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title, section, order, summary

title	section	order	summary
Member Capital Accounts	The Co-op	25	How a co-op member builds real savings from the firm's profits without the firm ever being sold, how those savings are protected, and what they add up to.

Member Capital Accounts

In a conventional company, you build wealth from the business by owning shares and eventually selling them. In a locked co-op, nobody can sell the firm (see The Lock). So there has to be another way for the value you help build to become yours. That's what a member capital account is for.

The idea isn't new. The Mondragon co-ops in Spain have used it since the 1950s, and US worker co-ops use it under ordinary federal tax law. This page describes how it works in this model, and how members' savings are protected. Protection matters, because savings held inside your own employer are exactly the kind that can vanish along with your job.

The basic idea

Every member has a personal account on the co-op's books. It works like a savings account the business holds for you:

• Each year, part of your share of the profits goes into it instead of being paid out as cash.
• It earns interest.
• It's paid back to you on a fixed schedule: each year's credit about five years after it's made, whether or not you still work there.

Meanwhile, the co-op gets to use that money to grow. In effect it's a loan from the members to their own business. That's why Mondragon valued it: a firm that can't sell shares to outsiders can still keep its own earnings working (Morris, The Mondragón System, 1992).

Where each year's profit goes

When the co-op makes a profit, it gets split. These are the defaults. Each co-op can change them in its bylaws, as long as it stays within the minimums.

Share of profit	Where it goes	Why
At least 30%	The co-op's permanent reserve	Nobody can ever withdraw it (see indivisible reserves). It's the firm's cushion and its own source of investment money.
Up to 10%	The federation's shared fund, if the co-op belongs to one	Pools risk between co-ops (see The Federation).
The rest, about 60%	Everyone who worked that year, divided by hours worked	This is the "profit share" from Worker Ownership. It ramps up with tenure, then caps. The part of a share someone hasn't reached yet goes to the reserve (How a Locked Co-op Is Taxed).

Mondragon's original split was similar: 10% to education and the community, at least 20% to reserves, and up to 70% to members. It later raised the reserve minimum to 50% (Morris, 1992).

The members' share is then split again, between cash now and the account:

• At least 20% of it is paid in cash right away. Members owe income tax on their whole allocation in the year it's made, including the part that goes into the account. The cash is there so they can pay that tax. This is how US co-op tax law works (Democracy at Work Institute guide). The default is half in cash.
• Lower-income members can take it all in cash. For a low-wage worker, being taxed on money they can't touch can cost them tax credits and health-care subsidies. So any member whose household income is under twice the poverty line can take their whole share in cash. If they leave some in their account, by default they aren't taxed on it until it's paid out (How a Locked Co-op Is Taxed).
• The rest goes into each member's account.

Members can also raise their own salaries instead of taking profit, but that doesn't get around the reserve. It takes its share of pay above the going rate too (see Investing for the Long Run).

A worked example. A 40-person co-op makes $600,000 in profit after paying everyone's salaries. It puts $180,000 in its permanent reserve and $60,000 in the federation fund. The remaining $360,000 is divided by hours worked. If all 40 members work the same hours, each one's hours earn $9,000. A member at full share gets it all: $4,500 as a check and $4,500 added to their account. A member at half a share gets $4,500, and the other $4,500 goes to the reserve. Profit earned by the hours of workers who aren't members yet is shared the same way, paid in cash, at the share of a member just starting out. Federal tax law is why it works this way (How a Locked Co-op Is Taxed).

How the account grows

• Interest is set by formula, not by vote. A current member's account earns the one-year Treasury rate plus two percentage points in years the co-op makes a profit, and the plain Treasury rate in loss years. Once a member leaves, their balance earns the plain Treasury rate. So does the slice of a current member's account that's protected by insurance, since it's no longer at risk. If current members voted on the rate, they could set it to zero on accounts that mostly belong to people who've left. Or senior members could set it high to pay themselves out of the firm. A formula stops both.
• Why the extra two points. Money in a current member's account is at risk: it shares in losses and ranks behind lenders. If it only earned what a risk-free government bond pays, every member would take as much cash as they could, and the co-op would have less of its own money to invest. Once you leave, your balance stops sharing in losses, so it stops earning the premium. See Investing for the Long Run.
• Losses are shared. In a year the co-op loses money, the loss is charged partly to the reserve and partly to members' accounts, in the same proportions as profits. Your account can go down, just like shares in any company.

