Think Outside the Boss (Fall 2015 edition): How to Start and Operate a Worker Owned Business
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Think Outside the Boss provides community members an introduction into the nuts and bolts of starting and running a cooperatively owned business. We go over legal issues in an accessible way to help you understand the relationships between cooperatives, employment, and community wealth-building. Think Outside the Boss is presented by the Sustainable Economies Law Center (SELC) and the Green Collar Communities Clinic (GC3), a project of the East Bay Community Law Center (EBCLC). Attorneys, law students, and experienced cooperative professionals give short presentations on legal issues, governance structures, financing, and more!
![Agenda for Day
Presentation:
Introduction to coops
Entity Formation
Difference between Nonprofits and Coops
STRETCH BREAK - 5 mins
Managing the Business
Employment Law Issues
Getting the Green I: Loans and Memberships
Getting the Green II: Securities
How the Money Flows [Tax and Accounting]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Think Outside the Boss (Fall 2015 edition): How to Start and Operate a Worker Owned Business
- 1. Think Outside the Boss How to Create a Worker-Owned Business?
- 2. Agenda for Day Presentation: Introduction to coops Entity Formation Difference between Nonprofits and Coops STRETCH BREAK - 5 mins Managing the Business Employment Law Issues Getting the Green I: Loans and Memberships Getting the Green II: Securities How the Money Flows [Tax and Accounting]
- 3. Agenda for Day Part II Snack Break Breakout Sessions Real Live Worker Owners (Mandela Food Cooperative, Arizmendi Cooperative) Legal Issues (Janelle Orsi, Sushil Jacob) Bookkeeping and Accounting (Esther Cervantes, Mary Carleton) Coop Academy and Legal Cafe Information (Ricardo)
- 5. INTRODUCTION Sushil Jacob Staff Attorney East Bay Community Law Center
- 6. Why Worker Cooperatives? Because the economy needs a new “Operating System”
- 8. How Coops Impact the Economy Cooperatives are everywhere!
- 9. What Are Worker Cooperatives? In a worker co-op, the workers are the members (and thus the owners).
- 10. The Cooperative Principles 1. Voluntary and open membership 2. Democratic member control 3. Members’ economic participation 4. Autonomy and independence 5. Education, training and information 6. Cooperation among coops (inter-cooperation) 7. Concern for community
- 11. What Make Worker Coops Different From Other Coops? Sovereignty of Labor Remove the boss, remove the exploitation of labor
- 12. History Knights of Labor
- 13. Mondragon, Spain
- 14. Cleveland, Ohio
- 15. Why Worker Ownership? Higher Job Satisfaction Higher Incomes Sustainability/Involvem ent in the local community Resiliency in economic downturns
- 16. Next: Forming a Cooperative Entity
- 18. Introduction to Legal entities Anuthara Hegoda, Law Clerk Green-Collar Communities Clinic (GC3) East Bay Community Law Center
- 19. LEGAL ENTITIES 1. What are legal entities and why do we form them? 2. What is limited liability? 3. What are the most common forms of legal entity?
- 20. LEGAL ENTITY A legal entity is the legal structure and rules under which a business operates. Examples of legal entities: General stock corporation Cooperative corporation LLC
- 21. SHOULD YOU FORM AN ENTITY? Factors to consider: Liability Tax considerations Mission/formation Business goals Control Costs of formation Capital requirements Liability Mission/ Formation Tax Treatment
- 22. Liability • Unlimited • Can sue YOU and your business Tax Treatment • Avoid $800/year (min) entity tax • Taxed as partnership Mission/Formation • Avoid organizational formalities PARTNERSHIPS
- 23. PROS AND CONS OF ENTITY FORMATION Pros • Can limit liability • Credibility • Attract investors • Tax election • Governance structure Cons •Potential additional tax •Minimum franchise tax •Corporate formalities •Time and cost of formation
- 24. LEGAL ENTITIES WE’LL DISCUSS TODAY • General Stock Corporation • Cooperative Corporation • Limited Liability Company (LLC)
- 25. GENERAL STOCK CORPORATION • The most common form of business entity • Owned by shareholders, governed by a board of directors • General purpose: make a profit for shareholders • Shares of stock usually issued in exchange for capital contributions • Voting power directly related to number of shares owned • Entity-level taxation
- 26. COOPERATIVE CORPORATION • Best incorporates cooperative principles of democratic decision-making and worker-ownership • General purpose: operate at cost for members • Legal requirements e.g. notice period for member meetings, cap on capital distributions • Must have “cooperative” in business name • One-member-one-vote principle required by CA law • Special tax deductions available for patronage
- 27. LIMITED LIABILITY COMPANY (LLC) • Similar to corporation but more flexible • Limited liability • Governed by Operating Agreement between members • Lower level of corporate formalities than corporations • Can incorporate one-member-one-vote principle, but not required by law • Members considered partners, not employees • Pass-through taxation
- 28. FORMING A LEGAL ENTITY Before incorporation: 1. Choose business name • Check availability/avoid confusion 2. Prepare Bylaws or Operating Agreement 3. Prepare and file Articles of Incorporation or Articles of Organization 4. File Statement of Information
- 29. FORMING A LEGAL ENTITY After incorporation: 1. Obtain employment identification number with IRS and employer account number with state 2. Open bank account 3. Obtain necessary licenses/permits/insurance 4. Hire/retain accountant or bookkeeper 5. Implement operational and management structure
- 30. REVIEW 1. What are legal entities and why do we form them? 2. What is limited liability? 3. What are the most common forms of legal entity?
- 32. Nonprofit Organization Anuthara Hegoda, Law Clerk Green-Collar Communities Clinic (GC3) East Bay Community Law Center
- 33. “We’re a nonprofit organization . . . We didn’t plan it that way, but that’s how it worked out.”
- 34. What does it mean to you?
