New by-laws were passed at the May 2007 annual meeting and are now in effect. They changed the way ownership works at the Co-op. This sheet highlights some of the important changes including patronage dividends and equity. Questions about the by-laws can be directed to the Board at firstname.lastname@example.org. For more general owner questions, contact Beth Dickens the Ownership Coordinator, at email@example.com or 374-2165.
Q: What are the most important by-law changes?
Equity: Dues, which have been taxable income for the Co-op and not refundable to owners, have been replaced with an equity system of capital certificate ownership. Owners have the option of paying into their equity in increments similar to their past dues. See details below.
Patronage Dividends: There is now a new system of computing and distributing patronage dividends.
Equity: Each owner pays in a certain capital contribution to the Co-op. Unlike dues, this amount is refundable should the owner leave the cooperative.
Quorum: For the first time, a quorum of owners is necessary for all matters subject to a vote of the ownership, including the election of board members. This quorum has been set at five percent of active owners.
Annual Meeting: Our annual meeting is now held within ninety days of the close of our fiscal year, which ends June 30.
Mail-In Balloting: Provision has been made for mail-in balloting when deemed necessary or desirable.
Owners as Legal Term: We are now referring to members as “owners,” a legal term that amplifies the distinction between cooperative share ownership versus membership in a discount house such as Sam’s Club.
Some changes are minor, designed to make the by-laws more clear and understandable. Other changes are more extensive and constrained by state and federal law to be worded in certain ways, such as the section on patronage dividends.
Q: Why did the Board propose changes the by-laws in the first place?
In 2006 the Board learned that the Blue Hill Co-op’s decade-long practice of computing and distributing patronage dividends was out of conformity with Maine business statutes. To remedy this situation, the Board started working with a lawyer whose practice concentrates on assisting cooperatives and nonprofit organizations in the interpretation and application of corporate, tax, and securities law. While helping us revise the by-laws that pertain to patronage dividends, the lawyer noted many other additional elements and/or omissions within the Co-op’s by-laws document that are in conflict with state or federal law or are written in a confusing or ambiguous way. After reviewing his recommendations, the Board decided that to ensure a sustainable future for our Co-op we needed to undertake a thorough revision of our by-laws.
Q: What was the old membership system and what happens now?
Previously, member-owners paid an annual fee or “dues” of $20, which was not refundable. Member-owners also invested a total of $10 as a capital contribution (equity) to the Co-op when they first became members. Members could close their memberships at any time and request the Co-op to repay their $10 capital contribution (equity).
Under the new by-laws, member-owners no longer pay annual “dues”. Instead, they pay only a capital contribution (equity), determined by the board, that could be spread out over many years and paid in installments if the member-owner chooses, or paid in a lump sum. This capital contribution is refundable to the owner should she/he choose to close her/his membership.
Q: What if I close my membership?
You are entitled to request that the Co-op repay your capital contribution (equity) if you close your membership. You must notify the co-op in writing. You must be a member in good standing with a valid forwarding address on file with the Co-op to receive a refund. The Co-op will redeem capital certificates as other member-owners provide replacement capital.
Q: How does the new patronage dividend system work?
At the end of each year, the Co-op’s Board of Directors will decide if the Co-op has a net distributable surplus (this term is explained more fully in Article 8 of the proposed by-laws) to distribute to its members as a patronage dividend. If yes, individual members will be paid a portion of the total dividends earned based on their patronage, or total amount spent, for that year at the Co-op. Depending on the Co-op’s capital needs, the board may decide to retain up to 80% of the available patronage dividend to reinvest for capital improvements in the Co-op such as facility upgrades or equipment purchases.
The retained patronage dividend is held in the member’s ownership account and belongs to the member but is reinvested in the Co-op for capital improvements. Over the years, as new retained patronage accumulates, the board will, if Co-op finances allow, pay out retained patronage from previous years to the members. The Co-op may defer payments of this retained patronage dividend for up to thirty years, after which time, they will be redeemed in the order of the oldest outstanding amounts first to members in good standing. The Co-op is entitled to reduce the amount of retained patronage dividends if the Co-op suffers any subsequent losses.
This system creates a more financially sound and sustainable Co-op that can respond to current needs and plan better for the future. This system also rewards the owner-member’s patronage of the Co-op (the more you shop at the Co-op, the higher your potential refund) and lets owner-members share in the Co-op’s success.
Q: What are the benefits to a patronage dividend system?
The Co-op is allowed to exclude from its taxable income amounts paid to its members as patronage dividends. Then, since the Co-op does not always have to pay the full amount of the dividends in cash, the Co-op potentially has additional operating capital available to it for capital needs. It also gives the Co-op a tangible way to share the overall success of the Co-op with members. Although members will be required to take patronage dividends into account for federal income tax purposes, the amount of any patronage dividend is not included in a members’ gross income when used to purchase personal, living, or family items; most member-owner purchases from the Co-op would be included in these categories. The patronage dividend would thus be taxable to a member-owner only if his or her purchases related to the operation of a trade or business or other income-producing activities.
Q: Will my purchases be tracked?
Yes, in order for you to receive a patronage dividend, the Co-op must track member-owner purchases, but only to obtain the total amount spent at the end of the fiscal year. No information about individual member-owners will be made available to any outside party. Internally, the Co-op will not examine your purchases or use the data in any way other than for the calculation of patronage dividends (i.e., not for advertising, direct marketing, or purchasing decisions).
Q: Do other co-ops do this?
Many, many co-ops of all kinds give a patronage dividend. The most familiar to people is REI. But there are a lot of retail food co-ops around the country – and in other countries as well – that have a similar system set up to give back to their members through a patronage dividend.
Q: How much patronage dividend will I receive?
That is a complete unknown, but depends on the three factors:
- Whether the Co-op has a net distributable surplus at the end of the year.
- Whether the Co-op board decides it would not be in the Co-op’s best interest to declare a dividend.
- How much you purchase from the Co-op during that fiscal year.
Q: Will I receive a dividend every year?
Not necessarily. It depends on the financial health and prospects of the Co-op for the given year.