The Whats and Whys of Patronage Refund

By Elka Malkis, Financial Manager

Patronage refund is the official name for how co-ops send profits back to their members. When the Wedge Co-op has a profitable year, we return that profit to the members because as owners of the co-op, members own the profit. Profit is returned proportionately: those who spent more get more back. We give back, in a combination of cash and retained equity, the profit that was generated only by sales to members.*

Members also own the responsibility to protect the co-op and safeguard its future. Remember that the co-op exists to provide goods and services to its members. A co-op that does not exist cannot provide anything to anybody. Business owners who regularly siphon 100 percent of the profits out of the business are at risk of finding themselves ex-business owners. The retained portion of the patronage refund, therefore, is reinvested in the business to keep it strong.

A retail consumer co-op finds products its members want to buy and sets prices to cover the costs of providing those goods in a retail environment. It is necessary to set prices slightly higher than routine costs to allow for the uncertainties of the real world. These uncertainties include such things as fluctuations in food costs, equipment failures, inflation, global economic near-collapse, and other liabilities that all organizations are subject to. A well-run cooperative will maintain the ability to pay its vendors and employees despite inevitable uncertainties. Consequently, in most years a cooperative should generate a surplus of income over expenses (profit).

Co-ops are built on the principle of One Member, One Vote. No matter how much you shop or how big your patronage refund, you still only have one vote. This holds true for all varieties of members: big spenders, frugal spenders, employees, or board members.

Remember when you paid $80.00 to become a member? That $80.00 buys one share of Class A stock — that's the one that gives you a vote — and seven shares of Class B (equity) stock — these shares help give the store equity to retire debt and prepare for the future.

Shares in a co-op exist to benefit the co-op as a whole, not to increase in value for the shareholder. The Retained Equity portion of patronage refund does not add to anyone's voting powers, although it does add to the store's equity. While your portion is assigned to your member number, it is not legally the same type of equity as the seven shares of Class B stock. It is not refunded when a member withdraws. Instead, it stays with the store as a shared asset, a way to help ensure that this community resource will exist to provide goods and services to Wedge owners now and in the future.

* Profit from sales to non-members stays in the store and is subject to State and Federal Income Tax. Member-generated profits, when a sufficient cash patronage refund is returned to members, is not so taxed.