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UC, Berkeley, School of Law 590 Simon Hall Berkeley, CA 94720 T: 510.643.1076 F: 510.643.

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MEMORANDUM TO: FROM: DATE: RE: Worker Cooperative Coalition Policy Advocacy Clinic November 19, 2013 Indivisible Reserves

Question: What are indivisible reserves, and what are the benefits and limitations of implementing them for worker cooperatives? Definition: An indivisible reserve fund is created by allocating a certain percentage of a worker co-op’s annual surplus to the fund on a yearly basis. This fund becomes a form of permanent capital, belonging collectively to the co-op, which cannot be distributed to individual cooperative members. In the case of dissolution or demutualization of the worker co-op, the indivisible reserve fund is directed to other worker co-ops or confederations of cooperatives. Other countries: In most countries and regions where worker co-ops are strong and have had sustained success, indivisible reserves are mandatory (required by co-op law), represent 10-30% of a cooperative’s yearly surplus, and receive some sort of tax benefit based on indivisible reserves as a public benefit that invests capital permanently in the worker co-op community and helps to create stable, high-quality jobs. Common elements: Indivisible reserves generally have three common elements: 1. Indivisible reserves are mandatory for all worker cooperatives. 2. Cooperatives are required to contribute from ten to thirty percent (10-30%) of their annual net surplus to the indivisible reserve. 3. Cooperatives receive a tax benefit based on their indivisible reserve contributions, either in the form of reduced taxation or a tax credit. Benefits: Indivisible reserve funds serve as a crucial source of capital for co-op business purposes in times when the co-op is operating at a loss and to assist co-ops that seek bank loans. Because the fund is indivisible, cooperatives are discouraged from dissolving or being sold if they become profitable, thus establishing greater job security and stable wages for workers. Because the funds remain in the cooperative community—either at their co-op of origin, or, in the case of demutualization, in other cooperative bodies—indivisible reserves are also a way to build and develop the worker cooperative movement. Potential drawbacks: Mandatory indivisible reserves may discourage new businesses from forming as worker cooperatives. Creating tax benefits for indivisible reserves in the U.S. (or California) may be challenging politically and fiscally, thus undermining one of the key benefits. Finally, there may be a legal conflict between establishing indivisible reserves and meeting requirements for distributing net margins for worker cooperatives that are formed under Subchapter T of the Federal Income Tax Code.