Part 1, published in April’s newsletter, presented the basic principles governing traditional cooperatives and illustrated these principles with reference to BCS’s operations. Here in Part 2, we delve into the fundamentals of patronage rebates or refunds.

(The rules and practicalities of cooperative patronage are fairly complex, and a detailed presentation is beyond the scope of this article. For more detail, see http://www.cdsconsulting.coop/patronagedividend).

Patronage refunding, based on the amount of business a member does with the co-op, is one of the primary features distinguishing co-ops from other business and associational entities. Co-ops are run for the purpose of providing various benefits to members, and return of any net profits of the business is an important one.  However, earned patronage can also be appropriately retained and used by a co-op and still provide significant benefits to members — even if a cash amount is not directly paid to the individual members. The IRS allows two subgroups of patronage to be tax exempt by the co-op. These are “distributed patronage,” or patronage amounts that are actually paid in cash to members; and “retained patronage,” or amounts that are kept as an asset of the co-op but still allocated or booked to individual members. Retained patronage can be used by the co-op — again, tax free — as capital for expansion, for reduction of charges or prices for the co-op members and users, and for other co-op member benefits or community purposes. By IRS regulations, when a co-op decides to make a patronage allocation, it must distribute at least 20% of the amount allocated as a cash payment to individual members. Thus, 80% of the allocated amount may be retained. 

(For more on the use of retained patronage by co-ops, see: http://www.cooperativegrocer.coop/articles/2010-06-04/waking-sleeping-giant).

When all or a large portion of retained patronage is not needed by the co-op itself, it is a good idea — and actually a primary duty of a co-op — to pay as large a percentage as possible of the allocated patronage directly to members. But there are very good reasons to not distribute the maximum allowable amount. For example, when it’s economically feasible to begin allocating patronage to member-owners, Black Star will likely retain as much tax-free patronage as possible (80%) for its continued expansion, a second/third/fourth(?) brewpub, additional brewing facilities, expansion outside of Austin, etc. Black Star, because of its particular co-op mission, would also likely use such capital to reduce the costs of brewpub bar and menu items, and, importantly, to enhance worker remuneration and benefits. But rest assured that the Black Star Board is committed to making at least the minimum cash payments of patronage to member-owners as soon as possible.

On a broader co-op society note: Imagine a community that offers cooperative options in all or most economic/industry sectors. In addition to co-op options for particular consumer goods (grocery stores, beer/brewpubs, donuts), consumer services (housekeeping, screen printing), banking (credit unions), residential housing, web hosting and electricity, other co-ops could provide goods and services fulfilling a much larger percentage of consumer need. Instead of a household benefiting and receiving patronage rebates from just the operations of the co-ops listed above, imagine the additional benefits of cooperatively owned department stores, energy companies (even oil/gas and service stations), transportation companies (automobile and bicycle sales), insurance companies (life, health, home, auto, commercial, business), laundries, home improvement/furnishing stores, professional service firms, plumbers, electricians, building contractors, etc. The amount of potential member patronage to a person or family using most or all such cooperative businesses could be enormous.  And many of those businesses could be worker co-ops providing living wages and salaries and generally great places to work. Oh, if only…

In Part 3 of this series, we’ll explore the details of member-owner investment share offerings and how they mesh with patronage rebates.

(This article was originally published on March 4, 2014)

Black Star Co-op, as a cooperative organization, is part of a world-wide resurgence of member-owned businesses that are democratically organized to provide goods and services to owner/members. According to a report issued to mark the 2012 launch of International Year of Co-operatives, there are now three times more members of co-ops of all sorts ($1 billion) than individual shareholders (300 million) worldwide. Like most co-ops, Black Star provides highly valued good and services to members as well as many benefits to the community at large just by operating as a co-op. As the co-op model of business is rapidly gaining in popularity and is seen by many as an antidote to the problems facing our economy presented by undemocratic, even dictatorial, large corporate enterprises, it is important that newer Black Star members understand what it basically means to be a co-op and a co-op member.  Many long-time Black Star members can also use a refresher on this subject. This is Part 1.

Let’s start with the 7 Cooperative Principles adopted by the International Cooperative Alliance in 1995, including additional explanations of each principle. These principles are widely adopted by co-ops, and to some degree or another, all cooperative businesses follow them. To fully appreciate what co-ops, understanding these principles is critical.

1. Voluntary and Open Membership.  Co-operatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.

Co-ops must offer their benefits to all persons who will comply with the co-op’s basic terms of membership based on the 7 principles. Co-ops can limit membership when required for economic or practical reasons, and worker co-ops can hire competitively like any business, but co-ops should be open to anyone without discrimination. Black Star, for example, welcomes all persons as co-op members (of course, because alcoholic beverages are part of Black Star’s mission, and because Texas law is clear on the point, you must be over 21 to join). If a co-op ever gets to the point of turning members away, it’s probably time to expand or start a new co-op. When viewed in the context of the next principle, this principle is truly part of what makes a co-op a co-op.

2. Democratic Member Control.  Member-owners democratically elect board members and make some decisions directly. In most co-ops, one member gets one vote, no matter how much stock the member owns, what the position the member holds, how much business is done with the co-op, or how many hours a member works.

