Features & Sacco Leadership

How to allocate co-op’s profits

How to allocate co-op’s profits

As the fiscal year wraps up, your co-operative board faces an important decision: how to allocate the profits. Unlike traditional businesses, co-operatives often return a significant portion of their profits to the community and their members. How you handle these profits affects members, taxes, and the co-op’s future.

Calculating Profits

First, determine your co-op’s profits by subtracting expenses from total revenue: Revenue−Expenses=Profit/Surplus\text{Revenue} – \text{Expenses} = \text{Profit/Surplus}Revenue−Expenses=Profit/Surplus

Options for Allocating Profits

How you allocate profits depends on your co-op’s goals, growth plans, and member preferences. Here’s a simple breakdown:

For Non-Profit Co-ops

Non-profit co-ops (or community service co-ops) can’t share profits with members or investors. Instead, they have a few options:

  • Reserve Fund: Allocate funds to a reserve for future needs or emergencies.
  • Charitable Donations: Donate a portion of profits to charitable organizations.
  • Operating Account: Keep the funds in an operating account to invest in future activities like expansion, equipment, or staffing.

Since non-profit co-ops are not taxed on net income, they can keep surplus funds in the operating account without immediate tax implications.

For-Profit Co-ops

For-profit co-ops can distribute profits to members or investors, offering more flexibility:

  • Patronage Allocation: Share profits with members based on their use of the co-op. This can be paid in cash or as equity (member shares). Choosing equity keeps more cash on hand for the co-op.
  • Retained Earnings: Keep some profits to invest in new projects or business expansion. This can include earnings from business done with members or non-members.
  • Investment Dividends: If your co-op has investment shares, you might pay dividends to investors. This could be a fixed percentage or decided by the board.
  • Donations: Co-operatives can also donate a portion of profits to community causes, although this can be done throughout the year, not just at year-end.

Allocating Funds: An Example

Imagine your co-op made $100,000 in profits:

  • Reserve Fund: Allocate 10% ($10,000) for future needs.
  • Charitable Donation: Set aside $7,500 for local charities.
  • Dividends: Allocate $25,000 for investment dividends.
  • Patronage: Distribute $51,000 to members, with $33,000 in equity and $18,000 in cash.
  • Retained Earnings: Keep $6,500 for future use.

Tax Considerations

For-profit co-ops need to consider taxes. Donations and patronage allocations reduce taxable income, while reserve funds and unallocated equity are taxed later. For example, with a 9% tax rate, the co-op would have $38,073 left for investment and dividends after taxes.

What the Board Needs to Consider

When allocating profits, the board should balance:

  • Ensure you meet any legal or bylaw requirements.
  • Be aware of how patronage dividends might affect members’ personal taxes.
  • Keep an eye on how much allocated equity might be redeemed by members, which could impact cash flow.
  • Your decisions will affect the co-op’s balance sheet, influencing its attractiveness to investors and lenders.

 

Andrew Walyaula
Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Andrew Walyaula

About Author

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

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