not personally liable for the company's debts.
Almost all large businesses are corporations, including Microsoft Corporation and the Coca-Cola
Company. A corporation may be created by an individual or a group of people.

Incorporation
A corporation is created when it is incorporated by a group of shareholders with a common goal who share
ownership represented by their holding of stock shares.

Corporations may return a profit to their shareholders. Some corporations, such as charities and fraternal
organizations, are nonprofit or not-for-profit.

A private or closed corporation may have a single shareholder or several. Publicly traded corporations have
many shareholders.

To their owners, both a limited liability company (LLC) and a corporation have similar legal advantages:
they cannot be held personally liable for the debts of either entity.
The shareholders elect a board of directors in an annual meeting.

Operating a Corporation
The shareholders of a corporation typically receive one vote per share and may hold an annual meeting
during which they elect a board of directors.

The board hires and oversees the senior management responsible for the corporation's day-to-day activities.

The board of directors executes the corporation's business plan. Although the members are not personally
responsible for the corporation's debts, they owe a duty of care to the corporation and can incur personal
liabilities if they neglect this duty. Some tax statutes also provide for the personal liabilities of the board of
directors.

Liquidating a Corporation
The incorporation can be ended using the process called liquidation. This may be a voluntary decision to
cease operations or may be forced by the financial collapse of the business. A company appoints a
liquidator who sells the corporation's assets. The company pays off its creditors and distributes any
remaining money to the shareholders.

An involuntary liquidation is triggered by the creditors of a corporation that has failed to pay its bills. If the
situation cannot be resolved, it is followed by a filing for bankruptcy.

WHAT ARE THE ADVANTAGES OF FORMING A CORPORATION?

There are several advantages to becoming a corporation, including limited personal liability, easy transfer
of ownership, business continuity, better access to capital, and (depending on the corporation structure)
occasional tax benefits. The legal structure of your corporation and the benefits you receive from it will
depend on the specific setup of your business.

Personal liability protection

A corporation provides more personal asset liability protection to its owners than any other type of entity.
For example, if a corporation is sued, the shareholders are not personally responsible for corporate debts or
legal obligations — even if the corporation doesn’t have enough money in assets for repayment. Personal
liability protection is one of the main reasons businesses choose to incorporate.
Business security and perpetuity

Corporation ownership is based on the percentage of stock ownership, which offers much more flexibility
than other entity types in terms of transferring ownership and perpetuating the business for the long term.

Although specific details regarding the transfer of ownership depend on the governing agreement in the
bylaws and articles of incorporation, ownership of this entity type is often easy to buy and sell. For
example, if an owner wants to leave a company, they can simply sell off their stocks. Similarly, if an owner
dies, their ownership stocks can easily transfer to someone else.

Access to capital

Since most corporations sell ownership through publicly traded stock, they can easily raise funds by selling
stock. This access to funding is a luxury that other entity types don’t have. It is great not only for growing a
business but also for saving a corporation from going bankrupt in times of need.

Tax benefits

They may give tax benefits depending on how their income is distributed.

WHAT ARE THE DISADVANTAGES OF FORMING A CORPORATION?

A corporation is not for everyone, and it could end up costing you more time and money than it’t worth.
Before incorporating your business, you should be aware of these potential disadvantages: There is a
lengthy application process, you must follow rigid formalities and protocols, it can be expensive, and you
may be double taxed (depending on your corporation structure).

Lengthy application process

The overall process of incorporating is often a long one. You will likely have to go through extensive
paperwork to properly determine and document the details of the organization and its ownership. For
example, you need to draft and maintain corporate bylaws, appoint a board of directors, create a
shareholders ownership change agreement, issue stock certificates, and take minutes during meetings.

Rigid formalities, protocols and structure

Alongside the lengthy application process is the amount of time and energy necessary to properly maintain
a corporation and adhere to legal requirements. You must follow many formalities and heavy regulations to
maintain your corporation status. For example, you need to follow your bylaws, maintain a board of
directors, hold annual meetings, keep board minutes and create annual reports.

Double taxation

Most corporations face double taxation , which means that the business income is taxed at the entity level
as well as the shareholder level (based on their percentage of profits earned).
Expensive

Corporations are expensive to form and operate. It might be easy for established corporations to raise
capital by selling shares, but forming and maintaining a corporation can be costly. You will likely need a
lot of startup capital to get a corporation running, in addition to paying the filing charges, ongoing fees and
larger taxes. When weighing the pros and cons to determine whether a corporation is the right legal
structure for your business, consult an attorney and an accountant who is well-versed in the implications of
creating a corporation.

