The way money moves from clients to the cooperative, to the worker owners and shareholders is based on the value of community wealth building. The system that keeps any value generated by individuals (such as profit, labor, etc.) within the co-op and distributed back to those individuals is called patronage. Sometimes, members are even called patrons. This system of patronage is designed expressly to ensure value stays with those who generate it.
How Co-ops Earn Money
Just like conventional businesses, cooperatives exist to generate value, typically in the form of economic profit (money). Unlike regular businesses where the profits go to the owner, in a co-op, the profits are shared among the members. Co-ops can earn money in many different ways. They might sell products or services, just like any other business. But because they are owned by the members, they can also save money on things like supplies and equipment by buying in bulk. Co-ops can also earn money by investing in other businesses or by renting out property they own.
It’s important to note that there are many different types of co-ops, and the ways they earn money can vary depending on the type of co-op. For example, a consumer co-op might earn money by selling products to its members, while a worker co-op might earn money by providing services to customers. Additionally, some co-ops might earn money through investments or by renting out property, while others might earn money by pooling resources with other co-ops to achieve greater buying power. There are many possibilities, and it all depends on the type of co-op and how it chooses to operate.
How Earnings Are Distributed
One major way cooperatives differ from conventional businesses is how they define and distribute the money they earn. In a coop, earnings are defined based on who contributed their labor. The percentage of money earned by coop members is called “surplus.” The percentage of money earned by non-member owners (or employees) is called “profit.” Each of these treated differently for distribution and tax purposes.
How Profit is Distributed
Example:
Green Commonwealth makes a nice profit! What happens now?
Green Commonwealth earns $150,000 from their landscaping services. It spent $105,000 to buy materials, pay wages to Amy, Bernardo, and Carla, buy insurance, etc. Green Commonwealth earned net revenue of $45,000 ($150,000 – $105,000 = $45,000). As members of Green Commonwealth, Amy and Bernardo are entitled to a share of this net revenue.
But how do we know how much they get?
First, look at how many hours everyone worked that year and figure out how much of that $45,000 was attributable to members’ labor (work done by Amy and Bernardo) and how much was attributable to non-members’ labor (work done by Carla).
Members Hours Worked
Amy: 1200 hours
Bernardo: 1800 hours
Total Member Hours: 3000
Non-Members Hours Worked
Carla: 1500 hours
Total: 1500 hours
Total Member and Non-Member Hours: 4500
Member hours/Total Hours
3000 Member Hours/4500 Total Hours = ⅔
Non-member hours/Total hours
1500 Non-Member Hours/4500 Total Hours = 1/3
2/3 of the $45,000 was attributable to the hours of work that Amy and Bernardo, the members, did (member labor). This is what the bylaws call a $30,000 Surplus.1/3 of the $45,000 (or $15,000) was attributable to the hours of work that Carla, the non-member, did (non-member labor). This is what the bylaws call a $15,000 Profit.
What to do with the money?
In the bylaws, they agreed to allocate 100% of Profit (i.e., the net revenue that was attributable to non-member labor) to the Collective Account.
How Surplus is Distributed
At the end of each accounting period (usually the fiscal year), the cooperative’s accountant determines whether there is any surplus (money left over after expenses.) If there is any surplus, the board must decide what to do with it. The options are:
- Keep the money in reserve to cover unforeseen expenses or invest back into the business,
- Distribute the surplus to the members (as patronage distribution)
- Do some combination of options 1 and 2.
Continuing the example above the bylaws also addressed how to distribute surplus stating: “[a]ny Surplus shall be credited to the Collective Account as necessary to bring the year’s contribution to the Collective Account up to 25%. All other Surplus shall be paid as Patronage Dividends in direct proportion to Patronage during the fiscal year.
Calculating Patronage
The amount of Patronage Dividends each member gets is based on how much patronage each of them had that year. In a worker cooperative, patronage is measured by the work done for the cooperative. In most worker cooperatives, it is calculated based on how many hours each member worked relative to each other.
The Patronage Dividends are calculated by dividing up the Surplus at the end of the fiscal year.
Back to our example:
Amy’s Hours/Total Member Hours = 1200/3000 = 2/5
Bernardo’s Hours/Total Members Hours = 1800/3000 = 3/5
2/5 of the $30,000 Surplus = $12,000 in Patronage Dividends to Amy
3/5 of the $30,000 Surplus = $18,000 in Patronage Dividends to Bernardo
(Carla doesn’t get any Patronage Dividends because she isn’t a Member. She only gets her regular salary.)
Amy gets $12,000 in Patronage Dividends. Does this mean she gets a $12,000 check to take home with her? Let’s look at the bylaws! Bylaws says that Patronage Dividends get paid to their members “50% in cash and 50% as written notices of allocation.” When a Member receives a written notice of allocation for a specified amount, that amount goes into his or her Member Account as a credit which will be paid out in cash sometime in the future, according to what the bylaws provide for.
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