- 35. What is a nonprofit? A corporation That may be tax-exempt Organized and operated exclusively for a charitable purpose (aka “exempt purpose”)
- 43. We know so much about healthy, sustainable gardening . . . We should start an URBAN FARM and teach people about healthy eating through a CAFÉ! Green Commonwealt h Farm & Cafe
- 44. Nonprofit or co-op? 4 main factors to consider 1. Purpose 2. Control 3. Funding 4. Profits
- 45. Nonprofit or co-op? Factors to consider 1. Purpose Who do you primarily hope to benefit? Can you articulate an “exempt purpose”?
- 46. Let’s make Green Commonwealth Farm & Café a nonprofit!
- 47. It’ll be a 501(c)(3), and get donations and grants, and be exempt from taxes!
- 48. 501(c)(3) Tax-Exempt Nonprofit Corporation CHARITABLE / EDUCATION AL Purposes PERSONAL/ COMMERCIAL Purposes
- 53. Nonprofit or co-op? Factors to consider 2. Control Worker-owner control vs. majority “independent” board
- 54. Nonprofit or co-op? Factors to consider 3. Funding Investments vs. contributions
- 55. Nonprofit or co-op? Factors to consider 4. Profits Distribution vs. reinvestment in the exempt purpose
- 56. QUIZ: What are the 4 main factors to consider when choosing between a nonprofit and a co-op? 1. 2. 3. 4.
- 57. QUIZ: What are the 4 main factors to consider when choosing between a nonprofit and a co-op? 1. Purpose 2. 3. 4.
- 58. QUIZ: What are the 4 main factors to consider when choosing between a nonprofit and a co-op? 1. Purpose 2. Control 3. 4.
- 59. QUIZ: What are the 4 main factors to consider when choosing between a nonprofit and a co-op? 1. Purpose 2. Control 3. Funding 4.
- 60. QUIZ: What are the 4 main factors to consider when choosing between a nonprofit and a co-op? 1. Purpose 2. Control 3. Funding 4. Profits
- 61. The Bottom Line A co-op is a for-profit business that benefits its members (the worker-owners) A nonprofit organization is an organization dedicated to serving the community at large
- 63. AG Foevewrn Tanhciengs Everyone Should Know About Governance Whoa! It’s all about governance!
- 65. Every member has one vote… In the election of the board and major decisions Power Power
- 66. Cooperatives don’t have to be this:
- 67. Alvarado Street Bakery Elects a Board Arizmendi Bakery is a Collective Board Members Every Member is on the Board
- 68. Board Every Member Members is on the Board Cooperative with a small Board of Directors Collective
- 69. Officers don’t necessarily have more power than Secretary: Gives notices, tracks meomtbhereshrisp, keeps minutes, etc. President: Signs official documents Treasurer: Keeps accounts The State of California wants to know that SOMEONE is doing this stuff.
- 71. Members Elect the Board on a One Member, One Vote Basis This means that co-ops are ultimately accountable to members, even if members don’t call the shots on a day to day basis.
- 72. It helps to remember that there are different realms in which people exercise control: 1. Worker Owners/Members: Elect the Governing Board and make certain major decisions. 2. Governing Board: Appoints the Officers and managers; make high level decisions that steer the company/organization toward its goals. 3. Officers: Corporations generally require President, Secretary, and Treasurer. These are primarily administrative in nature, and have special powers if you want them to. 4. Managers: Manage the day-to-day operations.
- 73. I’m going to work in an organization where my voice matters, I have control over my work, I can use my creativity, build community, and have fun!
- 74. Everyone is behind the wheel!
- 76. Beware of the Tyranny of Structurelessness I know what we should do! Rex
- 77. Cooperatives often make the mistake of not adopting clear governance procedures. Need to be quite specific about stuff like: •Procedures for meetings •Procedures for making, reviewing, and adopting proposals •Process for giving notice and creating agendas •Spheres of decision-making, management, and operations •Committees, Circles, Spheres, Managers, etc. •Composition and election of governing bodies/committees, etc. •Voting rights •Procedures for amending governing documents •Conflict of interest policies Note that this stuff is partially dictated by the statute that governs the entity.
- 78. Documents can’t look like this:
- 79. Give Governance Models Some Legal Teeth Need to be quite specific about stuff like: •Procedures for decision-making, AND •Spheres of decision-making, management, and operations •Committees, Circles, Spheres, Managers, etc. •Composition and election of governing bodies/committees, etc. •Place, time, process for meetings •Process for giving notice and creating agendas •Voting rights •Procedures for amending governing documents •Conflict of interest policies
- 80. Meetings can’t feel like hell.
- 81. Get trained. Learn the system. Practice it. Grow to love it.
- 82. Some worker cooperatives are exploring Holacracy (www.holacracy.org) 1. Distributing Governance Throughout the Organization, rather than requiring that all decisions flow up the chain of command. Division of the organization into semi-autonomous circles that are strategically interlocked to ensure communication flows up to a general circle.
- 83. 2. Roles: Each person in the organization fills multiple roles and can move in and out of the roles somewhat flexibly, rather than filling a single position with a single job description. Within a role, people have a lot of autonomy. 3. Accountabilities: Each role is accountable to a circle of people - i.e., they report to that group on how they are doing with the tasks required of that role. Role: Accountable to: Recycling Building Management Circle Grant Writer Fundraising Circle Cartoonist Communications Circle Window Washer Building Management Circle Legal Advice Legal Services Circle Happy Hours Fun Circle
- 84. 4. Highly Structured Meetings! •Everyone Has a Voice: Most meetings are held by going in a series of circles, which helps to ensure that everyone has a voice. Everyone can bring a proposal. • Keeps Personality Politics at Bay: The high level of structure keeps personality politics from dominating organizational culture, and keeps individuals from taking up too much space with too much talking. •Different Meeting Process for Different Types of Meetings: Governance meetings, strategy meetings, and tactical meetings.
- 85. 5. Proposals Move Things Forward! • Anyone can bring a proposal. In fact, everything discussed in the context of a governance meeting is discussed in the context of a proposal. This allows everyone to follow their passions and inspirations, and also have a voice in the direction of the organization. • Proposals are adapted through a structured feedback process. •Proposals are accepted if no one objects to the proposal on the basis that it moves the organization backward in its mission or harms the organization. • Accepted proposals can be revisited and adapted at any time. This allows the organization to be nimble, experiment, shift course quickly, and adjust to small changes, all while moving forward.