With the principle of open membership, democratic member control defines how co-op members make broadly participatory decisions. Members can and should be active in setting policy and giving broad direction to cooperative activities so that no member has a greater voice than any other member. People serving as elected representatives are accountable to the membership, not distant and/or disinterested stockholders. The principle allows for different voting procedures to reflect participation of members which are themselves co-ops or other democratically organized entities (this also promotes principle 6 — helping empower other co-ops). Black Star’s Board of Directors and Workers Assembly, in all their interactions with members, strive to engage with them to make democracy a reality. Democracy in a brewpub may seem insignificant in itself, but when our economy embraces the cooperative model in more and more sectors, this more expansive democratic model could truly transform our society. Black Star’s worker-managed operations further enhance the democratic nature of Black Star.

3. Member Economic Participation.  Members all contribute to the capital of the co-op, so all members are also owners.

Further bolstering their democratic attributes, co-ops have largely operated on the twin premises that capital is the servant of the enterprise, rather than its master, and that co-op activities should foremost meet member needs, not accumulate capital for investors who are often entirely disinterested in the particulars of the enterprise. Co-ops traditionally, and now by state and federal law, strictly limit returns on invested funds so that no one person or group of persons can financially control the co-op.  Investment is permitted, but it is circumscribed (many laws, including that of Texas limit any such return to 8% annually and prohibit accumulation of dividends). Co-ops also usually do not allow any additional vote or representation based on large investment. It is important to the democratic nature of co-ops that members patronize the co-op, contribute and own the co-op’s capital equally/equitably, and democratically control the capital and other assets of the co-op. This collective pooling of resources maintains the community centered nature of co-ops and provides financial strength that is possibly otherwise unavailable to co-op members. Profits from the co-op’s operations are to be allocated in such a way as to prevent any member from profiting at the expense of any other. Profits may or may not be returned directly to members as the board of a co-op, or the members themselves, may choose to use the money for improvements, expansions or new services for the membership, or other activities supported by the members. Black Star, like most co-ops, raises its capital from the profits of its business operations, as well as member-owner joining fees, paid on joining Black Star, and through Black Star’s Member Investor Share Offerings, the first of which was used for initial construction of the brewpub, with a likely second offering to come for Black Star’s expansion plans. Although only 3+ years in business, Black Star has been able to pay dividends on the MISO shares, and discussions are underway for a possible patronage rebate in the near future.

 4. Autonomy and Independence.  Co-ops are autonomous, and exist for the benefit of the members. If co-ops enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative autonomy.

Co-ops must be free of control or intervention from governments or other entities so that the members are able to control the business and community of the co-op — co-ops should not give up any aspect of their fundamental identity or democratic governance in order to get governmental favors, money or business partners. A co-op that allows the interests of its members to be subverted by politics, religion, corporate business expectations, etc., would not be a co-op consistent with these principles.

5. Education, Training, and Information.  Cooperatives provide education and training for members, elected representatives, managers and employees so they can contribute effectively to the development of their cooperative. Members also inform the general public about the nature and benefits of cooperatives.

Education of an ongoing nature for members, managers, board members, and employees, is critical to the development of a co-op. Many co-ops also educate the general public about the possibility of doing business cooperatively. This means more than simply product advertising or distributing information. Engaging the minds of members, elected leaders, managers and employees to appreciate the cooperative business model, with its complexity and richness is the ideal. Educating young people about co-ops will hopefully significantly lead to increased participation in co-ops. If co-ops are to continue their inroads into established business realms and form part of the solution to many community problems, people must be aware of the co-op movement and they must participate in it.

6. Cooperation Among Cooperatives.  Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures.

Working together makes all co-ops stronger, increases general co-op awareness, builds buying power and keeps the co-op business stable. In building a larger cooperative community (and hopefully world!), co-ops should strive to share experience and best practices with each other. This principle may seem odd to a mainstream businessperson who sees competition for customers and profits as the driving force of for business, but for co-ops, profit is a means, not an end. The goal of the cooperative model is to serve the needs of member-owners, who are usually also the primary customers of the co-op. Ideally, adherence to this principle will bring about co-op unity in a way that is beneficial to all co-ops. In the same way that individuals form cooperatives to achieve common goals, co-ops themselves can join forces. In game theory, one actually wins the most by cooperating. Through various organizations such as the National Co-op Business Association, and our own Austin Cooperative Business Association (Black Star belongs to both), co-ops lobby governmental agencies for laws that are favorable to co-ops, credit unions and related entities. By learning about and supporting each other’s business, mission and members, co-ops are helping to bring about a more democratic and economically stable world.

7. Concern for Community.  While focusing on member needs, cooperatives work for the sustainable development of communities through policies and programs accepted by the members.

Increasing democracy in the business world and building the values of social responsibility and caring for others, co-ops make significant contributions to a better society at large. “Cooperatizing” increasingly large portions of our economy says, in effect, that individuals can meet their needs and the needs of others in the community better than they are currently being met. Co-ops are uniquely able to contribute to the health and longevity of communities which is referred to as sustainable development. Some of the benefits that co-ops bring to a community are: stability in that co-ops don’t pull out of a community because there are higher profits to be made elsewhere; needs-based initiative in that co-ops start as a response to a perceived need, not just some new way to make a profit; and increased community income in that co-op spend and invest locally and directly benefit from paying higher wages, thus overall profit stays in the community. Not insignificantly, co-ops have traditionally led the way in areas such as human rights and environmental awareness.

In Part II, we explore the wonderful world of member-owner investment share offerings and patronage rebates.

John W. Vinson is a member of the Black Star Co-op Board of Directors. He was present at the first SXSW, when bands played 20 minute sets at a single venue.