What is a Mutual Association?

John Lister

A mutual association is primarily an organization, usually a company, which is owned by its members or customers. This differs from a privately held company, owned usually by a few senior staff, or a publicly traded company, owned by stockholders. Generally a mutual association will not simply work to make the largest possible profits, though sometimes this is the case.

Mutual insurance company decisions are made by the policyholders, usually through an elected board comprised of policyholders.
Mutual insurance company decisions are made by the policyholders, usually through an elected board comprised of policyholders.

A common form of mutual association is the mutual insurance company. This is owned by customers rather than stockholders. In theory, the customers, who are all policyholders with the company, have the ultimate say over how the business is run. In practice, many such firms operate like any other business, with senior management and executives taking most of the major decisions.

Technically such a mutual association is a non-profit company. This is because any money left over is not recorded as a profit or paid as a stock dividend. Instead it is divided among the members, either as a cash payment or as a discount on service fees, such as lower premiums for insurance customers. At one time, some mutual associations were thus able to avoid paying tax on the money they made. Today most mutual associations pay taxes based on a formula taking into account their market share and the overall taxes paid across the relevant industry.

A mutual association which is based around mortgage lending is known as a Savings & Loan company in the United States and a building society in the United Kingdom. Many former mutual associations in this category have opted to become publicly trade banks, a process known as demutualization. Another variation on the mutual association is the friendly society. In most cases, such groups originated on a small scale and operated towards a social purpose; for example, protecting members against lost income from sickness, or providing expenses for funerals. Today some friendly societies have grown into full-scale businesses offering financial services with little or no social connection between members.

It's important to note that the primary definition and explanation of mutual association in this article refers to the United States. Both the term itself and the concept described are used in some other countries. There are, however, variations in both what the term means in a legal context and how the concept operates in practice across different countries. The term should not be confused with a mutual fund, a type of investment which manages a pool of money from multiple investors.

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