Part 1, published in April’s newsletter, presented the basic principles governing traditional cooperatives and illustrated these principles with reference to BCS’s operations. Here in Part 2, we delve into the fundamentals of patronage rebates or refunds.
(The rules and practicalities of cooperative patronage are fairly complex, and a detailed presentation is beyond the scope of this article. For more detail, see http://www.cdsconsulting.coop/patronagedividend).
Patronage refunding, based on the amount of business a member does with the co-op, is one of the primary features distinguishing co-ops from other business and associational entities. Co-ops are run for the purpose of providing various benefits to members, and return of any net profits of the business is an important one. However, earned patronage can also be appropriately retained and used by a co-op and still provide significant benefits to members — even if a cash amount is not directly paid to the individual members. The IRS allows two subgroups of patronage to be tax exempt by the co-op. These are “distributed patronage,” or patronage amounts that are actually paid in cash to members; and “retained patronage,” or amounts that are kept as an asset of the co-op but still allocated or booked to individual members. Retained patronage can be used by the co-op — again, tax free — as capital for expansion, for reduction of charges or prices for the co-op members and users, and for other co-op member benefits or community purposes. By IRS regulations, when a co-op decides to make a patronage allocation, it must distribute at least 20% of the amount allocated as a cash payment to individual members. Thus, 80% of the allocated amount may be retained.
(For more on the use of retained patronage by co-ops, see: http://www.cooperativegrocer.coop/articles/2010-06-04/waking-sleeping-giant).
When all or a large portion of retained patronage is not needed by the co-op itself, it is a good idea — and actually a primary duty of a co-op — to pay as large a percentage as possible of the allocated patronage directly to members. But there are very good reasons to not distribute the maximum allowable amount. For example, when it’s economically feasible to begin allocating patronage to member-owners, Black Star will likely retain as much tax-free patronage as possible (80%) for its continued expansion, a second/third/fourth(?) brewpub, additional brewing facilities, expansion outside of Austin, etc. Black Star, because of its particular co-op mission, would also likely use such capital to reduce the costs of brewpub bar and menu items, and, importantly, to enhance worker remuneration and benefits. But rest assured that the Black Star Board is committed to making at least the minimum cash payments of patronage to member-owners as soon as possible.
On a broader co-op society note: Imagine a community that offers cooperative options in all or most economic/industry sectors. In addition to co-op options for particular consumer goods (grocery stores, beer/brewpubs, donuts), consumer services (housekeeping, screen printing), banking (credit unions), residential housing, web hosting and electricity, other co-ops could provide goods and services fulfilling a much larger percentage of consumer need. Instead of a household benefiting and receiving patronage rebates from just the operations of the co-ops listed above, imagine the additional benefits of cooperatively owned department stores, energy companies (even oil/gas and service stations), transportation companies (automobile and bicycle sales), insurance companies (life, health, home, auto, commercial, business), laundries, home improvement/furnishing stores, professional service firms, plumbers, electricians, building contractors, etc. The amount of potential member patronage to a person or family using most or all such cooperative businesses could be enormous. And many of those businesses could be worker co-ops providing living wages and salaries and generally great places to work. Oh, if only…
In Part 3 of this series, we’ll explore the details of member-owner investment share offerings and how they mesh with patronage rebates.