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Learn about cooperative financing through equity capital and debt, different stock types, tax implications, and the flow of funds for cooperative business operations.
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UNDERSTANDING COOPERATIVES UNIT 4 – Finance and Taxation for Cooperatives Slides for Unit 4 Rural Development – Cooperative Programs U.S. Department of Agriculture
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 • 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 S 4.8
IV. How Cooperatives Are Taxed Taxation Example CooperativePatron Expenses Income Purchase Corn ($600) Sell Corn $600 Merchandising expense ($300) Total ($900) Sell Corn $1,000 Margin $100 Patronage Refund $100 Taxable Income 0 Taxable Income $700 S 4.9
V. How Cooperatives Are Taxed Single Tax Treatment • Cooperative deducts patronage refunds distributed to member users. • Income from nonmembers is subject to federal tax at the cooperative level. S 4.10
V. How Cooperatives Are Taxed Tax Treatment Business TypeTimes Earnings TaxedLevel Proprietorship 1 Owner Partnership 1 Owners Corporation Investor-General 2 Corp/Owners Cooperative 1 Owners S Corporation 1 Owner S 4.11
VI. Flow of Funds to Finance a Business • 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 S 4.12
VI. Flow of Funds to Finance a Business Exhibit Owners Creditors Cash Customer Purchases Collections Sale of Fixed Assets Accounts Receivable Fixed Assets Inventory Depreciation S 4.13
