Mutual organization

A mutual organization, also mutual society or simply mutual, is an organization (which is often, but not always, a company or business) based on the principle of mutuality and governed by private law. Unlike a cooperative, members usually do not directly contribute to the capital of the organization, but derive their right to profits and votes through their customer relationship.

A mutual exists with the purpose of raising funds from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members – it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax.

Surplus revenue made will usually be re-invested in the mutual to sustain or grow the organization, though some mutuals operate a dividend scheme similar to a cooperative.

The primary form of financial business set up as a mutual company in the United States has been mutual insurance. Some insurance companies are set up as stock companies and then mutualized, their ownership passing to their policy owners. In mutual insurance companies, what would have been profits are instead rebated to the clients in the form of dividend distributions, reduced future premiums or paid up additions to the policy value.

This is a competitive advantage to such companies—the idea of owning a piece of the company could be more attractive to some potential clients than the idea of being a source of profits for investors. In the typical stock company, profits go to shareholders. In contrast, a mutual manages the company in the best interests of the customers. Furthermore, a mutual company is able to focus on a longer horizon than a typical company. Some mutual insurance companies make this claim explicitly.

In more general terms, mutual organizations are able to minimize the principal–agent problem by removing one stakeholder, the investor-owner, in favor of one of the other stakeholders, usually the customer, who becomes both user and joint owner of the business.

However, the mutual form of ownership also has disadvantages. One example is that mutual companies have no shares to sell and hence no access to equity markets.

At one time,^[when?] most major U.S. life insurers were mutual companies. For many years, the tax status of such organizations was open to dispute, as they were technically nonprofit organizations. Eventually,^[when?] it was agreed that federal taxation would be based on their share of business: for instance, in years in which mutual companies represented half of the business, they would be responsible for half of the taxes paid by the industry.