- 86. Let’s encourage hundreds of thousands of existing businesses to sell to workers and convert to cooperatives! Because
- 88. Employment Law and Coops Elizabeth Yates, Law Clerk Green Collar Communities East Bay Community Law Center
- 89. Roadmap Traditional Employment vs. Cooperatives Who is Considered an Employee / When Employment Laws Apply Four Major Categories of Workers NOT Considered Employees
- 90. Traditional Employment = Working for Others
- 91. Obligations of Employers • Maintaining workers compensation insurance; • Paying minimum wage and overtime; • Payment of payroll taxes and other withholdings; • Complying with standards for hours and working conditions; • Complying with occupational safety and health laws; • Posting of certain kinds of notices and posters related to employees’ rights; and • Adhering to certain recordkeeping requirements. Verifying employees’ eligibility to work in the U.S.
- 92. Cooperatives: Working WITH Others
- 93. True or False: Coops do NOT have to worry about Employment Laws.
- 94. FALSE! ▪ Why? ▪ Because coop members might be considered employees under current labor and employment laws. ▪ So, the coop might need to comply with laws that are designed to protect workers!
- 95. Ok, so what do we do… ? ▪ Be safe = assume everyone is an employee. ▪ Then work backwards from there to see if you can find any exceptions.
- 96. 4 Ways for People to Work Together and NOT be Employees: 1. PARTNERS: People that work together for their mutual benefit 2. VOLUNTEERS: People that do unpaid work for public benefit, humanitarian, or charitable purposes 3. INTERNS/TRAINEES: People that do unpaid work for their own educational benefit 4. INDEPENDENT CONTRACTORS: People that do work, but do so in an independent manner
- 97. PARTNERS: MUTUAL BENEFIT For more info on partnerships, see pages 64- 69 in your TOTB Manual. If NO “master-servant” relationship, then NO employment laws apply Partner Factors: 1) Control & operation of business 2) Participation in profits and losses 3) Employment security
- 98. Volunteers: Public Benefit As a general rule, you CAN volunteer for nonprofit organizations that are engaged in charitable, religious, or humanitarian purposes. But typically, you CANNOT volunteer for a for-profit business. NOTE: most coops do NOT fit under the charitable, religious, or humanitarian categories unless they are 501(c)(3) nonprofits.
- 99. Interns/Trainees: Own Educational Benefit YES, for-profit businesses can have unpaid interns! BUT Interns should be there Want more info on these to LEARN! criteria? See pages 60-62 in the TOTB Manual.
- 100. Independent Contractors: Independent Manner Who controls the manner and means of production How much skill is required Who owns the tools and instrumentalities Location of the work Duration of the relationship Right to assign additional projects to the hired party Extent of discretion over work hours The method of payment Whether the work is part of the regular business of the hiring party The provision of employee benefits The tax treatment of the hired party Just call them Independent Contractors?
- 101. Green Commonwealth Farm What If: Our coop founders decide to create an urban farm with 30 new members Goals: access to fresh produce and also profit All members are required to spend 3 hours per week volunteering on the farm to get cheap produce Each members spends time irrigating the farm, tilling the beds, and harvesting, and also handle some administrative tasks Each 3-hour shift has a supervisor that manages the members
- 102. To be safe… Be more democratic! Argue that your members are all partners and do the following: (1) Have all members serve on the Board of Directors. (2) Make decisions by a consensus process or with supermajority voting; this arguably gives each member a strong voice in each decision. (3) Give each member a lot of control over their own work, or create many semi-autonomous departments or committees that control their own work, procedures, and hours. (4) Make it somewhat difficult to fire people, by requiring a vote of a large number of members.
- 104. Moving On… All of this is nice but… …can we talk about the money now?
- 105. GETTING THE GREEN I: BANK LOANS AND MEMBER CONTRIBUTIONS
- 106. Show Me The MONEY!! Businesses need money to operate, how do we get some? Overview Traditional Businesses and Worker- Cooperatives Best Practices Alternative Sources of Funding Securities Law
- 107. Traditional Businesses A Traditional Business (non-cooperatively run) Typically, the owner would use person savings. Over time, the business owner may approach a bank or venture capitalist for additional funding. Personal Savings Loan Alternatives Venture Capital Successful Business
- 108. Financing A Worker Co-op Generally…. Member Contributions/Outside Investors Loans Alternative Financing Member contributions/Outside Investors = Equity Financing Loans = Debt Financing Successful Worker Cooperative
- 109. Raising Money LOANS – Traditional Lenders Banks want to see that you have enough money to cover your debt. Trend of Profitability Personal Guarantee Business Plan Size of the Loan
- 110. Best Practices Preparation Understanding their Perspective Attention to Detail Research Follow-up/Keep at it!
- 111. Alternative Ways to Raise $$$ Membership Capital Donations Micro Loans Pre-Selling Bartering
- 112. QUICK COMPARISON Traditional Sources (Banks and Credit Unions) Alternative Financing (microloans, for example) Greater Funding Potentially higher interest rates May require 2 to 3 years of profitability May require good credit, collateral, or equity Less Funding Potentially lower interest rates May invest in startups Credit, collateral, and equity requirements vary by lender
- 113. Getting the Green II: Securities Law
- 114. Things to Know
- 115. The definition of security You cannot offer or sell a security without registering … unless you have an exemption .
- 117. Basic Definition: Security You create a security when you ask people to put money into your business or venture, and you offer them a return. Walt Disney Stock Certificate (a security!)
- 119. Why does Securities Law Matter Offering or selling securities must be registered with the proper authorities Even ASKING people to invest in your business could be illegal, unless you register that security.
