This is taken from the Ohio Employee Ownership Center
What is an Employee Cooperative Pamphlet.
Co-ops typically divide their profits between 2 accounts – 1. a collective reserve account which absorbs losses if the buisness loses money and 2 members accounts and 3. a cash alloction to members.
The Board decides how each year’s retained earnings are divided between the collective account and the members accounts and the members cash allocations.
How retained earnings ar allocated depends typically on the age of your co-op (new co-ops need to build their capital and pay more into their collective reserve accounts while making the minimum legal cash distribution to members), your co-op’s capital needs (incl paying down debt taken on to redeem shares from retiring owners selling to us) (that might apply in this case if we ask K to do a little consulting for us).
Here’s how it works initially:
Early years while paying for the business:
Annual profit
- significant allcoation to reserve account to cover potentiallosses
___________________
allocations to members
There of: typically 75% or 80% to members’ capital accounts in co-op
20-25% to members in cash to pay taxes (20% is legal min)
Later years after business has been paid for, capitalized, and reserve account is adequate:
Annual profit
-little or no allocation to reserve account
__________________
allocations to members
50-75% to members capital accoutns in co-op
25-50% to members in cash to pay taxes
If the co-op’s losses exceed the amount in the collective reserve account, the additional loss is deducted from the member’s accounts.
Allocations among the member’s accounts and cash allocation follows a labor based formula laid down in the co-op’s bilaws. The formula is based on labor input (“patronage”) into the cooperative. You can use hours worked, W2 earnings, seniority up to a cap, or other measures of labor input. The formula is that you divide each member’s labor input (however measured) by the total input of all members and multiply that fraction by the total dollars being allocated among all the members’ accounts.
Here’s how it works:
Your labor input
_____________
Total member’s input X Total $ to be allocated among all members = You allocation for that year.
The co-op can make it’s allocation in what is called a “capital allocation” into your account
