Internal Capital Account

An internal capital account is comprised of money that is lent by a member to their worker cooperative. It can include an initial capital contribution when they join, as well as any earnings that members reinvest in the coop.

Many worker cooperatives require a capital contribution when a new member joins. The cost of the buy-in can vary widely depending on the cooperative. It gives the member a financial stake in the cooperative which is at risk if it performs poorly. If a new member can not afford the buy-in, it is sometimes purchased with salary or wage deductions over a period of time. Alternatively the buy-in can also be purchased with a loan from the cooperative to the member which is then paid off with future compensation. The buy-in is credited to the member’s internal capital account.

Profits and losses can also credited or debited from the internal capital account as determined by the bylaws. Many coops require a portion of the profits paid to members to be reinvested in the coop. Typically the profits are retained in an internal capital account for a period of time before being paid out. For example, 30% of the profits each year might be retained in an internal capital account for five years before being paid back to a member. This tends to equalize the capital contributions of members on time scales longer than the holding period. New members will have less capital invested until they have worked for a full holding period. Any reinvested earnings are credited to the internal capital account and debited from the internal capital account when they are paid out.

The holding period is designed to limit the value of an internal capital account so that its eventual pay out does not require the sale or demutualization of the cooperative. By paying out the earnings after a short period the cooperative prevents a lifetime of member earnings from building up in the cooperative. Historically, payouts of large internal capital accounts have led to the demutualization of a number of worker cooperatives in the United States, most notably the plywood cooperatives in the Pacific northwest.

Losses are often attributed to members by debiting their internal capital account. The internal capital accounts serve as risk capital because their value can be reduced to absorb losses. For this reason the members internal capital accounts are often categorized as equity on the balance sheet. Internal capital accounts may earn a fixed rate of return (interest) on their balance.

Functionally the internal capital accounts brings the banking function within the coop. Members could deposit their money at a financial institution which then lent it back to the coop. With the internal capital accounts the members are lending to their cooperative directly, removing the financial intermediary.

When a member leave the cooperative their internal capital account is paid out. This buy-out of the member investment can occur either as an immediate cash payment, or as a debt owed to the member which is paid out over time. Spreading the payment over time has the advantage of reducing the immediate liquidity needs of the cooperative and can prevent cash flow problems.