- 121. So what are YOU doing that is creating securities? Selling Stock Asking people to invest money in your business Offering a share of your business’ s profits Member capital buy-in
- 124. Here Are a Few Exemptions to FollowH aloengl thpe “ TYhinok Ouuts idOe thue Bto!ss” Manual for more in depth details
- 125. CA Limited Offering Exemption § 25102(f) In California Up to 35 lenders or investors People with whom you have a pre-existing No Advertising Simple online filing with the CA Department of Business Oversight
- 126. Unlimited # of Accredited Investors Really rich people Directors and Officers
- 127. CA Cooperative Equity Exemption §25100(r) A California cooperative can raise up to $300 from each member without that qualifying as a security Each person must be a member and have voting rights Can’t use a promoter
- 128. CROWDFUNDI NG
- 129. Crowdfunding
- 131. The CROWDFUND Act PROPOSED EXEMPTION You can raise up to $1,000,000 You can invest the larger of $2,000 or 5% of annual income/net worth
- 132. Direct Public Offerings Can publically advertise investment opportunities to the public Can DIRECTLY sell securities without a 3rd party intermediary
- 133. TO REVIEW! 1. Raising money from friends and family? Use a limited offering. 2. Raising money from directors, officers, managing members, or Mitt Romney? Think accredited investors. 3. Raising $300 from all your voting co-op members? Try the cooperative exemption. 4. Using the internet to raise little bits of money from lots of people? Might use crowdfunding in the future. Don’t fit into an exemption? Don’t
- 134. Outside Investing vs. Cooperative Principles
- 136. CASE STUDY: Equal Exchange CD Certificate of Deposits pooled together to guarantee loans to buy coffee, tea, and cocoa from farmer cooperatives at fair prices Control preserved Profit returns limited to the interest rate of CD
- 137. SECURITIES LAW REVIEW! 1. A security is created when you offer a return when you ask people for money for your business 2. When offering or selling securities, you must register the security unless… 3. There are several exemptions that worker-owned cooperatives can take advantage of to avoid registration of securities. USE THEM!!
- 139. How Money Moves Through a Cooperative (It’s AMAZING!) Presented by Janelle Orsi Executive Director of the Sustainable Economies Law Center (TheSELC.org) Featuring: Money
- 140. My Capital Account: $10,000 A B My Capital Account: $10,000 IN OUT (Business expenses) I just work here. C $5,000
- 141. A B IN OUT C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours Wages: $30,000
- 142. A B IN OUT C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours Wages: $30,000 Not!
- 143. In a typical business, workers work very hard to generate value… Ideally, dollars are a reward for generating value.
- 144. B C A You made me!
- 145. But the money doesn’t get to reward those workers for the full value they generate…
- 146. And if a dollar could show us how it feels about that…
- 155. A B C wages profits
- 156. How much is “profit?” A B IN C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours How much is “surplus?” OUT
- 157. How much is “profit?” Non-member hours = 1500 A B IN C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours How much is “surplus?” Member hours = 3000 OUT
- 158. How much is “profit?” Non-member hours = 1500 (1/3 of total hours) A B IN C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours How much is “surplus?” Member hours = 3000 (2/3 of total hours) OUT
- 159. A B IN C (Net income) Worked 1200 hours Worked 1800 hours Worked 1500 hours surplus = 2/3 profit = 1/3 OUT
- 160. A B IN C (Net income) surplus profit OUT
- 161. A B IN C (Net income) surplus profit The Collective Account OUT
- 162. Cooperatives have a special tax status! Thanks to Subchapter T of Internal Revenue Code! • “Dividends” don’t get taxed twice: Net profits distributed to members are tax deductible to the cooperative • Only if you are operating on a “cooperative basis,” which means: distributions of net profits are based on the "quantity or value of business done with or for such patron." Distributions to patrons not made in proportion to business done with the cooperative cannot qualify as patronage refunds. RurDev.USDA.Gov has lots of resources explaining all this.
- 163. A B IN C (Net income) surplus profit The Collective Account OUT X
- 164. A B IN OUT C (Net income) surplus profit The Collective Account Worked 1200 hours Worked 1800 hours I should get a bonus… $12,000 A’s share B’s share
- 165. A B IN OUT (Net income) surplus profit The Collective Account $12,000 A’s share B’s share They decided to pay 1/3 in cash and 2/3 in a “Written Notice of Allocation.”
- 166. A B IN OUT (Net income) surplus profit The Collective Account $12,000 A’s share B’s share They decided to pay 1/3 in cash and 2/3 in a “Written Notice of Allocation.”
- 167. A B IN OUT (Net income) surplus profit The Collective Account $12,000 A’s share B’s share
- 168. A B IN OUT (Net income) surplus profit The Collective Account $12,000 My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000
- 169. A B IN OUT (Net income) surplus profit The Collective Account $12,000 My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000
- 170. What on earth is this??? Self-employment income? (15% extra in taxes) or A B IN OUT (Net income) surplus profit The Collective Account $12,000 My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000 Regular income??
- 171. A B IN OUT (Net income) surplus profit The Collective Account $12,000 My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000
- 172. B My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000 A OUT
- 173. B My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000 A IN OUT
- 174. Free money! You already paid taxes B My Capital Account: $10,000 + $12,000 My Capital Account: $10,000 + $8,000 A IN OUT $6,00 0 $9,00 0 on it!