How it's paid out

• Each year's credit is paid back after five years. The money credited to your account for 2030 is paid to you in 2035, the 2031 credit in 2036, and so on, oldest first, each after that year's audited accounts are closed. Each co-op can set the wait anywhere from three to seven years in its bylaws. It's one of the two ways US worker co-ops already pay out accounts, called a "roll-over" (Democracy at Work Institute guide). The co-op gets to use each year's credit for years, and nobody's savings are stuck until they retire.
• The wait is fixed when the credit is made. A vote to change it applies only to credits made starting the year after the vote, so senior members can't speed up their own money or slow down anyone else's.
• Leaving doesn't change the schedule. When you leave, your balance is fixed at the end of that year, after that year's profit or loss is counted, so nobody can quit just ahead of a bad year and escape it. After that it stops sharing in losses, earns the plain Treasury rate, and each year's credit is still paid on its own date.
• Small balances are paid early, for everyone. Once anyone's whole balance is under $2,000, member or not, it's paid at the next payout date. That keeps a co-op from tracking small sums for years, and since it doesn't depend on leaving, nobody gains by quitting.
• There's no penalty for leaving. Mondragon used to cut the payout by up to 30% for people who quit. This model doesn't, because a core promise of the tenure cap is that you can change jobs without losing what you've built.
• Accounts are capped at one year's pay, measured as the highest pay in the last three years, so nobody can cut their own pay to get their money sooner. Anything above that is paid out every year in cash, which a member can put in their own retirement account and invest in anything. Nobody should end up with most of their savings tied to the same company that pays their wages.
• Any payout can be spread out. Members get 90 days' notice of each payout and can ask for it in up to 12 monthly payments, so one check doesn't push a family over a limit for public benefits (How a Locked Co-op Is Taxed).
• On death, the account goes to the person you name, your spouse unless you name someone else with their written consent, on the normal schedule.
• In a divorce, a court can split the account. The former spouse gets a separate account of their own, with no vote, paid out on the normal schedule.
• Every year, each person gets a statement showing each credit, any losses charged to it, and the date it will be paid. Former members get one too. A dispute gets a written answer within 90 days and can go to an outside arbitrator from the federation's list, or to court.

Why not pay it out when you leave?

Mondragon pays members their accounts when they retire or leave, and so do some US co-ops. This model doesn't, because of a federal pension law. Under the Employee Retirement Income Security Act (ERISA), any program an employer runs that holds back workers' income "for periods extending to the termination of covered employment or beyond" is a pension plan (29 U.S.C. 1002(2)(A)). The Labor Department's rule says the same about bonuses "systematically deferred to the termination of covered employment" (29 CFR 2510.3-2(c)). Members are the co-op's employees (Owners Are Still Workers). There's a case that a co-op's profit allocations are an owner's share, not an employer's bonus, but the model doesn't stake members' savings on winning it.

A pension plan would break the account. Its money has to be held in a trust, apart from the business (29 U.S.C. 1103), and the plan can't lend to the employer (29 U.S.C. 1106). The whole point of the account is that the co-op uses the money.

A fixed schedule is designed to stay outside the law's definition, but that isn't settled. In 1995 the Labor Department said a company's profit-based program wasn't a pension plan because it didn't "expressly provide for a deferral of income to the termination of covered employment." But that program paid nothing to people who quit, and the Department pointed to that. It also warned that a program can still become a pension plan "as a result of surrounding circumstances," such as "an inordinate percentage" of participants being near retirement age when payments arrive (Advisory Opinion 95-23A). Here, people who leave are still paid afterward, on the same dates as everyone else. A court could count that against the design. So:

• Nothing about the payout depends on leaving: not the date, not the amount, not the small-balance rule.
• The wait is short and the same for everyone, at most seven years, not tied to age or retirement.
• The account isn't sold as retirement savings. A co-op that wants to help members save for retirement does it the ordinary way, with a regular retirement plan held outside the business.
• The first pilot co-ops ask the Labor Department for an advisory opinion on their real bylaws, and the bank pays. An opinion only covers the co-op that asked, on its own facts, so the bank also asks the Department for a rule any employer could use, for profit-sharing paid on a short fixed schedule. It doesn't ask Congress for an exemption only co-ops would get.

