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Definition
A cooperative finance, similar to any business, requires capital for its initiation, stability, and expansion. Cooperatives can utilize both debt and equity to address their capital requirements.

Financial cooperatives are nonprofit entities that exclusively provide services to their members. They offer a comprehensive range of high-quality transactional, credit, and protection services, akin to traditional banks. However, in contrast to conventional banks, cooperative credit unions operate on a one-member-one-vote democratic basis. Unlike publicly traded banks, where voting power increases with equity ownership, cooperative members act as the owners.

Financial cooperatives also prioritize the financial well-being of their members over maximizing shareholder profits. Revenues are returned to members through higher dividends, reduced fees, and lower interest rates.

Moreover, financial cooperatives tend to be risk-averse institutions. They often adopt more conservative liquidity approaches and implement thoughtful measures for extending credit. Consequently, many of these organizations are better equipped to withstand disruptions.

Brief History
Cooperative financial institutions made their inaugural appearance in Germany in the mid-1800s, thanks to the efforts of politician and judge Hermann Schulze-Delitzsch. In 1850, he established the first cooperative finance with the aim of encouraging workers to pool their resources and save money.

The idea gained traction across various German states, broadening its objectives to attract investment from different communities in the form of loans. Subsequently, neighboring countries adopted this cooperative model, eventually introducing it to their immigrant colonies in North America. In the United States, the roots of financial cooperatives can also be traced back to early agencies specifically created to address the distinctive needs of the agricultural sector.

Membership equity requirements
Becoming a member of a cooperative entails a commitment to equity, typically fulfilled through the acquisition of common stock or a membership certificate. This stock is non-negotiable and does not appreciate in value. Each cooperative sets the cost of membership, striving to strike a balance between its capital needs and the financial capacity of its members.

Retained earnings
During periods of business profitability, owners may choose to reinvest some or all of the earnings. In a cooperative, profits can be distributed to members based on their usage, or patronage, of the cooperative. These allocations may be refunded to members, held as designated equity in the member's name, or a combination of both. A segment of the net profits may be collectively retained as unallocated equity, often stemming from transactions with non-members.

The board of directors engages in annual discussions regarding profit allocations and the redemption of previously retained patronage allocations.

Per unit retains
Producer co-ops frequently employ per unit retains, retaining a percentage of each financial transaction involving a member's products. The retained funds are then credited to member equity accounts.

Preferred Stock
Wisconsin co-ops have the option to generate equity capital by issuing preferred stock to both members and non-members. Preferred stock yields dividends but does not confer voting rights to members. Dividends are disbursed from the cooperative's net profits, though they are not guaranteed and are subject to the board's discretion.

Other Approaches to Cooperative Financing
Cooperative startups with high capital requirements might face challenges in securing sufficient equity from members alone. Accumulating the retained earnings necessary for substantial capital investments can prove challenging for cooperatives, which prioritize benefiting members rather than maximizing profits. Some U.S. states have adopted hybrid cooperative laws that permit both investor and patron members. Patron members play a role in determining whether non-patron members have voting rights and receive a share of net profits based on their investments. In Wisconsin, these hybrid cooperatives are referred to as Unincorporated Cooperative Associations.

Cooperative Profit Distribution and Taxation
Cooperatives undergo distinct tax treatment compared to other business entities. A cooperative is taxed at the corporate rate on the net profit retained as unallocated equity. Members, on the other hand, are taxed on the net profit allocated to them based on patronage. Allocated patronage can be classified as qualified or nonqualified.

Taxes are levied on members for patronage allocations retained and designated as qualified. A minimum of 20% of the qualified allocation must be disbursed to members in cash to assist in covering the taxes owed on the entire patronage allocation. This approach enables members to continually invest in the cooperative's equity in proportion to their patronage. There is an expectation that the retained allocations will be redeemed over time, considering that the member has fulfilled tax obligations on them.

In the case of nonqualified retained patronage allocations, the cooperative initially pays taxes at the corporate rate. When nonqualified retained allocations are eventually distributed to members, the member bears the tax liability, and the cooperative receives a tax credit. As members have not paid taxes on nonqualified retained allocations, there is reduced urgency to redeem this type of retained equity.

Financial Cooperatives
In 1995, the International Co-operative Alliance embraced the seven cooperative principles, which guide the operations of credit unions in fulfilling the needs of their members:

Voluntary and Inclusive Membership
Financial cooperatives extend their services to everyone without discrimination.

Democratic Member Control
Each member is afforded an equal opportunity to participate in shaping the cooperative's policies.

Members' Economic Participation
Member-owners reap the benefits of the credit union's profits.

Autonomy and Independence
Business dealings must not compromise the democratic control exercised by the cooperative's members.

Education, Training, and Information
Credit unions provide educational opportunities and training to empower members to actively contribute to the cooperative.

Cooperation Among Cooperatives
Cooperatives collaborate to enhance mutual benefits for their members and strengthen the overall cooperative movement.

Concern for Community
Cooperative financial institutions actively work towards sustainable economic development in local communities.

All cooperative credit unions uphold principles of equality and equity, regardless of gender, race, religion, political affiliation, or socio-economic factors. Some credit unions determine membership eligibility based on factors such as geographical area (e.g., State Employees’ Credit Union in North Carolina), profession (e.g., National Police Credit Union), or military service (e.g., Navy Federal Credit Union).

Key Facts
Cooperative financial institutions operate as not-for-profit organizations, prioritizing the welfare of their member-owners over stockholders. Key facts about these financial cooperatives include:

Over 100 million credit union members, with more than 7,000 credit unions spread across the country.

Credit union sector significantly contributes to employment, with approximately 275,000 people working at credit unions in the United States.

On a global scale, there are over 75,000 credit unions spanning 109 countries, collectively serving 260 million members.

Notable examples of financial cooperatives include Navy Federal Credit Union, Alliant Credit Union, and PenFed Credit Union. These institutions exemplify the cooperative model, focusing on member benefits rather than shareholder profits.