Glossary
Allocated equity
Section titled “Allocated equity”The share of net margin (savings) from member business that has been allocated to individual member-patrons based on their patronage but retained by the cooperative for operating purposes. There is an obligation to redeem this equity to members or past members at some point in the future.
Articles of incorporation
Section titled “Articles of incorporation”A set of formal documents filed with a government body to legally document the creation of a corporation. Articles of incorporation must contain pertinent information such as the firm’s name, street address, agent for service of process, and the amount and type of stock to be issued.
Assets
Section titled “Assets”The capital resources of a cooperative or everything that the cooperative owns.
Balance sheet
Section titled “Balance sheet”A statement showing the assets, liabilities, and equity (net worth) of a cooperative on a specified date, which is usually the end of the fiscal year.
Base capital plan
Section titled “Base capital plan”A financing plan in which the cooperative obtains capital by focusing directly on the current proportion of capital that a member-patron should have invested in the cooperative at a particular time. It is based on the degree of member-patron use of the cooperative during a base period, such as the average of the past three years.
Bylaws
Section titled “Bylaws”The document that serves as the governing body of the organization. The bylaws can be thought of as the contract between the cooperative and the members. Changes in the bylaws must typically be approved by the membership.
Board of Directors
Section titled “Board of Directors”A group of individuals elected by the members to act as representatives of the members to monitor the fiscal status of the cooperative, establish polices, formulate strategy and approve major financial commitments. The number, terms and structure of the board of directors is generally specified in the Articles of Incorporation and/or bylaws.
Capital
Section titled “Capital”Money, or the dollar value of plant and equipment used in the cooperative; may be supplied by members as owners and/or borrowed.
Capital credits
Section titled “Capital credits”The term used by electric cooperatives for retained patronage.
Certificate of equity, of investment; revolving fund certificate
Section titled “Certificate of equity, of investment; revolving fund certificate”Usually a certificate without a maturity date issued as evidence of retained patronage refunds or per unit retains.
Charter
Section titled “Charter”In some states the Articles of Incorporation are referred to as the charter. The articles of incorporation under which a corporation (including cooperatives) is legally organized. It is the authority to proceed as a corporation subject to the constitution and laws of the state in which the incorporation took place.
Common stock
Section titled “Common stock”Ownership capital in a cooperative, divided into shares or stock certificates that carry voting rights (unless otherwise indicated) and are eligible for dividends. Common stock may be split into Class A common stock with voting rights and Class B common stock without voting rights. Often as a condition for membership, a member must purchase one share of common stock.
Cooperative Corporation
Section titled “Cooperative Corporation”Most cooperatives are legally organized as corporations and are incorporated under separate statues from that of other corporations such as investor owned corporations or not for profit corporations.
Democratic Control
Section titled “Democratic Control”Cooperatives are owned and controlled by their member-patrons rather than by the investing public. Most agricultural cooperatives operate under a one member-one vote system. Voting can be proportional to patronage. However, unlike an investor owned firm, voting rights are not linked to investment.
Direct investment
Section titled “Direct investment”Cash investment in the cooperative via the purchase of membership certificates, shares of common or preferred stock, or other forms of equity.
Director
Section titled “Director”One of several members of the cooperative who is elected by the membership to a board of directors to govern or control the affairs of the cooperative.
Dividend
Section titled “Dividend”A return paid to investors on preferred stock or other invested capital. Most state cooperative incorporation laws limit dividends to an annual 8% return.
Duty to Education
Section titled “Duty to Education”Because cooperatives operate under a different financial model, members must understand how their cooperative works and the importance of their own patronage and support. Cooperative members, officers, employees and the general public should receive continuous education in the principles and techniques of cooperation.
Equity redemption
Section titled “Equity redemption”Returning to current or past members retained allocated equity.
Equity redemption plan
Section titled “Equity redemption plan”A plan detailing how the cooperative will redeem equity to current and past members.
Gross margin
Section titled “Gross margin”Total sales minus cost of goods sold.
Incorporating
Section titled “Incorporating”The act of setting up a corporation by filing incorporation papers with the appropriate state agency.
Liabilities
Section titled “Liabilities”Everything a cooperative owes to someone.
Limited Cooperative Association (LCA)
Section titled “Limited Cooperative Association (LCA)”A relatively new form of cooperative structure, enabled by separate legislation. Allows for two classes of members: producer members receiving benefits in proportion to use and investor members receiving benefits in proportion to investment.
Local margin
Section titled “Local margin”All income minus all expenses from the cooperative’s own operation. It may also be referred to as local savings.
Manager
Section titled “Manager”An individual hired by the board of directors to manage the day-to-day activities of the cooperative. This person is accountable to the board.
