Member: a farmer, share cropper, corporation, firm, partnership, association, or landlord with risk in the crop, who has been issued a certificate of membership, and who meets other requirements in the bylaws.

Patron: a member, or nonmember producer who does business with the cooperative.

Net Margin: Money left over after product is sold, and producers and all expenses are paid. Also called "earnings".

Service-at-Cost: The act of returning (refunding) net margins to patron's at the end of each fiscal year. Part or all of the refund may be kept (retained) by the cooperative as equity for several years, before being paid in cash to member-patrons.

Equity: The dollar value of member ownership in a cooperative. Also called capital. Includes amounts allocated to members (retained earnings, per-unit retains), and unallocated retained earnings.

Patronage Refund: The dollar amount refunded or "allocated" to patron's at the end of each fiscal year. The refund is in proportion to the volume of business each patron does with the cooperative. There must be an obligation (stated in the bylaws) by the cooperative to pay the refund before product is delivered. The amount can be cash and/or a credit to the patron's capital account.

Capital Account: A bookkeeping entry on a ledger page for each patron. It shows the dollar amount of membership fees, patronage refunds, and per-unit retains "credited" and "redeemed" to each patron. It shows patronage refunds "kept" by the cooperative, showing the equity provided by each patron.

Per-Unit Capital Retains: An extra charge on products marketed through the cooperative and used as equity. Each patron is issued a "per-unit retain certificate" showing the dollar amount retained during the fiscal year.

Patronage refunds are based on net margins, per-unit retains are based on the pounds (or other measuring unit) of product delivered to the cooperative, regardless of net margins.

Qualified written notice of allocation: A written notice to patron's within 8 1/2 months of the end of each fiscal year of a patronage refund (allocation) of net margins and/or per-unit capital retains. A qualified notice means the patron pays the income tax on the allocation in the tax year in which the notice is received. In order to qualify:

1. the written notice is sent with at least 20% of the allocation in cash, and either:

2a. the patron has agreed (consented) to include the value of the notice in their taxable income. This is generally a done through a consent provision in the bylaws, or

2b. the patron has the option of redeeming the written notice within 90 days of issuance.

Non-qualified written notice of allocations: The same as a qualified written notice of allocation except a non-qualified notice means the cooperative pays the income tax during the year the net margin and/or per-unit capital retain was earned. The patron pays the income tax at some point in the future when the cooperative redeems the non-qualified allocation to the patron. Following redemption, the cooperative takes a tax credit for tax paid previously.

Capital Reserve: Net margins that are not allocated to patron's. This equity belongs to the cooperative. Also called unallocated equity.

Allocated Equity: Equity that has been credited to patron's Capital Reserve Account(s).

Unallocated equity: Equity that is not credited to patron's. This equity belongs to the cooperative. Unallocated equity may come from Patron Net Margins, nonmember business Net Margins, and other sources of income.

Equity Redemption: The act of paying back patron's capital that was retained in a prior year by the cooperative.

Last Revised: September 4, 2001

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