Understanding cooperative equity
Download
1 / 30

Understanding Cooperative Equity - PowerPoint PPT Presentation


  • 223 Views
  • Updated On :

Understanding Cooperative Equity. Phil Kenkel Bill Fitzwater Cooperative Chair Oklahoma State University. Investor Owned. Cooperative. Legal business Forms . Individual Partnership Limited Liability Company Corporation. What is a Cooperative?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Understanding Cooperative Equity' - artie


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Understanding cooperative equity l.jpg

Understanding Cooperative Equity

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University


Slide2 l.jpg

Investor Owned

Cooperative

Legal business Forms

  • Individual

  • Partnership

  • Limited Liability Company

  • Corporation


Slide3 l.jpg

What is a Cooperative?

A Cooperative is an association of members (corporation) owned and controlled by the people who use its services.

$

$

Investor

$

Member

Customer

Investor

Customer

Corporation-

Cooperative

Corporation

$

$


A cooperative l.jpg
A COOPERATIVE

  • A business that is owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitable on the basis of use.

  • The more they use the cooperative the more service they receive

  • Earnings are allocated based on the amount of business done with the co-op.


Cooperatives are l.jpg

COOPERATIVES are...

Private Businesses owned and controlled by users and operated principally to provide benefits to users.


One third of americans are directly served by co ops l.jpg
One-third of Americans are directly served by co-ops

NCB


What is different about a cooperative l.jpg
What is Different About a Cooperative

  • Profits are distributed in proportion to use (business volume)

  • Limited or no return on equity

  • Equity is temporary (revolves)

  • Voting is not in proportion to equity investment

  • Limitation on non-member business

  • Cooperation between cooperatives


What is equity l.jpg
What is Equity

  • Owner’s investment in the business

  • Cushion fund that declines if the business suffers a loss

  • High debt to equity ratios increase the risk of the business and make the banker nervous


Equity in an investor owned firm l.jpg
Equity in an Investor Owned Firm

  • In investor-owned firms the profits are distributed in proportion to the equity investment

  • Investors purchase equity with the anticipation of future returns

  • Investors may buy or sell their equity to other investors


Why is cooperative equity different l.jpg
Why is Cooperative Equity Different

  • Profits are distributed in proportion to business volume so there is may be no advantage in holding more equity

  • Many cooperatives require a very low equity investment to join

  • Cooperatives create equity investment out of the profit stream by retaining cash and issuing the patron stock

  • There is generally no market for cooperative stock

  • Each cooperative creates

    a system to redeem stock

    at face value


Slide11 l.jpg

Income

Co-op income statement

Expenses

Net Savings

(Non-Member)

(Members)

Taxes

Cash Patronage Refunds

Retained Patronage Refunds

(Qualified or non-qualified stock)

Retain Earnings

(Unallocated Equity)


Slide12 l.jpg

One-Time Stock

Sales

Per-Unit Retains

Retained Patronage

Dividends

Co-op equity

Inflows

Outflows

Base Capital

Plan

Special

Plans

Revolving

Funds


How do cooperatives distribute profits l.jpg
How Do Cooperatives Distribute Profits

  • Unallocated Equity (Retained Earnings)

  • Cash Patronage

  • Stock (Retained Patronage)


Retained patronage l.jpg
Retained Patronage

  • Share of profits distributed as stock

  • Creates funds for the cooperative to finance infrastructure

  • Usually taxable to the member when the stock is issued


How does the cooperative distributions impact my taxable income l.jpg
How Does the Cooperative Distributions Impact My Taxable Income

  • IRS treats cooperative like an extension of the farm business

  • Member is taxed on the cash patronage they receive

  • Most cooperative issue “qualified stock” which is also taxable

  • Cooperatives issuing qualified stock must pay 20% in cash

  • Qualified stock is not taxable income when redeemed for cash because the member has already pre-paid the taxes.


