3. Sources Of Member Equity

Not all member equity comes from direct investment as described above. In fact, there are three primary sources of member equity:

1. Direct investment from members
2. Retained earnings
3. Per-unit capital retains

"A central business proposition is based on an economic opportunity.This...can be so powerful as to engender sacrifice, commitment and loyalty to the cooperative, helping it to survive."
Bill Patrie North Dakota Assn. of Rural Electric Co-ops

The first is direct investment. New cooperatives usually obtain direct investments from their members, often in the form of capital stock shares. These shares are evidence of the members' investment and carry with them all membership and voting rights. With established cooperatives, new members are usually required to make a similar purchase of capital stock or membership certificates, which entitles them to membership and voting rights.

The purchase of one or more shares of common stock is usually the first investment a new member makes in a cooperative. This stock purchase entitles the member to voting rights in the co-op, usually on a one-member, one-vote basis. Non-cooperative businesses pay dividends on stock based on the number of shares owned, but in cooperatives, stock dividends are limited by state law (8% in WI).

The second source of member equity, retained earnings, is another way to generate equity after a co-op is up and running. When a co-op makes a profit on its operations, a portion of those profits (also called net earnings or net income) are usually distributed to the members on the basis of the amount of business they do with the co-op, and a portion is retained by the co-op as an investment in the business. Many co-ops pay part of their net income (usually 20%) in cash to their members (more about this below under patronage refunds), and retain the remaining funds for future capital needs. These retains are allocated to each member's account, although some co-ops also keep a portion of the net income as unallocated
reserves.

Thus, retained earnings are simply the co-op's profits that are kept by the co-op in order to build it for the future. Conversely, if the co-op loses money, that loss must be absorbed by the members, in Many co-ops design a program to repay the equity of members who no longer use the co-op due to retirement or relocation. Some co-ops have a revolving equity redemption program in which the oldest equity on the books is paid out regardless of whether the members are still active or not. In most cases, the shares are bought back from the member at par or book value, whichever is less.

The third source of member equity, per unit retains, are used primarily by farm marketing cooperatives. The co-op retains deductions from the sale proceeds of each member's goods through the co-op. These per unit retains are calculated either as a percent of sales dollars or as a unit of weight or volume. One advantage of this type of equity is that it is not dependent on the co-op's net income as are retained earnings.

"Empowerment and the development of community leadership is in the background of every cooperative. Empowerment opens up a great many options to...develop leaders."
Theresa Marquez CROPP Co-op