How co-op shares work

Money is usually the main source of conflict in a business, and shares are all about money, so understanding how they work will save you a lot of hassle, writes Susan Pletts.

In a cooperative, cohesion (sticking together) is always threatened. The co-op’s constitution, which you need for the co-op to be a legal entity, should be written in such a way that conflict reduces. In other words, it should be as clear as possible and cover all aspects of the business. Understanding how co-op shares work is another way of avoiding conflict between members.

A “share” is the portion that any member owns in the business. It’s usually expressed as a percentage (%). For example, if there are five members, each might own 20% of the business (20% x 5 = 100%).Sometimes the shares all have the same starting value at the time the co-op is registered, but there could be a situation where shares have different values, or some members own more than others. This could be because they’ve invested more money into the business than others. These values are recorded when the business starts operating.

The co-op constitution must contain the rules of business, including how to operate the shares. This is very important as the “shares structure” will determine how the profits are paid out at the end of the financial year. Particularly in the early years, a really smart co-op might decide not to pay out all the profits. Instead, these are reinvested into the business according to the rules of the constitution or the voting decision of the current members, and used to buy additional seed or equipment.  But let’s say the profits are paid. If your shares are worth 5%, you’ll get 5% of the profit.

If someone else has 10%, they’ll get 10% of the profit. But what if you’re more active in the co-op and do more work than Mr 10%? He’ll still get more money than you, and that’s when conflict arises. The first thing to remember is that the pay out of profits, based on shares owned, has nothing to do with how much work someone does. If they own 10%, they get 10%, end of story. And they probably own more shares than you because they invested more money in getting the business started. Without their initial investment, there might be no business.

It’s up to the co-op constitution to make things fair. It could allow for those who actually work the land to be paid a salary, while investors who don’t work the land only get a percentage of the profit. The other area of conflict regarding co-op shares is what happens when a member dies or leaves the district. Some co-ops have a constitution that states that if a person leaves, they forfeit, or lose, all of their shares, and their investment remains within the co-op to be distributed among the remaining members. Death is more problematic.

Generally, members should nominate who inherits the shares on their death. The person chosen should be written into the minute book and the acceptance of the nomination signed and witnessed by the co-op committee. It’s important that the nominated member be accepted by the existing members to avoid conflict that in turn could cause conflict in the business.