- 175. B My Capital Account: $10,000 + $6,000 + $8,000 = $24,000 My Capital Account: $10,000 + $4,000 + $6,000 = $20,000 A
- 176. B My Capital Account: $10,000 + $6,000 + $8,000 = $24,000 It’s time for something new. I’m leaving. My Capital Account: $10,000 + $4,000 + $6,000 = $20,000 A
- 177. Me: Not really. B My Capital Account: $10,000 + $6,000 + $8,000 = $24,000 My Capital Account: $10,000 + $4,000 + $6,000 = $20,000 I’ll sell my share and get RICH! A
- 178. B My Capital Account: $10,000 + $6,000 + $8,000 = $24,000 A $$550000 $500
- 179. Let’s sell this business for $1,000,000 and retire! Member hours worked over the years = 20,000 Member hours worked over the years = 15,000 Member hours worked over the years = 10,000 B C D
- 180. We’re gonna get RICH! Member hours Us: worked over the years = 20,000 Member hours worked over the years = 15,000 Member hours worked over the years = 10,000 B C D
- 181. Member hours worked over the years = 20,000 Member hours worked over the years = 15,000 Member hours worked over the years = 10,000 B C D Hey! ‘Member me? A
- 182. Member hours worked over the years = 20,000 4/10 of all hours Member hours worked over the years = 15,000 3/10 of all hours Member hours worked over the years = 10,000 2/10 of all hours B C D Member hours worked over the years = 5,000 1/10 of all hours A
- 183. Member hours worked over the years = 20,000 4/10 of all hours Member hours worked over the years = 15,000 3/10 of all hours Member hours worked over the years = 10,000 2/10 of all hours B C D Member hours worked over the years = 5,000 1/10 of all hours A
- 184. My Capital Account: $10,000 A B My Capital Account: $10,000 IN OUT (Business expenses) But let’s say that you don’t make much money in the first year or two….
- 185. My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) Should you share losses equally, even if one person worked more?
- 186. My Capital Account: $6,000 A B My Capital Account: $4,000 IN OUT (Business expenses) Should you divide losses based on patronage?? Well that doesn’t seem fair…
- 187. If next year brings lots of surplus, should you divide it only based on next year’s patronage? My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) Well that doesn’t seem fair…. My Capital Account: $10,000 C D My Capital Account: $10,000
- 188. If next year brings lots of surplus, should you divide it only based on next year’s patronage? My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) My Capital Account: $10,000 C D My Capital Account: $10,000 Surplus!
- 189. If next year brings lots of surplus, should you divide it only based on next year’s patronage? My Capital Account: $15,000 A B My Capital Account: $15,000 IN OUT (Business expenses) My Capital Account: $20,000 C D My Capital Account: $20,000 Surplus!
- 190. Can you reward A and B for their risk taking and hard work in creating new jobs?? Probably. My Capital Account: $18,500 A B My Capital Account: $18,500 IN OUT (Business expenses) My Capital Account: $16,500 C D My Capital Account: $16,500 Measure patronage with more than just hours: Give value to seniority. Give value to sticking with it through the lean years! Give value to measurable job creation. Give value to experience.
- 191. You could also let the Collective Account go into the negative and require that next year’s earnings restore it. My Capital Account: $10,000 A B My Capital Account: $10,000 IN OUT (Business expenses) The Collective Account
- 192. Ok, we took a loss. Can we use that on our My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) taxes to offset other income? In a cooperative corporation, that’s awkward. You can’t issue a negative 1099-PATR.
- 193. Ok, we took a loss. Can we use that on our My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) taxes to offset other income? In a cooperative corporation, that’s awkward. You can’t issue a negative 1099-PATR. There is no such thing as this:
- 194. Ok, we took a loss. Can we use that on our My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) taxes to offset other income? You can show a capital loss when you cash out of the cooperative down the road.
- 195. Ok, we took a loss. Can we use that on our My Capital Account: $5,000 A B My Capital Account: $5,000 IN OUT (Business expenses) taxes to offset other income? If we were taxed like a partnership, then we can have a tax benefit from the loss! LLCs and partnerships CAN do this:
- 196. Cooperative finances will change our economy! Cooperatives are meant to PROVIDE stable jobs, to reward workers EQUITABLY, to keep wealth LOCAL, and to create LASTING enterprises in our COMMUNITIES. A B C D
Notas del editor
- [Narrator -] “One bright and sunny day in Oakland, California, four landscape architects develop an idea.” [Narrator -] The owners of Green Commonwealth will now embark upon a challenging journey. They must navigate through the murky waters of starting a business: choosing a business entity, talking to lawyers and banks, and thinking about how to create a successful and sustainable business. You or your clients may be in a similar position as these founders and we hope today to give you a broad overview of the legal needs around starting a cooperatively run, worker-owned business.
- Ask the crowd to yell out why they’re here, what interested them in co-ops? Cooperatives are really hot right now, and it’s not hard to see why. I think people are everyday waking up to the fact that our economy is rigged against everyday people, and that we can’t rely on business as usual- whether it’s traditional corporations, government programs or nonprofits- to lead us out. We have to figure out our own way out of this economic mess. The U.S. economy is changing. It is no longer assumed that our children will have a better standard of living than we had. It is no longer assumed that corporate America will provide middle class, or manufacturing jobs on the scale it once might have. The only thing we can assume is that things are going to change, perhaps drastically. These changes are both scary, as well as provide an opportunity for drastically rethinking how our economy should operate, and for whom. Worker cooperatives provide a way to totally reimagine the role of labor and capital in a business enterprise. This is because a worker cooperative is one in which capital works for labor, and not the other way around. In essence what we’re here to discuss with you today is a reimagination of what our economy could look like, and get into the nuts and bolts of how you can create this in your community. We’re lawyers and law students with a different vision about how our economy can be organized, and it starts with workers owning the means of production- their own businesses, equipment, factories, you name it. In short, we’re talking about a new operating system for the economy. What we’d like to call, the next economy.
- One of the reasons we need a workshop like this is because there is so much misinformation about what cooperatives are. There are mainstream perceptions that this is only for hippies. First we want to take you on a tour of how communities who have been bearing the brunt of loss of manufacturing jobs, high unemployment and recessionary economics are organizing alternatives to capitalism, that may still fit in the market economy. These departures are occurring at a scale that we didn’t think was possible before.