Unallocated equity l.jpg
Unallocated Equity Income

  • Also called retained earnings

  • Permanent capital because it does not revolves

  • Created from profits from non-member business and by channeling a portion of the profits to this reserve fund


Purpose of unallocated equity l.jpg
Purpose of Unallocated Equity Income

  • Lenders like non-revolving capital because the cooperative’s debt/equity ratio increases every time stock is redeemed

  • Because the cooperative stock is redeemed at face value the auditors require the cooperative to either write down stock or reduce unallocated equity every time the cooperative shows a loss

  • Unallocated equity serves as the cushion fund that prevents frequent stock write downs


Why equity redemption l.jpg
Why Equity Redemption? Income

  • Equity Redemption is the process of Returning equity in cash to member-patrons who have previously invested.

  • Over invested or inactive members should not be responsible for financing a cooperative they do not use

  • Redemption is essential since there is no market for cooperative stock


Equity redemption systems l.jpg
Equity Redemption Systems Income

  • Age of patron

  • Age of stock

  • Percentage of all equities

  • Special Situation (death, hardship, move out of trade territory)


Age of patron l.jpg

Advantages Income:

Easy to understand and administer

Equities somewhat proportional to use for short revolving periods

Co-op can set the age level

Disadvantages:

Equity investment is not very proportional to use

Not popular with young members

Members may expect fixed revolvingregardless of financial conditions

Age of Patron


Age of stock l.jpg

Advantages: Income

Keeps equity investment more proportional to use

Co-op can manage redemption budget by redeeming partial year or multiple years

Disadvantages:

Requires tracking year of issue

Difficult to maintain a fixed period because of the good year-bad year problem

Age of Stock


Percentage of all equities l.jpg

Disadvantages: Income

Redeeming a portion of new members equity when they should be investing more

Transfer of ownership cannot be completed without additional provisions.

Advantages:

Rewards new patrons

Easy to understand and administer

Works well for cooperatives with a stable membership and patronage

Percentage of All Equities


Special situations l.jpg
Special Situations Income

  • Estate, hardship, moved out of territory

  • Usually at the discretion of the board unless specified in bylaws or state cooperative law

  • If the cooperative has limited financial resources the board may redeem estates in a first-in first-out order

  • Cooperative stock may be allocated in a divorce settlement but the cooperative will not change the timing of redemption



Profits create equity l.jpg
Profits Create Equity Income

Income

From

Operations

Cash

Regional

Dividends

Stock

Regional

Dividends

PROFIT

Cash

Patronage

Dividend

Retained

Patronage

Dividend

Balance Sheet

Equity


Impact of profits on the balance sheet l.jpg
Impact of Profits on the IncomeBalance Sheet

Debt

Cash

Physical Assets

Allocated Equity

Unallocated

Equity

Stock in Regional

Cooperatives


Losses destroy equity l.jpg

Retained Income

Patronage

Dividend

Losses Destroy Equity

Regional

Loss and Stock

Write Down

Loss

From

Operations

Loss

From

LOSS

Operations

Balance Sheet

Equity

Cash

Patronage

Dividend

Stock Regional Dividend


Impact of loss on the balance sheet l.jpg
Impact of Loss on the IncomeBalance Sheet

Debt

Cash

Allocated Equity

Physical Assets

From

Unallocated

Equity

Stock in Regional

Cooperatives


Impact of a stock write down on the member l.jpg
Impact of a Stock Write Down on the Member Income

  • Face value of stock is reduced

  • Amount eventually redeemed will be less

  • Generates an immediate ordinary income taxable loss

  • Immediate tax benefit cushions the blow of the lower eventual redemption


Understanding cooperative equity summary l.jpg
Understanding Cooperative Equity Summary Income

  • Cooperatives distribute earnings in cash and stock

  • Stock is redeemed at face value under a specific system and the board’s discretion

  • Stock is usually taxable income when received, not when redeemed

  • Loss may require a stock write down which generates an ordinary income taxable loss


ad