What is a Patronage Dividend?
When the Co-op is profitable, the money that is not needed to reinvest in the business is returned to member-owners in the form of patronage dividends. If the Cooperative is fiscally healthy, then we all benefit.
Cooperatives are structured so that when business operations are profitable, the annual surplus may be returned to member-owners as patronage dividends based on their purchases. For example, if the Cooperative had a 5% profit for the year, the Board of Directors could allocate it towards patronage dividends. The Co-op is required to give you at least 20% of your portion of the profits, the other portion can be retained by the Cooperative to be reinvested in equipment, other capital, an emergency fund, or other necessary items. Through this method, the Cooperative is not taxed on its income.
This means that in profitable years, the Co-op does not have to pay taxes on our income if we distribute profit to you and at the same time reinvest the remaining portion.
What is changing?
Currently and in the past, member-owners have financially benefited by receiving a discount at the till at the time of purchase. In 2014, the total amount discounts given to member-owners was over $101,000. In 2015, after reducing the discount to 5%, the member-owners received about $86,000 in discounts. In 2016, we are estimating about $100,000 discounts.
After 2016, member-owners will no longer receive an at-the-register discount on their entire purchase. We will use the additional income and reinvest it into the Co-op in order to generate a sustainable profit. Member-owners will then receive a portion of our profit in the form of a dividend.
What should I do if I have questions?
At the 2016 Annual Meeting on April 24th, the Board of Directors will present this information to you and answer common questions. They will also be holding special sessions with member-owners in the summer if you have more direct concerns or suggestions. Feel free to ask questions via our Suggestion Box at the store so that everyone can benefit from the answer.
How it works:
Step 1: The Cooperative earns a profit.
We are projecting profits between 1-3% in the next five years.
Step 2: The Board of Directors makes a few decisions.
Decision 1: The Board decides whether or not to declare a dividend. Co-ops can declare up to 100% of profits from member-owners as dividends.
Decision 2: The Board decides what percentage of the declared dividend to return to the member-owners. Legally, the Co-op must distribute no less than 20% of declared dividends. The remaining 80% is retained in the Co-op in a non-refundable equity account.
Step 3: We do some math, and allocate the dividend.
The following is based on 2015 data, with 1,432 eligible members. In this example, the Co-op made a profit of 72k. The Board decides to distribute 20% to members and retain 80% for reinvestment into the Co-op.
|(Example Year)||Your Purchases
Purchases by all Member-Owners
|Your Share of the Dividend||Total Distribution
to Member -Owners
|Member Low||$0.55||$916,209||>0.001%||$15,000||No Dividend|
- How much will my dividend be? Every year is different.
- How can I increase my dividend? The more you shop, the more greater the dividend.
- How are dividends calculated? Dividends are calculated based upon the eligible purchases an owner-member makes and how much profit the Co-op makes each year.
- What are eligible purchases? All business done with the Co-op except for purchases of shares, donations, Co-op sponsored classes, off-site transactions, fundraiser ticket sales, crate & bottle deposits, special orders and online orders.
- Am I eligible to receive dividends? If you own all forty shares, or if you purchased shares in the year in review, then you are eligible.
- How will I get my dividend? Dividends that are greater than $2 will be issued by way of store credit. You’ll get a notice when the patronage is allocated, then another notice when the distribution occurs. You will have until the end of November to use your dividend. You will also have the opportunity to donate the dividend back to the Co-op or donate it to the Community Contributions Program. The Community Contributions Program (which will be set up in 2016) is a method for the Co-op to support the community, local projects and local charities. Dividends less than $2 will cost the Co-op more to process than the value of the dividend. Therefore dividents less than $2 will not be allocated.
- What if I am a Joint Member? Joint members are two member-owner households that share the same residence or kitchen. Joint members will receive a check made out to both.
- What if I am an Associate Member? Associate members are business, organizations, or associations that are an owner-member. Associate members will be mailed a check payable to the organization.
- How does the dividends program compare to the discount program, for me and the co-op?
- For the Co-op
- It is a more sustainable method of distributing profits. All co-ops return profits to their member-owners based on how much they use the services. The discount program returned these profits before we made them. The dividend program allows the board to decide how much to return after the books are closed.
- Patronage dividends allow the Co-op to realize a significant tax savings. The dollars that we allocate as patronage stay here in the community rather than going to the IRS.
- The retained portion of patronage builds financial stability.
- For You
- Other Co-ops have found that owners experience more savings under patronage benefits programs compared to discounts at the register.
- The Co-op is able to invest in equipment and inventory to improve your shopping experience and product selection.
- For the Co-op
- How many other co-ops use this method of returning profits to their owners?
- Most Co-ops use dividends. Many Natural Foods Cooperatives are using them to stay competitive. Almost all types of other Cooperatives use patronage benefits. When Breadroot was incorporated in 2001, our business was formed to include patronage benefits. We first considered patronage benefits in 2012.
- How is the Co-op doing? Are we making a profit? The Co-op is doing well, especially in the new location. Our members are loyal. Our business has increased significantly since we moved here last April. Since 2012, we have increased sales by at least 15% annually. The Co-op in that time has mostly broken even, if we include annual share purchases of members.
- Do you project a profit for 2017 and beyond? Our long term budget foresees significant profits from 2017 – 2020.
- Will this affect member-owner loan repayments? The two are not related.
- Why is patronage limited to profits from sales to owners? Dividends as a method to distribute profits is strictly regulated by the IRS. This is one of those requirements.
- Are taxes taken out of my dividend? However, consult with your tax professional if you have other questions, including if you use your purchases at the Co-op for business purchases.
- When were the member-owners told about this? The bylaws include in them the process of patronage distribution. The bylaws are available online, when joining the Co-op, or at anytime a member asks for a copy. In 2014, the Board of Directors officially decided to pursue Patronage Dividends as a method to distribute profits. In 2015, our member-owners voted to implement the Patronage Program and change the discount.
- Will the Co-op distribute dividends every year? Only in years when the Co-op generates sufficient profits.
- How are we different than other stores without a large member worker program and discount?
- You own the Co-op.
- The Co-op can only be owned by the people who use it. Publicly traded corporations can be owned by anyone.
- The Co-op exists to provide a service, and is judged based on that service. Publicly traded corporations exist to make a profit for their shareholders.
- The Co-op returns profits based on how much our owner-members use the Co-op, not how much stock they own.
- Our Co-op is democratically owned by community residents, which lends accountability and oversight to store operations.
- Our member-owners can vote, attend annual meetings, be active in the community, and suggest ideas as a way to be involved with the Co-op and the Community without having to travel afar.
Some of the information in this document is from Patronage Dividends for Food Cooperatives, published by Publishing Partners, June 2015. www. Cdsconsulting.coop