Mutual Company


DEFINITION of 'Mutual Company'

A private company whose ownership base is made of its clients or policyholders. The defining feature of a mutual company is since its customers are also its owners, they are entitled to receive profits or income generated by the mutual company. Such distribution of profits may typically be in the form of dividends made on a pro rata basis, based on the amount of business each customer conducts with the mutual company. Also referred to as a "cooperative."

BREAKING DOWN 'Mutual Company'

The mutual company structure is commonly found in the insurance industry, as well as in savings and loans associations. In addition, many banking trusts and community banks in the U.S., and credit unions in Canada, are also structured as mutual companies.

The term "mutual" is believed to arise from the fact that in an insurance mutual company, for instance, a policyholder is both the insured party (as the company's customer) and the insurer (as part owner).

Most institutions that are structured as mutual companies are private entities rather than publicly traded companies. In recent decades, many mutual companies in the U.S. and Canada have opted to change from the mutual structure to a joint stock corporate structure, a process known as demutualization.

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