Agriculture Reference
In-Depth Information
Operation at cost
In most cases, a cooperative's net income is distributed to individual members in proportion
to the volume of business that they have done with the cooperative. A cooperative may
choose to retain profi ts rather than pay them out as patronage returns (see below), but when
it does, it normally must pay corporate income tax just as any corporation must (there are
some exceptions to this rule, discussed briefl y below). The obligation to return profi ts to
members is a primary factor that separates cooperatives from other forms of business. Non-
cooperatives are not so obligated and, after paying any tax on profi ts that may be due, will
return profi ts to the owners of the business in proportion to the owner's investment, or will
keep the profi ts in the business as retained earnings for future growth.
Cooperatives may do some business with individuals who are not members. In the case
of such non-patron business, any excess of income over and above the expenses generated
specifi cally by that transaction does not have to be returned to the customer (although it may
be in some cases). Instead, many cooperatives elect to treat this additional income as regular
profi t, to pay taxes on it just as any business would, and to use the profi ts to fund growth of
the cooperative. An agribusiness can maintain its cooperative status as long as not more than
half its business is transacted with non-members.
Limited returns on capital
Since the basic purpose of cooperatives is to operate at cost in order to benefi t member-
patrons directly in their own business, many state cooperative laws require that returns on
invested capital be limited. Limiting returns on member equity to a nominal amount helps to
ensure that members holding stock in the cooperative are not tempted to view the coopera-
tive as an investment in and of itself, but rather as a service to their own business. Typically,
returns on capital cannot be greater than 8 percent, although this rule varies from state to
state. In practice, most cooperatives pay no dividends on their stock; therefore limiting
returns is often a moot point.
Other issues unique to co-ops
Patronage refunds
Patronage refunds
allow cooperatives to distribute net returns or margins to members or
patrons:
•
On an annual basis
•
Consistent with standard accounting procedures
•
Without regard to how much was earned on individual transactions
Many cooperatives opt to return net earnings to members; however, this does not happen
on a transaction-by-transaction basis. Instead, cooperatives usually charge market prices for
supplies and services furnished to their members and patrons. Operating at normal market
prices allows many cooperatives to fi nance growth by special methods, such as retaining a
portion of cash savings and making patronage refunds in the form of stock or other obliga-
tions. They also offer competitive prices for products delivered for further processing and
marketing. This mode of operation generally allows them to generate suffi cient income to
cover costs and meet the continuing needs for operating capital.
