Ti	=	ARTICLE 7 – Financial Provisions
1.Ti	=	Fiscal Year
1.sec	=	The fiscal year of the Cooperative is January 1st through December 31st.
[A fiscal year is the 12-month period that the cooperative uses to calculate its yearly earnings and to prepare its yearly financial statements. The cooperative also calculates the patronage dividends/patronage refunds owed to each member based on the patronage conducted during the fiscal year. In this example, the fiscal year is January 1st through December 31st.]	=
2.Ti	=	Definitions
2.1.sec	=	“Surplus” shall be defined as the excess of revenues over Expenses for a fiscal year attributable to Member labor.
2.2.sec	=	“Profit” shall be defined as the excess of revenues over Expenses for a fiscal year attributable to non-Member labor.
[Explanatory Note: These bylaws make a distinction between revenues that are attributable to member labor versus non-member labor because federal tax law says that only “patronage-sourced” income may be distributed as tax-deductible patronage refunds/patronage dividends. In the case of a worker cooperative, patronage is defined by the member’s labor.]	=
2.3.sec	=	“Loss” shall be defined as the excess of Expenses over revenues for a fiscal year.
2.4.sec	=	Surplus, Profit, and Loss shall be determined on a tax basis. Surplus and Profit shall not include cash contributions by Members to capital.
2.5.sec	=	“Expenses” shall include Distributions paid pursuant to Section 7.6, payments of any interest and principal on any debts of the Cooperative, and reasonable reserves as determined by the Board of Directors.
2.6.sec	=	The “Collective Account” shall be Surplus, Profit, and reserves that are retained in the Cooperative and not distributed to Members.
2.7.sec	=	“Patronage” shall be defined as hours worked by each Member for the Cooperative.
[Explanatory Note: The statutory definition of “patronage” found in CA Corps. Code Section 12243 does not fit for worker cooperatives because the statute was designed for consumer and marketing cooperatives. Surplus earnings in a cooperative are divided among the members, in the form of patronage refunds (called Patronage Dividends in this sample), based on the members’ relative patronage. Worker cooperatives typically calculate patronage based on the hours that each member works.]	=
2.8.sec	=	“Patronage Dividends” shall have the definition contained in Internal Revenue Code Section 1388(a) (dividends paid to Members based on Patronage).
[Explanatory Note: The CA statute (see Section 12244) refers to patronage dividends as “patronage refunds.” However, some worker cooperatives choose to use the term “patronage dividend” to better clarify that such payments are owner distributions instead of additional employment compensation. This is because, in the past, the IRS has tried to establish that patronage refunds are subject to employment or self-employment tax.]	=
2.9.sec	=	“Member Account” shall be defined as each Member’s capital account in the Cooperative (initial capital contribution plus written notices of allocation minus Distributions minus Losses plus/minus any other item that affects the balance in the Member’s capital account).
2.10.sec	=	“Distribution” means the distribution of interest on capital contributed, but does not include Patronage Dividends.
[Explanatory Note: This is a paraphrase of the definition that is found in the Corporations Code Section 12235.]	=
2.	=	[G/Z/ol-a/s10]
3.Ti	=	Allocations
3.1.sec	=	Any Profit shall be credited to the Collective Account.
3.2.sec	=	Any Surplus shall be credited to the Collective Account as necessary to bring the year’s contribution to the Collective Account up to 25% of the year’s combined Profit/Surplus. All other Surplus shall be paid as Patronage Dividends in direct proportion to Patronage during the fiscal year.
3.3.sec	=	Any Loss shall be allocated 75% to Member Accounts in direct proportion to Patronage during the fiscal year and 25% to the Collective Account, with the exception of Losses occurring and/or carried over from the Cooperative’s first two fiscal years, which shall be allocated 100% to the Collective Account.
3.4.sec	=	The percentages referred to in this section can be changed for a coming fiscal year by the Board.
3.	=	[G/Z/ol/s4]
[Explanatory Note: See Corporations Code Section 12201 and 26 U.S.C. § 1388]	=
4.Ti	=	Patronage Dividends
4.1.sec	=	Patronage Dividends shall be made 50% in cash and 50% to each individual Member Account as a written notice of allocation, unless different proportions are approved by the Board within eight-and-a-half months of the fiscal year’s close – however, at least 20% must be distributed in cash.
4.2.sec	=	Patronage Dividends may be by qualified or non-qualified written notices of allocation or a combination of the two.
4.	=	[G/Z/ol/s2]
[Explanatory Note: See 26 U.S.C. §§ 1382, 1385, and 1388. A cooperative that meets the requirements of Subchapter T of the Internal Revenue Code does not pay corporate income tax on the earnings that are paid out as patronage dividends/refunds. Rather, they are tax deductible for the cooperative. For the patronage dividend/refund to be fully tax deductible, at least 20% must be distributed in cash and the remainder that is distributed in a written notice of allocation must be “qualified” as defined in 1388(c). (See http://www.rurdev.usda.gov/rbs/pub/cir23/CIR23.html for a general discussion of Subchapter T and qualified vs. nonqualified written notices of allocation). Sometimes, the written notice of allocation may not be qualified, in which case the cooperative would pay corporate income tax on the amount represented by the unqualified written notice of allocation.]	=
5.Ti	=	Members’ Covenant to Declare Income for Tax Purposes
5.sec	=	Each Member shall take into account on his or her income tax return any Patronage Dividends which are made in qualified written notices of allocation (as defined in 26 U.S.C. Section 1388) at their stated dollar amounts in the manner provided in 26 U.S.C. Section 1385(a) in the taxable year in which the Member receives such written notices of allocation.