The cost is capital. Money paid back after five years is money the co-op can't keep using for fifteen. So a co-op that wants to invest more has to keep more in its permanent reserve, and that weakens the model's answer to the horizon problem (Investing for the Long Run).

Protecting the co-op, and the people who stay

A payout system can also be used to strip a failing firm. People who see trouble coming leave first and get paid in full, while everyone who stays absorbs the loss. So:

• Every payout must pass a solvency test. No payment may push the co-op below its loan requirements or a minimum cash level set in its bylaws when it's founded. Members can't lower that minimum without the bank's consent.
• If payouts fail the test, they're paused, all together, for at most two years. Credits from the same year are treated the same whether their owner still works there or not, and the oldest are paid first when money allows. Paused amounts earn the Treasury rate plus two points, since the people waiting are carrying extra risk. While any payout is paused, current members get no cash profit share, no bonuses and no raises above the going rate. Nobody gets paid ahead of the people who are waiting.
• After two years, a pause becomes a debt with a schedule. Whatever is still unpaid becomes a note the co-op repays in equal parts over five years, still behind its lenders, and the insurance pool covers former members' insured amounts if the co-op fails. So the worst case for a member who leaves is a long wait: up to seven years for the last credit, plus the pause, plus the note. The co-op's bylaws have to say so in plain words.
• Losses are spread evenly. When a loss is charged to members' accounts, it's charged to every year's credits that haven't been paid yet, in proportion, not to the newest or the oldest first. So the timing of payouts can't be used to dodge a loss.
• Payouts rank behind the co-op's lenders. In a bankruptcy, members' accounts are paid only after the co-op's creditors. That's the honest cost of being an owner, and it's the main reason for the one-year-of-pay cap.
• The co-op doesn't lend to members against their accounts. That would just be an early withdrawal by another name. Members can use their account as collateral with an outside lender.
• Savings are insured, up to a point. Every locked co-op belongs to a members' savings insurance pool, paid for by the co-ops. It covers workers' final unpaid wages, former members' unpaid payouts up to $50,000, and a protected slice of current members' accounts. See Protecting Members' Savings.
• No other savings in the co-op. A co-op can't take deposits from its members or sell them bonds. A member's only money in the co-op is their account.

Why this much caution. Fagor, Mondragon's appliance maker and once the world's largest industrial co-op, went bankrupt in 2013 with about €800 million (about $1.1 billion) of debt (The Local, 2013), putting 5,600 jobs at risk. Savers who had bought its subordinated co-op bonds, which had been sold as safe deposits, ended up suing (Wikipedia summary of the Mondragon record). Shortly before Enron collapsed in 2001, about 63% of its workers' 401(k) retirement savings were in Enron's own stock (GAO-02-480T). It's the same lesson: savings concentrated in the company you work for are the savings most likely to disappear with your job.

What the account doesn't do

This matters, because it's the core of the founder problem.

The account holds the profits you earned. It doesn't hold the value of the firm's future profits. When a conventional firm is sold, the buyer pays for years of its future earnings, and the seller keeps that money. A co-op member's account never includes that part. The future profits go to whoever works there in the future.

That's intentional. It's what the lock is for. But it means a co-op member who helped build something valuable walks away with much less than a conventional owner would, and the model shouldn't pretend otherwise.

What it adds up to

Here's what a member who joined a successful co-op in its third year has received by year 15, on top of their salary, in four kinds of business. The numbers come from a simple model with these assumptions:

• A one-year probation, then a profit share that grows from 20% to 100% over five years.
• 60% of profit goes to members.
• Money received later counts for less than money received now. It's discounted at 5% a year, the rate used in the founder study on the next page.

Kind of business	Profit per worker (after salaries)	Size at year 15	What the member received
Care work (home care, cleaning)	$3,000	40 people	about $14,000
Main Street (trades, services)	$15,000	40 people	about $68,000
Strong (skilled services, light manufacturing)	$40,000	80 people	about $200,000
Very high margin (a firm like Conservice)	$150,000	200 people	about $780,000

In a conventional firm, all of that goes to the owners.

Be honest about the first row. Home care runs on thin margins. For a care worker, a co-op offers a real say in how the work is done, and very little wealth. That's why the model has a separate answer for low-margin work: the floor.

These are all success cases. A co-op that struggles pays little or nothing. One that fails pays out only what's left after its debts.