Cooperative Society

Executive Summary

German Name: Genossenschaft

General Information: active participation of members

Incorporation: establishment of charter by the founders, permission to become member of an auditing association, entry into the register of co-operatives

Minimum Capital: not specified

Board Structure: managed by board of directors, mandatory supervisory board, general assembly is supreme decision making body

General Information

The most important fields for cooperative societies are:

·     credit cooperatives (credit and loan societies)

·     purchasing cooperatives (co-operative societies for joint purchases of raw materials, especially in the retail industry, but also in other businesses)

·   purchasing cooperatives of handicraft businesses

·     dairy and winegrower cooperative societies (conjoint sale of agricultural or commercial produce)

·    production cooperatives (especially on the territory of the former GDR as a result of the transformation of the stately run “Produktionsgenossenschaften des Handwerks” and “Landwirtschaftliche Produktionsgenossenschaften”)

·   other rural cooperative societies

·     public transport cooperatives

·    house building cooperatives

·    consumer or retail cooperatives

·     central cooperative societies (consortium of several cooperative societies)

·    Joint ventures, i.e. new entities made up by two companies both contributing equity

In development cooperatives, the economic independence of members remains largely untouched. Different types of development cooperatives can be distinguished by their function:

·    Procurement Cooperative

The most prominent examples of procurement cooperatives are: purchasing associations, procurement cooperatives of handicraft businesses, retail cooperatives, credit cooperatives and house building cooperatives.

Procurement cooperatives’ functions are manifold but primarily lie in the procurement and storage of goods. However, procurement cooperatives also act as agents in agency or chain-of-delivery transactions.

·     Marketing Cooperative

In its typical form, a marketing cooperative serves the selling of farmers’ or craftsmen’s produce. The latter is far more frequent in industrialised countries.

·     Multiple Purpose Cooperative

A multiple purpose cooperative combines the functions of both a procurement and a marketing cooperative. The advantage of a such a cooperative is that the financial risk is substantially lower. For example, risks can be assessed better to make up for a member’s lack of economic experience. Also, the cost of membership in a multiple purpose cooperative is lower than the costs that would arise from membership in several separate cooperatives. On the other hand, a multiple purpose cooperative is especially demanding to run, so that the management body should be chosen very carefully.

The characteristic trait of a production cooperative is that its individual member companies are not discernible: All member companies together run a common enterprise. The downside of this form of organisation is the fact that all members hold the same rights (i.e. votes in the general assembly) so that differences within the enterprise are frequent. However, appropriate measures can curb this effect.

In Germany, production cooperatives are most frequent in the new Länder where they exist in the form of rural cooperative societies. However, a substantial part of them greatly lacks sufficient financial means due to the outpayment of assets following the conversion from “Landwirtschaftliche Produktionsgenossenschaften”.

Central cooperative societies whose members are primary cooperatives (mostly local or regional) are referred to as secondary cooperative societies. Their aims are mainly supra-regional and involve other production tasks, i.e. wholesale functions.

Due to freedom of contract, atypical forms of cooperative societies can be forged. The cooperative joint-stock company for instance is relatively widespread.

The cooperative society differs from the corporation and the company limited by shares in the intensive participation of its members. The cooperative society is not limited to a closed group of members. Its purpose is the promotion of the profitability and cost effectiveness of its members. Members are not personally liable for the society’s obligations.

The cooperative society works on a voluntary basis; it allows a multitude of companies to collaborate in order to achieve a functional concentration that can operate at lower cost that the member companies individually. The cooperation will thus enhance the members’ market position.

In Germany, the cooperative moment evolved in the 19th century. Its historical predecessors are the guilds that were already formed with view to rising competition pressure. The amendment of the law of cooperative societies in 2006 brought about the introduction of the “European Cooperative Society” that is designed to facilitate trans-border activities of cooperative societies in the European Union.

Incorporation

The foundation of a cooperative society requires the following steps:

a) The Statutes Have to Be Determined by the Founding Members. At least seven persons have to participate. Membership can be terminated by cancellation, however the period of cancellation has to be observed. The statutes can set up specific conditions for membership such as economic activity in a certain field. As required by the law, the statutes have to contain provisions concerning the cooperative’s firm name, its registered office, its object of business, rules concerning the convening of the general assembly and the form in which notifications are effected, as well as the provision of the prescribed reserve to cover potential losses. Rules that govern possible additional contributions of the cooperative’s members in the case of its insolvency are especially important. Before a cooperative is registered in the cooperative register at the district court, the court will verify whether the statutes fulfil the prerequisites, especially whether the statutes ensure the promotion of the cooperative’s members and whether they pose no danger to either the cooperative’s members or its creditors.

b) Appointment of the Executive Board and the Board of Directors by the founders

c) Admission to Accession by an Auditing Association

d) Registry in the Cooperative Register

The statutes having been determined, the cooperative exists as a company prior to registry.

