What it means
Membership is a way of limiting access to a market or an organisation to parties that have agreed to its rules. A stock exchange or clearing house admits members who meet capital and conduct standards, and in return they may trade directly or settle trades through the central system.
The membership itself can carry a fee and ongoing obligations. In company law, the owners of a limited liability company are often called members, in the same way that shareholders are the owners of a corporation.
Their rights come from the operating agreement, which sets out how profits are shared, who can make decisions and what happens if a member leaves. Their liability is usually limited to what they have invested.
Mutual organisations such as credit unions, building societies and cooperatives call their customers members because they also own the institution. Profits are generally returned through better rates or lower fees rather than paid to outside shareholders.
Each member typically has one vote, regardless of the size of their deposit. Professional and trade bodies also have members.
Joining an accountancy body, for instance, can give someone a designation, such as chartered status, and bind them to a code of ethics. Losing membership can end a person's right to practise or use the title.
When reading a contract or a financial document, always check how the word is defined. The rights of a member of a stock exchange, a member of an LLC and a member of a credit union differ greatly.
A finance team should check the defined-terms section before relying on any assumption. Finally, being a member usually brings obligations as well as benefits.
These can include paying subscriptions, following rules, contributing capital and in some structures sharing in losses.
In practice
Real-world examples.
Example
A broker-dealer applies to become a member of a stock exchange so it can trade directly for clients. It must prove that it holds enough capital and has qualified staff. Once admitted, it pays annual fees and follows the exchange's rules.
Example
Three friends form a limited liability company to run a design studio. They are the members, and their operating agreement says profits are shared 50%, 30% and 20% according to what each put in. When one member wants to leave, the agreement sets out how her share is valued.
Example
A teacher opens a savings account at a credit union and becomes a member. She has one vote at the annual meeting, and the profits are used to offer lower loan rates. She values the lower fees compared with a commercial bank.
Case study
Seen in the real world.
Tamarind Cooperative Bank is an illustrative, fictional credit union with 20,000 members. In a year when it earned a surplus of $2,000,000, the board proposed to return it to members through lower loan rates.
Because every member held one vote, the proposal was put to the annual meeting. Members approved it, and the surplus of $2,000,000 averaged $100 for each of the 20,000 members, given in the form of reduced interest and fees.
A member who also owned a small business asked whether the credit union could expand into business lending. The board studied the capital needed and the risk, and agreed to a limited pilot. The illustrative lesson is that membership gives customers a voice that shareholders of a large bank rarely have. Several members said they had chosen the credit union over a larger bank because of this voice, even though its branch network was smaller.
Watch out
Common mistakes.
- Assuming the word member means the same thing in every document, when the rights differ widely between exchanges, companies and mutual organisations.
- Treating membership as free of obligations, when fees, capital contributions and rules usually apply.
- Confusing a member of an LLC with an employee, when a member is an owner with a stake in the business.
Questions
People also ask.
Is a member the same as a shareholder?
Not exactly, because owners of an LLC and customers of a credit union are called members, while shareholders own shares in a corporation. The rights of an LLC member depend on the operating agreement and local company law, while a credit union member's rights come from its rules and the law governing cooperatives.
Can a member lose their membership?
Yes, usually for breaking the rules, failing to meet requirements or not paying fees, as set out in the governing documents. Rules usually set out a process, including notice and sometimes an appeal, before membership ends.
Do members always get a vote?
Often they do, and in cooperatives it is typically one vote each, though the rules of each organisation decide. In some organisations the voting power depends on the size of the holding instead, so read the rules before assuming equal votes.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related