The Board of Directors can elect to retain all of the cooperative’s net income to set up or maintain a capital reserve. In addition to a capital reserve, the Board may 1) set aside an amount not to exceed five percent of the annual net income of the cooperative for promoting and encouraging cooperative organization and 2) establish and accumulate reserves for new buildings, machinery and equipment, depreciation, losses, and other proper purposes.
Net income in excess of additions to these reserves can be distributed to owners by declaring a patronage dividend. Unless your purchases at Three Rivers Market are a business expense, your patronage dividend is not considered taxable income. Each patronage dividend is calculated as a percentage of the total purchases by members at Three Rivers Market. To ensure that your purchases are recorded, present your member card each time you visit the store. In those years when a refund is given, the amount you receive will be calculated from the total purchases in your account.
The following are terms used in describing capital structure in cooperatives.
- Allocated equity: Profits that have been allocated as equity credits to members’ individual equity accounts, and are not taxable for either the co-op or the member.
- Capital reserve: Unallocated profits that are retained in the capital reserve of the cooperative, and are taxable.
- Retained earnings: Earnings that are not paid out to members as patronage refunds, and are retained in the co-op as allocated equity or in the capital reserve.
- Patronage dividend: The patronage dividend for a member includes both their patronage refund for the year and the allocated equity credits that were added to their equity account.
- Patronage refund: That portion of the patronage dividend (and it must be at least 20%) that is paid in cash or cashable store credit to a member at the end of the year in which the profit was made. This refund is not taxable to the individual.
- Common equity: Funds required to purchase membership interests in Three Rivers Market. This equity is not a security since it is non-transferable, is redeemable only at the discretion of the board, and is redeemable only at face value.
- Net Income Eligible for Allocation: Net Income generated by member purchases.