- Background to the Coop Economy: 29,000 cooperatives in the U.S. Including agricultural, consumer, housing, credit and purchasing cooperatives Consumer includes: education, healthcare, housing, childcare, utility cooperatives For all coops: nearly $500 billion in revenue, $3 trillion in assets, Over two million jobs, $25 billion in wages The services provided to the members determines the character of the coop. Agricultural- farmers produce the goods, the coop markets the goods, assists the farmers in other ways, i.e. by joint purchasing of inputs/machinery, joint credit. Consumer- members run the store for their benefit Residential- residents own the property Cooperatives, as a legal entity – the cooperative corporation. In California, cooperatives generally form as a corporation under the California Consumer Cooperative Corporation statute. The rules governing this type of corporation are found in the California Corporations Code provisions beginning with section 12200. In California, you cannot legally have the word “cooperative” in your name, unless you have formed under this statute. Cooperatives, as a legal structure (LLC or mutual benefit): Many organizations operate like a cooperative, but, for a variety of reasons, chose an entity other than a cooperative corporation. For example, some cooperatives form as Limited Liability Company (LLC) or Nonprofit Mutual Benefit Corporations, and incorporate cooperative principles and practices into their Operating Agreement, Articles of Incorporation, and/or Bylaws. Cooperatives, as a set of practices and values (a set of practices and values): Some organizations or groups call themselves “cooperatives,” without having formed a cooperative corporation, or for that matter, perhaps not having formed an independent legal entity at all. For example, a group of tenants might create a housing cooperative, simply by adopting highly participatory and democratic ways of operating. Similarly, workers at a non-profit organization, or fiscally sponsored project, may elect to operate through cooperative, democratic principles, such as one-person one-vote. This type of cooperative organization likely will not have the other cooperative attributes of joint ownership and member benefit, described above. We’ll discuss this more in the next section on entity formation.
- About 300 worker cooperatives in the U.S. Workers are both member/owners and often they are employees of it. The workers elect the board, or serve on it, the board appoints the management. This inversion of the traditional corporate hierarchy, in which the workers at the bottom actually control the top, is what makes worker coops so revolutionary and radical.
- 1. Voluntary and Open Membership: Cooperatives 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. 2. Democratic Member Control: Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. 3. Member Economic Participation: Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. 4. Autonomy and Independence: Cooperatives are autonomous, self-help organizations controlled by their members. If they enter to 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 cooperative autonomy. 5. Education, Training and Information: Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public -- particularly young people and opinion leaders -- about the nature and benefits of co-operation. 6. Co-operation among Cooperatives: Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures. 7. Concern for Community: Cooperatives work for the sustainable development of their communities through policies approved by their members.
- Because worker cooperatives are owned and controlled by and for the people who work there, they operate differently from traditional businesses in some key ways. Joint Ownership: In traditional for-profit businesses, the owners are sole-proprietors or shareholders whose main interest is in generating a profit. Similarly, worker cooperatives are interested in making money, but they are also invested in making sure that the business meets the needs of its members- mainly to secure their stable employment. Sovereignty of Labor: In a typical business, decisions are made by a BOSS or by INVESTORS who cast votes based on the number of shares they own. In contrast, in a worker cooperative labor makes the decisions. Some people call this the “sovereignty of labor”. Unlike in a traditional capitalist business where labor is viewed as an “expense” to be minimized, in a worker cooperative, capital is what is controlled. Decisions are made directly by the workers, on a one-member, one-vote basis, not on a share ownership basis. No member has a larger or more influential vote because she invested more money in the business AND the cooperative remains accessible to everyday people who buy-in to the coop. Subordination of Capital - means is that generally worker cooperatives do not allow absentee investors, i.e. people who do not work for the cooperative, but only invest money in it, own or control the business. When worker cooperatives bring in outside investors, they are usually treated as loans, not shares- this means that outsiders don’t own the business, they are lending money to it. This relationship with outside capital is called “subordination” because it maintains the workers in control. We’ll discuss this a bit more in our section on raising investments. Member Benefit: In an investor-owned business, profits are distributed based on how many shares each person owns. Worker cooperatives instead distribute surplus earnings based on their labor contribution, meaning how many hours they worked or how much wages they earned. The overarching purpose is not to maximize profits for shareholders, but to reward workers for their work! This is a radical departure from the way traditional corporations work!
- KOL formed over 200 worker coops in the 1880s Cheeseboard Founded in: 1971; helped to launch the Arizmendi association of coops Mandela Foods Coop Founded in 2009 in west Oakland Mission to build community health and wealth through business ownership, nutrition education and increasing access to affordable, locally grown food New Era Windows In 2008 Republic Windows declared bankruptcy The workers thought something wasn’t right, because the windows business was profitable; it turned out the company was trying to open another windows business and hire temp workers So, the workers occupied the factory, and got support from a lot of people, including then-Senator Obama In 2012 they decided to buy out the business- and keep the manufacturing jobs alive in their community The workers got help from a lot of places, including a union- United Electrical Workers; and a nonprofit- the Working World, to raise capital They successfully bought the equipment they needed, and they aim to be the greenest, most energy efficient windows maker in the country, operating as a cooperative!
- Mondragon is the largest network of worker coops in the world. It began in the Basque Country of Spain during the Spanish Civil War, when the Basque people were highly persecuted by General Franco. Well, these people organized cooperatives as a means of creating self-sufficiency and community resiliency. Today they have a network of 120 cooperatives that are linked into one corporation, with 83,000 worker-owners. When I say network, I mean these coops are tightly integrated- they share branding, they have a bank, a university, a health insurance system and shared research and development. Like New Era, Mondragon is an industrial worker coop. They built the Guggenheim, they are working on the Ground Zero train station; They also operate a large-grocery store and a worker/consumer-owned bank.
- And Mondragon’s adherents are coming to the U.S. Recently in the City of Cleveland, there has begun on a worker-ownership experiment- creating three worker-owned cooperatives, a large-scale, green laundry, a greenhouse and a solar installation cooperative, that are supplying goods and services to the local University, hospital and to the City itself. The most exciting thing about this development is that the worker-owners come from some of the most disinvested and ignored communities of Cleveland, a neighborhood called the Greater University Circle, which has a median income of $18K, and which is majority African American. These folks will become the worker-owners of these new cooperatives, and they have a chance to build wealth as their business builds wealth.