Member
Section titled “Member”An individual who meets the cooperatives requirement for membership (which often requires the purchase of a share of membership stock) and has the right to vote. The bylaws of a cooperative define the requirements of membership, such as purchasing one share of common stock, paying a membership fee, conducting a minimum annual dollar amount of business with the cooperative, or simply using the services of the cooperative.
Net Income Distributed as Patronage
Section titled “Net Income Distributed as Patronage”A cooperative’s net profits usually called net savings, are returned to members in proportion to their use of the cooperative—that is, according to the amount they bought or sold to the cooperative. The IRS uses the term “patronage dividend” but patronage refund is the preferred term since it is less likely to be confused with the concept of a stock dividend which distributes profits in proportion to ownership.
Officers
Section titled “Officers”Executive agents of the cooperative responsible for certain duties such as signing documents, keeping meeting minutes and providing notice of meeting. Officers are generally members of the board of directors.
Open Membership
Section titled “Open Membership”Refers to a structure where any person who meets the bylaw requirements for membership and purchases a share of membership equity can become a member at any time. Most farm supply and commodity marketing cooperatives are open membership.
Operating statement
Section titled “Operating statement”An itemization of business income and expenses with net income (net savings, net margin, net profit) for a given period such as a month, quarter, or year. It may be referred to also as a statement of operations, income statement, or profit and loss statement.
Outside director
Section titled “Outside director”An individual who is not a member of the cooperative but sits with the board of directors, and is elected by the cooperative membership. Outside directors are usually selected and approved by the board of directors and have no votes on the board, instead serving in an advisory capacity. An exception is the federal requirement that those cooperatives that are part of the Farm Credit System have an outside director with voting rights.
Patron
Section titled “Patron”A term used in a broad sense to refer to a customer or user of a cooperative and in a narrow sense to refer to a user of a cooperative who is eligible to receive a share of profits in the form of patronage refunds. In most, but not all, cooperative a user must also be a member in order to receive patronage and be a patron. The IRS code defines patron as: “any person with or for whom the cooperative association does business on a cooperative basis, whether a member or a nonmember of the cooperative.
Patronage refund
Section titled “Patronage refund”An allocation of net margin (savings) distributed to patrons on the basis of patronage (use of the cooperative).
Percentage of all equities plan
Section titled “Percentage of all equities plan”A financing plan that redeems a specified percentage of the designated equity pool, without regard for the age of the equity or age of the member or past member. For example, all members or past members receive a redemption of 10 percent of their allocated equity account.
Preferred stock
Section titled “Preferred stock”Capital stock that has a stated dividend rate and takes preference over dividends paid on other stock and/or patronage refunds to members. It is equity capital, since any dividends paid are at the discretion of the board of directors. Preferred stock may be sold to members and nonmembers alike.
Retained patronage
Section titled “Retained patronage”The share of net margin (savings) retained by the cooperative for the purpose of operating the cooperative.
Revolving fund plan
Section titled “Revolving fund plan”A financing plan in which capital funds are obtained from member-patrons through retaining patronage refunds or per unit retains, are used for a period of time by the cooperative, and are later (e.g., 10 years) repaid to the member-patrons or past members.
Rochdale
Section titled “Rochdale”A set of principles established by a cooperative group of weavers, the Rochdale Pioneers, in Rochdale England in 1844. In Rochdale, the Rochdale pioneers did not propose a set of principles. However, many years later their rules were studied by others and came to be called the Rochdale Principles. Because the rules evolved over time, they have been summarized differently into 6-12 principles which define how cooperatives ought to operate.
Special or unsystematic plan
Section titled “Special or unsystematic plan”Plans that redeem equity by age of member, when settling estates, for hardships and the like.
Statement of cash flow
Section titled “Statement of cash flow”A statement showing all gross cash flows of the cooperative over an accounting period, usually twelve months. It records cash provided by sources and cash consumed. It contains three components: (1) cash flow from operating activities; (2) cash flow from investing activities; and (3) cash flow from financing activities.
Statement of changes in financial position
Section titled “Statement of changes in financial position”A statement showing all sources of funds and all uses of funds, with the change in working capital, for an accounting period.
Targeted base capital plan
Section titled “Targeted base capital plan”A base capital plan that sets a targeted equity capital investment for each member-patron (such as $2.00 for each bushel of corn normally marketed annually through the cooperative), and then allows member-patrons to either invest their amount up front or to build up this amount up over time through annual retained patronage refunds.
Total net margin
Section titled “Total net margin”Local net margin plus patronage refunds from regionals or other cooperatives.
Unallocated equity
Section titled “Unallocated equity”The share of net margin (savings) from member and/or non-member business retained by the cooperative for operating purposes. This is considered permanent capital in that there is no obligation to redeem this equity to current or past members unless the cooperative is dissolved.
Working capital
Section titled “Working capital”Total current assets minus total current liabilities.