Sharing the success of our co-op
Chris Maher, General Manager
At the February Board of Directors meeting, our Management Team presented a recommendation that, after setting aside needed reserves for store operations, the Board approve the distribution of last year’s profits back to the owners as a patronage dividend. The final calculation of the total dividend amount will take place in April after our annual financial audit. Watch for my column in the May issue of the Vine and our Annual Report for details.
The decision on how to handle our profits from operations is one of the fundamental responsibilities shared by the Management Team and the Board. Our ability to offer members a patronage dividend is unique to co-ops. And it is also an important strategic consideration for the health of the co-op, challenging us to strike an effective balance between investing our earnings into needed improvements, and putting aside funds for the future. I’d like to take some time here to share with you how the dividend works, since it’s such an integral part of our organization.
Our cooperative structure is unique in a very basic way, because instead of requiring a large investment from few owners, as in traditional businesses, we collect a small investment from many owners. Every member makes this investment as a $200 membership fee (“equity investment” in financial terms) when they join the co-op. The sum of these many small investments is then augmented by the patronage dividend system, which enables the co-op to retain some of its earnings as member equity. As the business grows over time, this model not only builds stability, but offers benefits to the business as well as its owners.
The Federal tax code governs how patronage dividends are administered. The law allows for the portion of net income from operations that is generated by the co-op’s owners to be returned to them, based on their patronage. The law also requires that if a dividend is declared, a minimum of 20% of that income is paid out to owners. Only the portion of net income that is generated by owners is eligible for distribution as a dividend. This system benefits both the co-op and the owners, since the dividend is tax-deductible for both the co-op and the owners, and the owners also get to share in the profits!
That’s why each year, as we close our financial statements for the previous year, we determine how much of our profit came from our owners. We then consider how much money we expect to need to reinvest in the co-op in both the short and longer term. We consider such things as upcoming development projects (such as our recent store remodel and solar array), the replacement of old or worn equipment, maintaining cash reserves for unexpected challenges to the store’s operations, and ensuring a fair return to our owners.
After considering these and other factors, we boil it all down to a recommendation to the Board that they declare a patronage dividend and pay out a portion to owners. We then turn the process over to the CPA firm which audits or reviews our financial statements each year. In April we bring the finalized numbers to the Board, and upon their approval, we begin notifying owners about their dividends, which are generally distributed in May.
We feel very good about patronage dividends. They are a big, tangible way we share the success of our co-op with our owners, who are among our most valuable customers. And they’re a wonderful win-win that underscores the magic of the cooperative model.