- Cooperatives are more likely to create stable fair-paying jobs, adopt environmentally sustainable business practices and invest in the local community. Because they often evaluate success based on a variety of metrics in addition to profit, such as worker health and happiness, sustainability, and community benefit, worker cooperatives are often said to have a “multiple bottom line.” Higher Job Satisfaction - Worker Health and Happiness. Because workers have an ownership stake in the cooperative business, they can make business decisions that directly promote and support worker health and happiness. Even the most benevolent owner/employer is unlikely to make business decisions that benefit workers if such decisions have a negative impact on business profit. Conversely, worker owners are interested in generating a profit, but also invested in ensuring that they work in a healthy environment, characterized by job stability, fair wages and benefits, and safe business practices. UN Study: More innovative and flexible: “Cooperatives have a tendency to produce a type and level of organizational innovation that significantly contributes to the economic sustainability of the enterprise.” Despite some job losses and a small number of closures, worker and social cooperatives seem to be more resilient in weathering the crisis than conventional enterprises. Thus in downtimes or recessions, worker cooperatives will often democratically decide to take a pay cut, rather than lay off the workers. This is what has happened in Mondragon, where the Spanish economy is shrinking, so the workers have decided to reduce their pay, rather than close their businesses. Sustainability. The people who own and run worker cooperatives also tend to live, work, and play in the neighborhood where the business is located. Because worker cooperatives are deeply rooted in the local community, they are less inclined to engage in environmentally destructive business practices than companies controlled by outside investors. Using toxic chemicals, squandering natural resources, or damaging open spaces would have a negative impact on the very people making key decisions about how to run and operate the business, as well as on their families, friends, and neighbors. Contribution to Community. Worker cooperatives help build community wealth through local ownership. Workers who own their jobs have not only a direct stake in the local environment, but the power to decide to do business in a way that creates community benefit rather than destroying it. Worker cooperatives are likely to form relationships with other local businesses, hire local workers, and reinvest their profits in the local neighborhood.
- What is a legal entity? It is the legal structure and rules under which a business operates – it sets out things like how a business is governed, how liability is allocated, and also how a business is taxed. The most common examples of legal entities are the general stock corporation, cooperative corporations, and LLCs, and I will talk about these in more detail a little later.
- When considering if you want to form an entity, there are a number of factors to consider – the main three being liability, tax, and the mission/formation of the business, which includes the long-term business goals, how you want the business to be controlled, and the costs of formation and what capital would be required to start the business and keep it operating smoothly. Liability issues - think about activities your business will engage in and the risks these activities may create. Will you be serving food? Will there be customers walking into the premises? Will you be carrying out work on someone else’s property? Will you have employees?
- You can choose to operate a business without forming a legal entity. If you start a business with someone else or other people, the law will consider your business a partnership. In a partnership, there is flexible control over the business, however there is unlimited liability, which means that if something goes wrong in the course of business such as an injury or unpaid debt, each partner can be sued and their personal assets would be at risk in addition to the business assets. In fact, a partner can be held liable for the actions of another partner even if they didn’t know of/authorize those actions, and this can be risky. The advantages of not forming an entity and being considered a partnership include the fact that you can avoid the CA minimum franchise tax of $800 per year, and you don’t have to follow corporate organizational formalities, e.g. you can form the partnership without formal paperwork. If you were operating a business alone without forming an entity, the law would consider you a sole proprietor, which has many of the same characteristics as a partnership, but includes unlimited control of the company.
- So it is clear there are pros and cons to not forming an entity, and there are also pros and cons to forming an entity. Pros include: Limited liability – can protect yourself and your personal assets, so the entity itself is the only thing at risk Credibility – it looks good to operate as a formal entity, easier to build and maintain relationships with other entities and customers, etc. This also works to attract investors. The general form of a corporation, in issuing shares, allows for the inclusion of outsiders. Can transfer shares to other people and give them ownership of the business, so attracts investors automatically. This doesn’t happen in sole proprietorships, and in GPs you have to figure out a percentage, which is not straightforward. SP. GP can attract investors Tax election – in choosing an entity, you can decide how you want to be taxed, such as whether you want the entity to be a separate taxpayer or if you want the owners to be taxed directly. I’ll go into tax election in more detail later on. Governance structure – having a legal structure in place with rules and responsibilities set out on paper can help the business operate smoothly and ensure efficiency. Cons include: Potential additional tax – double taxation when the entity is taxed separately and then shareholders have to pay tax on the same profits when they receive dividends Minimum franchise tax of $800 per year. Must observe corporate formalities – paperwork, meetings, etc. Time and cost of formation – might need to hire attorney and accountant to go over paperwork, can be costly and lengthy process which might not be worth it, based on your business goals.
- General stock corporation The most common form of business entity Owned by SHs Governed by board of directors General purpose – make a profit Shares of stock in exchange for capital contributions Voting power directly related to number of shares owned Reasons to choose general corporation over a cooperative corporation? More flexible (coop corps have more rules surrounding membership and notice, and caps on distributions etc), and can still have democratic principles if the SHs sign a SH agreement which states that each SH will have equal voting power. But general corporation can’t have “cooperative” in its name.
- Cooperative corporation Best incorporates cooperative principles of democratic decision-making and worker-ownership General purpose – operate at cost for members. Legal requirements e.g. notice period for member meetings, 15% cap on distributions on capital stock – paying someone based on capital invested. Rules preventing it from becoming traditional corporation. Purpose of coop is to give patronage dividends, not capital dividends. Must have “cooperative” in business name One member one vote principle required by law Special tax deductions available for patronage
- LLC Similar to corporation but more flexible – limited liability because business is separate entity for liability purposes, but governed by OA between members of business. Contract they sign – important difference to coop – bylaws adopted by board. Not subject to same tax principles or corporate formalities (meetings, minutes, notice of meetings) as corporations. Tax treatment - pass-through taxation (entity not taxed separately, can avoid double taxation). Can make one member one vote principle, like general corps, but not required by law
- [Narrator -] The Green Commonwealth goes on to be a very successful business. We hope the same for you and the businesses you support and cultivate.
- Now I’m going to talk about nonprofit organizations and what you should consider if you are deciding whether to form your venture as a nonprofit versus a co-op. My presentation won’t cover all the details of forming a non-profit and seeking tax exemption. It will just be an introduction. If you decide that you would like to start a nonprofit organization, you should talk to an attorney.
