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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 out to you, when you leave or once it passes a set size, whichever comes first.

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%	Members, divided by each member's share weight	This is the "profit share" from Worker Ownership. It ramps up with tenure, then caps.

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.
• 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 among members by share weight. Say the members' share weights add up to 36. A member at full share then gets $10,000: $5,000 as a check and $5,000 added to their account.

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

• When you leave, your balance stops sharing in future losses and becomes a fixed amount the co-op owes you, earning the plain Treasury rate until it's paid. It's paid in equal parts over up to five years, so one big departure can't drain the firm's cash. Balances under $10,000 are paid all at once.
• 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. Anything above that is paid out every year, in cash or into the member's own retirement account, where it can be invested in anything. Nobody should end up with most of their savings tied to the same company that pays their wages.
• On death, the account goes to your estate, paid within two years. It's your property.
• 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.

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.
• If a payout fails the test, it's paused for at most two years. Interest keeps building, and nobody's account is cancelled. While any former member's payout is paused, current members get no cash profit share and no bonuses. Nobody gets paid ahead of the people who are waiting.
• 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 €1.1 billion of debt, 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.