How to manage share capital in a co-op

When starting a co-op, you’ll often encounter terms like ‘shares,’ ‘capital,’ and ‘share capital.’ These concepts are crucial for raising funds and building a strong co-op. Here’s a simple explanation of How to manage share capital in a co-op.
What is Share Capital?
Share capital is the money raised by a business in exchange for ownership. For co-ops, it usually refers to the amount paid by individuals to become members.
Types of Shares
Co-ops can issue two main types of shares:
- Membership Shares: These shares grant ownership in the co-op, voting rights at meetings, and a share of the co-op’s profits. Typically, each membership share has a fixed value, like $1. Members buy a set number of these shares (e.g., 10 shares for $10). Most co-ops issue an unlimited number of membership shares.
- Investment Shares: These shares are used to raise money and do not offer the same rights as membership shares. They usually have a higher value (e.g., $1000) and come with financial benefits like dividends. Investment shareholders receive their returns before membership shareholders if the co-op dissolves. Investment shares are issued with specific financial goals in mind, such as raising a set amount of money.
Why $1 Shares?
Many co-ops set membership shares at $1 for several reasons:
- Flexible Payments: It allows members to pay for their membership in installments. For example, a $1,000 membership fee can be paid as $100 each month.
- Easier Redemption: If a member wants to leave, the co-op can buy back their shares in manageable amounts, which helps with cash flow.
- Adjustable Pricing: It’s easier to change the price of membership shares if needed. Membership share prices can be adjusted in the co-op’s bylaws, which are easier to change than the articles of incorporation.
No Shares? No Problem
Some co-ops don’t use share capital, especially those focused on community service or seeking charitable status. In these cases, membership might be free or involve a non-refundable membership fee, which could be one-time or annual. Membership fees help cover regular costs and can also manage member activity.
Getting Started
To start, estimate the amount of money your co-op needs to raise. Decide on the membership fee and how many members you expect. Creating a business plan will help with cost estimates and understanding the co-op’s goals. Explore all available financing options to determine what suits your co-op best.