CO-OPERATIVE SOCIETY BUSINESS IN NIGERIA: A CLOSER LOOK

According to the Nigerian Co-operatives Societies Act (“Act”), co-operative society means a voluntary
association of individuals, united by common bond, who have come together to pursue their economic
goals for their own benefits.

In another form, a cooperative society is an association of people that come together to pool resources
together to engage in business or economic activities for the purpose of improving their welfare. It is a
jointly owned commercial enterprise duly registered and managed by individuals of the same purpose and
for the benefit of members.

Ownership: In a cooperative, the members own and control the business. Each member has an equal say in
how the business is run, regardless of the amount of money they have invested. In contrast, in other forms
of business organizations such as sole proprietorships, partnerships, and corporations, ownership is held by
one or a few individuals who make decisions on behalf of the organization.

Profit distribution: In a cooperative, the profits are distributed among the members based on their
participation in the business. This means that each member receives a share of the profits, regardless of the
size of their investment. In other forms of business organizations, profits are usually distributed among the
owners based on the amount of money they have invested in the business.

Governance: In a cooperative, the members have a direct say in how the business is run. They elect a
board of directors to make decisions on their behalf, and each member has one vote, regardless of the size
of their investment. In other forms of business organizations, decision-making is often centralized, with a
few individuals or a management team making the majority of decisions.

Purpose: Cooperatives are often formed to meet the needs of a specific group of people, such as farmers,
workers, or consumers. They are typically organized to provide goods and services to their members at a
lower cost than they would be able to obtain from other businesses. Other forms of business organizations
are usually formed to make a profit or provide a service to the general public.
Overall, cooperatives are unique in their focus on democratic ownership and control, equitable profit
distribution, and meeting the needs of a specific group of people.

Co-operative societies in Nigeria are governed by the Act which empowers the Governor of each state to
establish a Directorate for Co-operatives which will be in charge of registering and regulating co-
operatives, pursuant to Section 1(2) of Nigerian Co-operative Societies Act.
Types of Co-operative Societies
Under the Act, there are four types of co-operative society:

Industrial society: This is a registered society whose principal objective is manufacturing, making,
servicing or assembling of industrial goods and whose members are respectively manufacturers; craftsmen,
artisans, industrial workers and apprentices.

Primary society: means a registered society consisting of individuals as members. Section 73 of the Law
buttresses this category stating that primary society means (a) a co-operative thrift and credit society
registered to save and grant loans only; (b) a co-operative organisation made up of ten (10) members; or (c)
a co-operative organisation whose membership is made up of primary cooperative societies and individuals
who have come together for a specific investment purpose.

School co-operative society: means a registered society whose members are pupils or students attending
school or any institution of learning.

Secondary society means a registered society established to facilitate the operations of registered societies
in accordance with co-operative principles and includes a central financing society. Using the prism of the
Law, a secondary co-operative organisation’’ means a co-operative society whose membership is made
up of at least five (5) primary co-operative societies and which has as its objective the facilitation of the
operations of its members.

Ditto, Section 73 of the Law provides that a “Multipurpose Co-operative Union” means an association
of all primary cooperative societies within a jurisdiction as defined by the State Department of Cooperative
societies.

Registration of a Co-operative Society

Subject to the provisions of the Law, a society which has as its object the promotion of the economic
interests of its members in accordance with co-operative principles, or a society established for the purpose
of facilitating the operations of such societies, may be registered under this Law with limited liability,
provided that a registration fee as may be prescribed by the Commissioner is paid to the Director of Co-
operatives.

Benefits of Registering a Co-operative Society

Upon registration a Cooperative Society becomes a legal entity with the right to sue or be sued in its
corporate name and assumes capacity to enter into contracts or agreements.

Cooperatives can own movable and immovable property, of any description, in its corporate name.

Profit and Gains made from trading or business activities of Cooperative Societies is exempted from
Corporate Tax Liabilities.

A cooperative society has a separate legal entity. Hence, the death, insolvency, retirement, lunacy, etc., of
the members do not affect the perpetual existence of a cooperative society.

Government has adopted cooperatives as an effective instrument of socio-economic change. Hence, the
Government offers a number of grants, loans and financial assistance to the cooperative societies.
The management of cooperative society is entrusted to the managing committee duly elected by the
members on the basis of ‘one-member one -vote’ thus making the model democratic.

