28 BULLETIN 1414, U. S. DEPARTMENT OF AGRICULTURE 



The larger associations, as a rule, can not depend to the same extent 

 on outside assistance, although even here banks and individuals have 

 taken a liberal attitude. The " certificate of indebtedness " plan seems 

 to be the only feasible method of financing fixed investments in a 

 nonstock organization which does not organize a subsidiar}^ corpora- 

 tion. A part of the initial capital for fixed assets should come from 

 the members. Certificates of indebtedness may be issued payable 

 in annual installments, usually five, or payable in full in three, four, 

 or five years from the date on which they are issued. Certificates 

 of indebtedness generally carry the common rate of interest payable 

 annually or semiannually. 



As deductions are made from money received for members' prod- 

 ucts to retire matured certificates of indebtedness, purchase new 

 equipment, or erect new plants, it is customary to issue certificates 

 covering these deductions. This means that the certificates are a 

 perpetual liability against the assets of the association. They repre- 

 sent the equity of the members in their association, but are nontrans- 

 ferable and retirable at a definite date or dates. 



Some associations operate on a plan that looks forward to the 

 eventual retirement of all certificates of indebtedness. Under this 

 plan, from a deduction of say 5 cents per package, 2 cents would be 

 applied directly to " retirement of indebtedness," or a similar fund. 

 The remaining 3 cents would be applied to the same fund, but would 

 be credited to the contributing members. Therefore, certificates of 

 indebtedness would be issued to cover 60 per cent of the members' 

 contributions. In this way, members entering the organization after 

 it has been in operation for some years would pay their share of the 

 capital investments of the organization. 



The retirement of certificates of indebtedness has been objected 

 to on the ground that the certificates are a direct evidence of each 

 member's interest in the assets of the association. Such interest, 

 however, usually can be determined by an appraisal. This question 

 can arise only on the death, withdrawal, or expulsion of a member. 

 Many associations refuse to recognize the right of a withdrawing 

 member to a share of the assets of the organization. At least one 

 court decision has upheld this view, 6 and it appears to be sound 

 provided there are no provisions, statutory or otherwise, to the 

 contrary. 



In all cooperative organizations, the chief problem in connection 

 with the financing of investments in permanent assets, is to procure 

 funds that can be made the basis of credit, usually mortgage credit, 

 necessary to complete the investment. A few associations have 

 financed the construction of plants by a bond issue. This is feasible 

 when the organization's credit is well established, and it possesses 

 assets sufficient to insure the safety of its bonds. 



Any plan should contemplate that eventually permanent invest- 

 ments will be financed by the members of the organization. This 

 is sound financing and will contribute materially toward the stability 

 of an association. In addition, the interest and loyalty of the mem- 

 bers are often in direct proportion to the investments they have 

 made to build up their organization. From the cooperative as well 



6 U. S. Dept. Agr., Bui. 1106, Legal phases of cooperative associations, 1922, p. 21. 



