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Allocating Surplus in a Co-operative Business

Surplus is commonly used by co-operatives to describe a business’s profit. Many co-ops create policies or bylaws to guide how they use these profits; here is how surplus in a co-operative can be allocated. 

Disclaimer: This document intends to provide the reader with a basic understanding of the role of surplus in a co-operative business and should not replace advice from an accountant or lawyer or the decisions made by shareholders.

Reserve funds

Having a surplus is a sign that a business is doing well. However, unexpected things can happen, and it’s a good idea to set aside some money in a reserve fund (or “rainy day fund”) when co-operative surplus is available. 

Each province has rules that mandate co-ops put a certain percentage of their surplus into reserve funds. Co-ops have the option to set this percentage themselves by writing it in their bylaws. If they don’t do this, the co-op simply defaults to the amount set out by the province. Ultimately, the amount of funds put in reserve is determined by the board of directors and should be supported by the members.

Dividends

Co-ops are known for distributing their surplus to members. There’s a few ways they can do this, like the surplus in a co-operative, depending on the type of co-op they are.

Dividends are paid out to investment shareholders first, because they provide a greater investment in the co-op with the intention of seeing a return. Membership shareholders that use the co-op can also be entitled to a return. Bonuses may be given out in a worker co-op. A retail co-op, however, might see members getting a rebate based on how much they purchased at the store. Finally, the returns in a producer co-op may be given out based on how much product each member delivered to the co-op.

(For a description of these different types of co-ops, click here).

These returns not only offer co-op shareholders the benefit of getting some extra cash — they also  reduce the co-op’s taxable income. It is important to remember that non-profit co-operatives can’t distribute profits to their shareholders.

While these returns are popular among co-op shareholders, the co-operative may also want to make an investment or expand its operations. For this reason, many co-operatives enter agreements with members that allow the co-op to retain some surplus to implement their plans. These retained earnings still belong to the shareholder and may be paid out at a later date, or when the shareholder withdraws/redeems their share.

Re-invest

It’s important that co-operatives invest in their future. This should include investing in the business to improve and expand operations, but should also include investing in their community. Co-operatives usually have a strong attachment to the communities they serve. This tie is made even stronger by making financial contributions to local programs or projects with the capital from a co-operative surplus.

Questions to Consider about surplus in a co-operative

Are we allocating sufficient funds to our reserves?

Are we prepared for the loss of revenue?

How will shareholders react to receiving less revenue than last year?

Are there areas of operation that we could expand or improve?

Are we in a stable financial position to allocate full funds to members?

Was this tool helpful? Then you might also find our blog on co-op start-up capital useful

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