Part IV: Finance and Taxation for Cooperatives

I. Who Finances the Business

Members as Owners – provide equity capital

• Purchase of common stock

• Purchase of preferred stock

• Transferable Delivery Rights

S 4.1

Common Stock

• Voting stock – usually one-member one-vote.

• Some cooperatives vote on a proportional basis.

S 4.2

Preferred Stock

• May be sold to provide for additional capitalization.

• Either members or non-members can purchase.

• May pay a limited dividend.

• Has no voting privileges.

S 4.3

Transferable Delivery Rights

• Long-term delivery rights used by some cooperatives (right and obligation to deliver a specified quantity of production).

• Tied to purchase of shares of preferred stock representing the delivery right.

• May sell the rights with board approval.

S 4.4

II. Who Finances the Business

Members as Users of the Cooperative – also provide equity capital in other ways and may have their equity redeemed.

• Retained patronage• Per-unit retains• Members are entitled to equity redemption

S 4.5

Retained Patronage, Per-Unit Retains & Equity Redemption

• Retained patronage – cooperative profits distributed as patronage (some in cash, some allocated).

• Per-unit retains are based on the volume or value of business conducted with the cooperative.

• Equity redemption—oldest retained patronage or per-unit retains are redeemed first. Equity account balances must be adequate to finance the cooperative (board decision).

S 4.6

III. Who Finances the Business

• Creditors as Lenders of Debt Capital• Types and Sources of Debt Capital

– Long-term sources• Commercial Banks• CoBank• Insurance Companies• National Cooperative Bank• State governments• Sale of Commercial Paper• Leasing

– Short-term sources• Commercial Banks• CoBank• National Cooperative Bank• Credit Unions• Suppliers

S 4.7

IV. How Cooperatives Are Taxed

S 4.8

• The cooperative deducts patronage paid to members from its taxable income during the year the profits are earned.

• Members include the patronage (both cash paid to them and the amount retained by the cooperative) received from the cooperative in their taxable income

IV. How Cooperatives Are Taxed

Cooperative PatronExpenses IncomePurchase Corn ($600) Sell Corn $600Merchandising expense ($300) Total ($900)Sell Corn $1,000Margin $100 Patronage Refund $100

Taxable Income 0 Taxable Income $700

S 4.9

Taxation Example

V. How Cooperatives Are Taxed

S 4.10

• Cooperative deducts patronage refunds distributed to member users.

• Income from nonmembers is subject to federal tax at the cooperative level.

Single Tax Treatment

V. How Cooperatives Are Taxed

Business Type Times Earnings Taxed Level

Proprietorship 1 Owner

Partnership 1 Owners

Corporation

Investor-General 2Corp/Owners

Cooperative 1 Owners

S Corporation 1 Owner

S 4.11

Tax Treatment

VI. Flow of Funds to Finance a Business

S 4.12

• Cash inflow– Equity investments

– Sales of fixed assets

– Sales of inventory

– Accounts receivable collection

– Depreciation

– Creditors – advances

• Cash outflow– Purchases of fixed assets

– Purchases of inventory

– Advances on products purchased

– Paying accounts payable

– Customer credit

VI. Flow of Funds to Finance a Business

AccountsReceivable

InventoryFixedAssets

Cash

Sale ofFixedAssets

CustomerPurchases Collections

CreditorsOwners

Depreciation

S 4.13

Exhibit