Patrons, Patronizing, Patronage Dividend

These are all terms used in the cooperative business community and sometimes their meanings are unclear or jumbled.  This blog will discuss the definitions of these terms with examples of how they are used by different types of cooperatives.

A patron patronizes a cooperative and receives a patronage dividend at the end of the year.  Tricky sentence but it is easier to understand when you think about the underlying purpose of any cooperative, to provide goods and services to its members and their community that they could not provide as easily by themselves.

Patrons – Patrons are the people or entities (businesses, nonprofits, etc.) that “use” the products or services of a cooperative.  Patrons can be members or nonmembers of a cooperative; they can be customers or employees. In multi-stakeholder cooperatives, patrons can be split into classes of membership, based on each group’s use of the cooperative.  The important item to remember is that the cooperative needs to track each patron’s use of the cooperative separately.  For example, an agricultural cooperative will usually have just farmers or ranchers as patron members of the coop, but they often also have nonmember patrons who purchase fertilizer, fuel, or other products from the coop.  So how much fertilizer and seed were purchased by members or by nonmember patrons.  In a worker cooperative, you can have employees who are members and those who are non-members.  The income generated by each of these member or nonmember groups must be tracked by the cooperative if it is taxed as a Subchapter T corporation, because nonmember income can be taxable at the cooperative level, while member income creates net margins that generally flow through to the members in the form of patronage refunds, dividends, or capital credits.  So, the cooperative’s income that is generated by nonmember patrons in an agricultural coop or nonmember employees in a worker cooperative needs to be tracked and separated from member-generated income.

Patronizing/Patronage – This term defines how a person “uses” a cooperative, called patronage.  If you are patronizing a grocery cooperative, you are purchasing groceries from the coop store.  If you are a farmer member and patronizing your cooperative, you can be buying fertilizer and seed, or selling your harvest through the cooperative.  If you are a worker member of a cooperative, you are employed by and working for the cooperative, providing services or products to the cooperative’s clients.  As noted in the definition of Patrons above, a patron can also be a non-member, patronizing the cooperative by purchasing the cooperative’s products or services.  Determining how to define “patronage” or “patronizing” is often the most difficult formation issue for start-up cooperatives, especially those with multiple types of membership.  Probably the simplest way to think about patronizing or patronage is to describe how a member relates to the cooperative.  Are they a customer, a producer, an employee, an investor?  If they are a customer, what are they purchasing from the cooperative, specifically?  If a producer, what are they selling to or through the cooperative?  A cooperative is a business and accurately describing the services or products the member utilizes will help in defining the business plan for the cooperative.  A grocery store cooperative is always a good example for describing what it means to patronize, as it usually has multiple classes of membership.  Customer members buy groceries, employee members provide services to other members and the public, and vendor members might be a separate class that sells goods to the cooperative.  All of these members are patronizing the cooperative in different ways and their patronage must be tracked separately.

Patronage Dividend – Patronage Dividend is the term most easily misused by new cooperatives.  Many people shorten the phrase to just “Patronage” to describe the refunds or dividends received by members at the end of a year. They will say – what’s my patronage going to be for last year? Or how is patronage calculated each year, when what is really meant is “how is the dividend or refund calculated”? Using the word “patronage” without “dividend” can cause confusion because “patronage” (as described above) is the value of the member’s use of the cooperative. It is not the value of any dividend. In addition, many people mistakenly think a Patronage Dividend is like the dividend on a savings account, a certificate of deposit, or another type of investment.  To clear it up a little (or make it muddier for some), “dividend” is actually the wrong term, although widely used today in the cooperative community.  As Don Frederick stated in his fantastic series of booklets on cooperative accounting (Income Tax Treatment of Cooperatives, available for free in a 5-part series from the USDA), the preferred term should be Patronage Refund.  The member is not receiving a dividend on an investment they made in the cooperative, but rather a refund or return of income the member generated for the cooperative.  For example, a farmer sells his crop through the cooperative and receives payment for the crop, less a portion to the cooperative for operating expenses.  The cooperative has positive net margins at the end of the year, and returns some of that deduction to the farmer, based on the value of his sales in relation to all the other farmers.  In a producer cooperative (whether it is a group of artists, a group of coders in a tech coop, or a group of independent contractors providing services), the cooperative “keeps” a portion of what could have been paid to the members for their services and then refunds a portion if the cooperative generates positive net margins (or profits).  Note that nonmembers can also be eligible to receive patronage refunds if their use of the cooperative has been tracked and the organizational documents (articles and bylaws) provide for nonmember patrons to receive Patronage Dividends.  This is quite common in agricultural cooperatives where the voting farmer members and the community-based nonmember patrons, all share in refunds (or capital credits) from the cooperative based on the value of their patronage in the cooperative.

So, a person can be a patron, patronizing a cooperative, and periodically receive a patronage refund.  The cooperative has fulfilled its purpose by bringing together a group of people with common goals and common needs for services or products.  This is all terminology that you need to know if you are going to be working with or for a cooperative.