Restrictions on Co-operative Society

A registered society is restricted from giving out loans to persons that are non-members. Except with the
approval of the Director of Co-operative Societies, a registered society is not permitted to give out loans to
another registered society.

A registered society may receive deposits and loans from persons who are not members only to such extent
and under such conditions as may be prescribed by the regulations made under this Law or its bye-laws.

Characteristics of Cooperative Society

Cooperative societies are defined by the following characteristics.

1. Voluntary Association: The membership of a cooperative society is voluntary in nature, i.e it is as per
the choice of people. Any individual can join the cooperative society and can also exit the membership as
per his/her desire. The member needs to serve a notice before deciding to end the association with the
society.

2. Open Membership: The membership of a cooperative society is open to all i.e, membership is open to
all, irrespective of their caste, creed and religion.

3. Registration: A cooperative society needs to get registered in order to be considered a legal entity. After
registration it can enter into contracts and acquire property in its name.

4. Limited liability: The members of a cooperative society will have limited liability. The liability is limited
to the amount of capital contributed by the member.

5. Democratic Character: Cooperative society forms a managing committee and elected members have the
power to vote and choose among themselves. The managing committee is formed so as to take important
decisions regarding the operations of the society.

6. Service Motive: The formation of a cooperative society is for the welfare of the weaker sections of the
community. If the cooperative society earns profit it will be shared among the members as dividend.

7. Under state control: In order to safeguard the interests of society members, the cooperative society is
under the control and supervision of the state government. The society has to maintain accounts, which will
be audited by an independent auditor.

Advantages:

1. Easy Formation:
Compared to the formation of a company, formation of a cooperative society is easy. Any ten adult persons
can voluntarily form themselves into an association and get it registered with the Registrar of Co-
operatives. Formation of a cooperative society also does not involve long and complicated legal
formalities.

2. Limited Liability:

Like company form of ownership, the liability of members is limited to the extent of their capital in the
cooperative societies.

3. Perpetual Existence:

A cooperative society has a separate legal entity. Hence, the death, insolvency, retirement, lunacy, etc., of
the members do not affect the perpetual existence of a cooperative society.

4. Social Service:

The basic philosophy of cooperatives is self-help and mutual help. Thus, cooperatives foster fellow feeling
among their members and inculcate moral values in them for a better living.

5. Open Membership:

The membership of cooperative societies is open to all irrespective of caste, colour, creed and economic
status. There is no limit on maximum members.

6. Tax Advantage:

Unlike other three forms of business ownership, a co-operative society is exempted from income-tax and
surcharge on its earnings up to a certain limit. Besides, it is also exempted from stamp duty and registration
fee.

7. State Assistance:

Government has adopted cooperatives as an effective instrument of socio-economic change. Hence, the
Government offers a number of grants, loans and financial assistance to the cooperative societies – to make
their working more effective.

8. Democratic Management:

The management of cooperative society is entrusted to the managing committee duly elected by the
members on the basis of ‘one-member one -vote’ irrespective of the number of shares held by them.
The proxy is not allowed in cooperative societies. Thus, the management in cooperatives is democratic.

Disadvantages:

In spite of its numerous advantages, the cooperative also has some disadvantages which must be seriously
considered before opting for this form of business ownership.
1. Lack of Secrecy:

A cooperative society has to submit its annual reports and accounts with the Registrar of Cooperative
Societies. Hence, it becomes quite difficult for it to maintain secrecy of its business affairs.

2. Lack of Business Acumen:

The member of cooperative societies generally lack business acumen. When such members become the
members of the Board of Directors, the affairs of the society are expectedly not conducted efficiently.
These also cannot employ the professional managers because it is neither compatible with their avowed
ends nor the limited resources allow for the same.

3. Lack of Interest:

The paid office-bearers of cooperative societies do not take interest in the functioning of societies due to
the absence of profit motive. Business success requires sustained efforts over a period of time which,
however, does not exist in many cooperatives. As a result, the cooperatives become inactive and come to a
grinding halt.

4. Corruption:

In a way, lack of profit motive breeds fraud and corruption in management. This is reflected in
misappropriations of funds by the officials for their personal gains.

5. Lack of Mutual Interest:

The success of a cooperative society depends upon its members’ utmost trust to each other. However, all
members are not found imbued with a spirit of co-operation. Absence of such spirit breeds mutual rivalries
among the members. Influential members tend to dominate in the society’s affairs.