[Explanatory Note: See 26 U.S.C. § 1385(a)-(b) and § 1388(c). One of the requirements for qualifying a written notice of allocation, so that the entire patronage refund becomes tax deductible for the cooperative, is that the member consents to report the written notice of allocation on his or her income tax return in the year in which he or she receives the allocation. Some cooperatives include this section in their bylaws as a way to establish that consent.]	=
6.Ti	=	Distributions of Interest on Member Accounts
6.sec	=	The Cooperative may, by a decision of the Board, pay interest to Members on the Members Accounts. The interest may be paid in cash or as an additional credit to the Member Accounts. The rate of interest shall be determined by the Board, but may not, in one year, exceed 15 percent of each Member’s contributed capital, which includes capital contributions, membership fees, and capital credits.
[Explanatory Note: See Corporations Code Sections 12376, 12451-12455.]	=
7.Ti	=	Periodic Redemption of Member Accounts
7.1.sec	=	The Cooperative shall aim to pay out in cash to the Members all funds credited to their Member Accounts within three years of the date they were first credited.
7.2.sec	=	As a general rule, written notices of allocation credited to Member Accounts (including notices now converted to debt) will be paid out in the order in which they are credited, with the oldest paid out first. However, the Board can decide to accelerate the repayment of debt owed to former Members on a case-by-case basis.
7.3.sec	=	If the Cooperative does not have sufficient funds to pay out all funds credited to Member Accounts for a given fiscal year, then funds will be paid out in proportion to the balance in the Member Accounts.
7.	=	[G/Z/ol/s3]
[Explanatory Note: See Corporations Code Section 12445.]	=
8.Ti	=	Payment Rights Upon Membership Termination
8.1.sec	=	When a Membership is terminated for any reason, including a Member’s death, the amount in the Member Account will automatically be converted to debt owed to the former Member, or, if necessary, to the Member’s estate, or to another assignee designated by the Member.
8.2.sec	=	The Cooperative shall repay the debt within five years of the Membership termination, with interest accruing at the discount rate – as set by the Federal Reserve Bank of San Francisco – plus two percent, on the amount outstanding at the end of each fiscal year.
8.3.sec	=	The Cooperative, in settling a Member Account, shall have the right to set off any and all indebtedness of the former Member to the Cooperative.
8.	=	[G/Z/ol/s3]
[Explanatory Note: See Corporations Code Section 12445.]	=
9.Ti	=	Priority of Payments
9.0.sec	=	Notwithstanding anything else to the contrary in this Article, payments by the Cooperative shall be made in the following order of priority:
9.1.sec	=	First, to make payments of any necessary expenses related to the operation of the cooperative, including wages, and payments of any interest and principal on any debts of the Cooperative,
9.2.sec	=	Second, to pay Patronage Dividends to all eligible Members,
9.3.sec	=	Third, to pay Distributions to all eligible Members, and
9.4.sec	=	Fourth, to make periodic redemptions pursuant to Section 7.7.
9.	=	[G/Z/ol/s4]
[Explanatory Note: See Corporations Code Section 12445.]	=
10.Ti	=	Dissolution Distributions
10.1.sec	=	Upon liquidation, dissolution, or sale of the assets of the Cooperative, any assets left after payment of all debts and Member Account balances shall be distributed to all persons who are current or living past Members in proportion to the number of hours each Member worked during the time he or she was a Member of the Cooperative.
10.2.sec	=	No distribution need be made to any person who fails to acknowledge the receipt of notice of liquidation in a timely manner. Said notice shall be deemed sufficient if sent by certified mail, at least 30 days before distribution of any residual assets, to the person’s last known business or residence address.
10.	=	[G/Z/ol/s2]
[Explanatory Note: See Corporations Code Sections 12653, 12655, 12656.]	=
11.Ti	=	Unclaimed Equity Interests
11.sec	=	Any proprietary interest in the Cooperative held by a Member that would otherwise escheat to the State of California as unclaimed personal property shall instead become the property of the Cooperative if the Cooperative gives at least 60 days prior notice of the proposed transfer to the affected Member by (1) first-class or second-class mail to the last address of the Member shown on the Cooperative’s records, and (2) by publication in a newspaper of general circulation in the county in which the Cooperative has its principal office. No property or funds shall become the property of the Cooperative under this section if written notice objecting to the transfer is received by the Cooperative from the affected Member prior to the date of the proposed transfer.
	=	[G/Z/ol/11]
[Explanatory Note: See Corporations Code Section 12446. As in most states, California has an Unclaimed Property Law that provides for unclaimed property or funds to “escheat” to California (i.e. becomes the property of the state), if the owner does not claim his/her property or funds after three years. This is because businesses are sometimes unable to locate their shareholders or other people to whom they owe money. However, Corporations Code Section 12446 allows a cooperative to keep a member’s equity interest that would otherwise escheat to the state, if the cooperative includes such a provision in its bylaws and complies with the proper notice requirements that are set forth in Section 12446.]	=