For Lees Famous Recipe, what are the permissible forms of Patronage Dividends that AdCom can use?
Lees_Famous_Recipe Franchise · 2025 FDDAnswer from 2025 FDD Document
Article 5.7 Patronage Dividends
Notwithstanding any above Section of Article 5, AdCom will distribute Patronage Dividends to the members of AdCom based on the following Subsections of Article 5.8.
Article 5.7.1 Distribution of net savings
The realized net savings of AdCom, to the extent attributable to the patronage of members, shall be allocated and distributed among members as Patronage Dividends in proportion to their patronage and in such a manner and at such a time as to constitute Patronage Dividends within the meaning of the Internal Revenue Code. AdCom may set aside only such reserves as are authorized in this Section of Article 5. To the extent permitted under the Internal Revenue Code, all of the operations of AdCom shall be netted into a single allocation unit. 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% of the Patronage Dividends must be distributed in cash.
Patronage Dividends may be by qualified or non-qualified written notices of allocation or a combination of the two.
Article 5.7.2 Exceptions
Net savings may be reduced by such reasonable reserves for necessary business purposes as is determined by the Board. Any allocations of such a nominal amount as not to justify the expenses of distribution may, as determined by the Board, be excluded from distribution provided that they are not then or later distributed to other Members. Members shall retain the rights to waive in whole or in part, by action at a meeting of Members, any Patronage Dividends to which they may be entitled.
Source: Item 23 — RECEIPTS (FDD pages 70–287)
What This Means (2025 FDD)
According to the 2025 FDD, Lees Famous Recipe franchisees who are members of AdCom may receive Patronage Dividends in several forms. AdCom is required to distribute these dividends in proportion to each member's patronage. Unless the Board approves different proportions within eight and a half months of the fiscal year's close, 50% of the dividends will be in cash, and 50% will be allocated to each member's account as written notice. However, a minimum of 20% of the Patronage Dividends must be distributed in cash.
These Patronage Dividends can be issued as qualified or non-qualified written notices of allocation, or a combination of both. This flexibility allows AdCom to manage its finances in accordance with the Internal Revenue Code while still providing benefits to its members. The Board has the authority to set aside reasonable reserves for necessary business purposes, which would reduce the net savings available for distribution.
Additionally, the Board can exclude allocations of nominal amounts if the cost of distribution is not justified, provided these amounts are not later distributed to other members. Members also have the right to waive their entitlement to Patronage Dividends, either in whole or in part, through action at a meeting. This comprehensive framework ensures that AdCom operates for the cooperative benefit of its members while adhering to legal and financial requirements.