Capitalisation and Financing

In the statutes, the respective shares (i.e. the sum up to which a member is entitled to participate in capital shares) have to be determined. They have to be the same for all members. Other than that, the statutes have to contain a rule governing the members’ payments of calls. As far as one tenth of the capital share is concerned, the amount and time of the obligation to pay have to be laid down.

The joint capital equals the sum with which a member factually participates in the cooperative at a given time. It is the sum of payments of calls and ascribed profits minus losses.

It is also possible to form a cooperative on the basis of non-cash contributions.

Like every other company, the cooperative society requires gains to make up for losses and investments. However, it is liable to the so-called obligation to promote (“Förderungsgebot”), meaning that it has to build a stable equity through reserves. The general assembly will decide on the usage of surpluses by assent of all the cooperative’s members.

Following a member’s cancellation, only shares will be paid out, whereas reserves will remain untouched.

The financing of a cooperative consists of:

·     External Financing (external self financing, equity financing, debt financing)   and

·     Internal Financing (financing from sales revenues, financing from other releases of capital)

Board Structure

The cooperative society is an independent corporate body that is considered as merchant (“Kaufmann”) in terms of the Commercial Code. The executive board effects the management of the cooperation as well as its judicial and extrajudicial representation. However, the statutes can limit the board’s management authorization. The executive board consist of at least two persons; on their acceptance, they are appointed either by the general assembly or by the board of directors. Only members of the cooperative are eligible for the executive board. The executive board decides about the admission or rejection of new members.

Subject to special regulations in the statutes, the board of directors consists of three members of the cooperative that are elected by the general assembly. The board of directors has the duty to supervise the executive board’s management. To fulfil this role, the board of directors disposes of broad rights of inspection and rights to demand information vis-à-vis the executive board. Furthermore, the board of directors summons the general assembly as required by the interests of the cooperative, inspects the annual final revision, the balance sheet and the allocation of profits, and reports to the general assembly (or assembly of representatives). Further tasks can be assigned to the board of directors in the statutes. The board of directors can only act collectively. Measures of single members are inadmissible, as far as they are not covered by an express power of attorney.

The general assembly is the cooperation’s highest body of decision-making. It is responsible for the election and dismissal of the members of the executive board and the board of directors as well as for their discharge. Other than that, the general assembly adopts the annual statement of accounts and decides about amendments of the statutes. These votes require a majority in numbers. Each member has one vote.

The general assembly also decides about the allocation of profits and the building of reserves.

For cooperatives with more than 1500 members, the general assembly can be replaced by an assembly of representatives. An assembly of representatives is mandatory for cooperatives that have more than 3000 members.

Furthermore, a cooperative can set up an advisory board, who’s role is to advise the cooperative’s bodies. However, in practice, advisory boards are rarely established.

Liability: Since the amendment of 1974, there are three different types of liability within the cooperative:

·     Unlimited Liability: every member is personally liable in the case of insolvency without limitations

·     Limited Liability: liability in the case of insolvency is limited to a certain liability coverage; in most cases, members have to deliver additional contributions in the amount of their shares

·     No Liability: every member is liable only to the extent of their cash contribution, i.e. company share

For purposes of representation and examination of cooperative societies, there are umbrella organisations that also carry out tasks of integration, information, communication, and administration.

Annual Costs

Total annual costs arise from legal, informational and control costs, especially in the fields of accounting, auditing, and publicity. Further costs may include legal and tax advice as well as organisational costs for control and management staff. Annual costs vary in amount with regard to the size of the cooperative, its structure, and capital needs. As a general rule, costs for partnerships tend to be lower than costs for corporations.

Corporate Taxation and Financial Reporting

The cooperation’s revenues underlie corporate income tax, which is currently at 25% in Germany. A solidarity surcharge of 5.5% of the income tax is added to this.

The cooperative society is governed by the accounting rules in secs.283-335 of the Commercial Code as well as additional rules in secs.336-339.

The cooperative’s members immediately relate to the joint business. Thus, the cooperative depends on the economic strength of its members. Consequently, in order to preserve the cooperative’s fundament, one differentiates between members’ transactions that do or do relate to the membership. These classes of transactions underlie a different taxation.

Employee Participation in Corporate Bodies

For every private enterprise that employs more than five, it is compulsory to set up a workers’ council that holds rights of information, representative participation and consultation.

In a cooperative society with more than 500 employees, the board of directors has to be composed of at least one third of employee representatives. Should the number of employees exceed 2000, half of the board of directors’ seats have to be occupied by employee representatives.