‍Unlocking the Power of Internal Capital Accounts: A Practical Guide for Worker Co-ops

Based on Christie Lam’s and David Hammer's VEOC 2025 Presentation

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By Joel Mejia

As a founding member of a worker-cooperative that up until that had never organized a cooperative before, I did initially ask myself, “Where does the money go in a worker co-op”? Happy to report that I got a great overview at the 2025 Vermont Employee Ownership Conference, where my colleague Christie Lam broke down one of the most daunting topics, accounting, in the most approachable walkthroughs I've ever seen. Specifically, I’m talking about internal capital accounts (ICAs), which Christie explained with clarity, curiosity, and just the right amount of accounting nerdiness.

Here's a recap — and why your co-op should care. Pro tip: Download our illustrated guide here and get familiar with some of the terms before deep diving.

What Are Internal Capital Accounts?

Internal Capital Accounts (ICAs) are like personalized savings accounts for each member of a worker cooperative — except the money is technically “owed” to you by the business, not sitting in your personal checking account. That’s an important distinction to understand before moving forward because folks get tripped up by the word “account”. Review chart of accounts here and here for a primer.

ICA’s are the mechanism by which profits are allocated to members, tracked internally (not distributed right away), and reinvested in the business — a brilliant and overlooked way to retain capital while building individual member wealth.

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Why Should Worker Co-ops Use Them?

Christie laid out three compelling benefits:

• Deferred income, not lost income – Members earn money that’s reinvested, with a plan for payout.
  
  
• Stronger balance sheets – Capital stays in the business to fuel growth, upgrades, or weather tough seasons.
  
  
• Tax efficiency – Co-ops using Subchapter T rules can avoid double taxation and deduct patronage allocations from taxable income.
  
  

‍The Three Levers That Drive Capital Strategy

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Christie emphasized that the power of ICAs comes from making choices. Every year, co-ops have to decide how to use their profits across three key levers:

1. How much to allocate to individual member accounts vs. the collective account

• Want to expand or invest in equipment? Maybe allocate 60% to the collective.
  
  
• Want to reward your team? Tip the balance toward individual accounts.
  
  

2. How much to pay in cash vs. equity (Written Notices of Allocation aka QWNAs)

• QWNAs act like IOUs — they increase a member’s ICA balance but stay in the co-op for now.
  
  
• Paying more in cash boosts morale, but retaining equity helps build long-term assets.
  
  

3. When to pay out the equity

• Some co-ops wait 5–7 years.
  
  
• Others tie payouts to retirement or member exit.
  
  

The key is intentionality: knowing your cash flow, business stage, and membership goals.

Let’s Get Real: Co-Op Cleaners Case Study

Christie shared a year-in-the-life simulation of “Co-Op Cleaners,” a fictional 10-person business (5 members, 5 non-members). Through a series of “What Would You Do?” scenarios, the session walked through:

• Allocating member vs. non-member profits
  
  
• Dividing cash and QWNAs
  
  
• Weighing present needs (e.g. bonuses, morale) against long-term goals (e.g. loan repayments, retirement planning)
  
  

It brought home this truth: ICAs aren’t a one-size-fits-all tool — they’re flexible and powerful when co-ops use them to align financial strategy with values and vision.

Need help designing or ensuring your co-ops in creating systems that uphold democracy and empower members to lead? Check out our guide “An Overview of Democratic Governance”, which outlines how worker cooperatives can build effective governance systems that balance structure with accessibility.

So, What About Taxes?

Yes, you pay taxes on patronage — even the part you don’t get in cash. But here's the upside:

• Co-ops deduct patronage from their corporate taxes (if they follow Subchapter T rules).
  
  
• It’s still more tax-efficient than many traditional business models.
  
  

The trick is transparency and education: make sure worker-owners understand what’s on their tax forms — and why it’s worth it. I can’t stress this enough: without education and practice, this strategy is empty, and members lose a critical opportunity to build wealth.

Questions Every Co-op Should Be Asking

Christie closed with a powerful set of reflective questions for any board or finance committee:

• Are member wages already livable?
  
  
• What’s more urgent — rewarding workers or reinvesting for future stability?
  
  
• How well are we using our current assets?
  
  
• Are our members experiencing the benefits of ownership in tangible ways?
  
  

These aren’t just accounting questions. They’re strategic, spiritual, and deeply personal ones.

Final Thoughts

Being in a worker-owned cooperative can be challenging in so many ways. Internal Capital Accounts are a unique gift of the co-op model — a tool for wealth-building that doesn’t come at the cost of sustainability or personal empowerment. But they only work well when paired with transparent governance, smart financial planning, and a commitment to cooperative values.

Reach out to me if you have any questions or want to set up a session with your business to go over how to use this tool.

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