- You’re probably thinking, this is a workshop about worker co-ops; why are we talking about nonprofit organizations? We understand that many of you are interested in the co-op model precisely because you do not want to be a non-profit. But some of you may may be considering both entity type, and a common question we get is whether it’s possible to form a worker co-op as a nonprofit organization. So that’s why we’re talking about nonprofits and going over the key differences between the two types of entities.
- Before I explain all the key differences between co-ops and nonprofits, let’s take a step back and talk about what a nonprofit organization is. What comes to mind when you hear the term “nonprofit organization”?
- A corporation In CA, most are organized as Public Benefit Corporations this is the term used in CA law, so this is what you should look for when doing research or gathering forms to file and create a nonprofit organization May be tax exempt Tax exemption is a separate step Federal tax exemption is handled by the IRS. The most common federal tax exemption for nonprofit organizations is known as the 501(c)(3) exemption. State tax exemption is separate but generally follows the federal exemption. So worry about the federal tax exemption first and once you obtain that, apply for the state tax exemption. Organized and operated exclusively for a charitable purpose This relates to the tax exemption. The 501(c)(3) exemption requires the organization be organized and operated exclusively for a limited set of purposes, namely ones that could be considered charitable, educational, scientific, or religious.
- Here are a few examples of non-profits.
- Even the Mozilla Foundation, which is the force behind Firefox, is a nonprofit. It has the purpose of promoting openness and innovation on the internet. ----- Meeting Notes (11/13/14 15:26) ----- add rubicon
- Could your venture be a nonprofit organization? Some ideas could work as either a nonprofit or a co-op. For example . . .
- Let’s imagine that Green Commonwealth, the landscaping co-op that we’ve created in our skit, decided to create an urban farm and a nearby café. The purpose would be to provide access to and education about healthy food for people living in food deserts in West Oakland. You could imagine this business as either a co-op or a nonprofit. If it were a worker co-op, it would operate the farm and café as a business and the workers would own the business. If it were a non-profit, it would focus on serving a charitable and educational purpose: people living in the areas of West Oakland without access to fresh healthy food would likely qualify as “charitable class” that a nonprofit could seek to help, and teaching people about healthy eating would be educational. So how would the founders of the Green Commonwealth Farm & Café decide whether to form as a co-op or nonprofit? Now I’m going to introduce you to four important factors that the founders should consider.
- There are four main factors to consider when choosing between the co-op and nonprofit forms: Purpose Control Funding Profits
- The first and most important consideration is purpose. What will your organization do? Who will benefit from it? These are important questions. Once you answer them, then you can begin thinking whether you can articulate an “exempt purpose” that the IRS will recognize.
- Imagine that Green Commonwealth decided to form its farm and café as a nonprofit organization
- The founders are excited about the possibilities . . .
- But being a 501(c)(3) tax exempt nonprofit comes with certain limitations, specifically on the kinds of activities you can do and the overall purpose/mission of your business. So here’s the bottom line: If Green Commonwealth is producing food, its primary motivation must be to further charitable and educational purposes, and its purposes must NOT be personal or commercial .
- So let’s take another look at the three distinct purposes of food production (food we produce for personal consumption, food we produce as a commercial/business enterprise, and food we produce for charitable/educational purposes). As we can see from this drawing, there is some potential for problematic overlaps which can affect your ability to qualify for a 501(c)(3) exemption (which, as we mentioned, is ONLY available if the purpose of your organization is charitable/educational).
- So, what if you are growing a lot of food and just giving it to the handful of volunteers who grow it and they aren’t disadvantaged people? The problem with this is that 501(c)(3)s are meant to benefit the public and communities in need – and can’t be designed to just benefit a private group of people. If, on the other hand, the communities who are working on this garden are disadvantaged and you state to the IRS that your purpose is to help these specific communities grow and eat food, then this could be a legitimate activity for your 501(c)(3) because it would meet the IRS’s definition of a charitable purpose.
- Now, what if you grow a lot of food and also want to sell it to earn money for your organization? That starts to look that your typical commercial business, which creeps into a grey area between commercial and charitable activities, and the IRS is going to want to limit how much you can do this and/or tax you on your profits from those sales. Mandela foods serves low income community it doesn’t qualify for tax exemption – doesn’t limit sales to low income people, not restricting people who work there to be low income, etc.
- And finally, what you if you have a project that DOES ALL THREE? Though in many ways this looks like a great business model, it remains problematic when it comes to the IRS’s 501(c)(3) tax exempt status for nonprofits. One solution may be to revisit other business structures, such as the co-op. Co-ops will often be able to serve all three circles—personal, commercial, and charitable. However, there will definitely be times where being a nonprofit (with that clear charitable purpose!) is the best option.
- The second factor you should consider is the amount of control that you and the other workers would like to have over the organization. One of the co-op principles is democratic control by the workers. This is difficult to achieve in a non-profit organization because the law limits the control of interested persons (basically anyone who performs paid work for the organization) to no more than 49% of board seats. ----- Meeting Notes (11/13/14 15:26) ----- 49% is not full control so not real worker coop - that's one reason why you can't have 501c3 tax exemption with coops
- Co-ops can have investors who acquire an interest in the future returns of the organization. Non-profits, on the other hand, have donors who make contributions or grants to the organization and, if the organization has a 501(c)(3) exemption, can claim a tax deduction for the contribution.
- Co-ops can distribute their profits to their members. Non-profits cannot. They can pay their workers reasonable wages, but any profits must be reinvested in the organization’s exempt purpose.
- A co-op is a for-profit business that benefits its members (the worker-owners) A nonprofit organization is an organization dedicated to serving the community at large
- At SELC, we’ve figured out that its all about the governance. The systems of governance that you decide on can be just as important as the business planning, market research, and all the other ingredients you’ll need to be a successful entrepreneur or to run a sustainable business. So, there’s a few things that everyone should know about governance. Like, what is governance?
- Governance is all about how decisions are made, who is making them, and how those decision makers are held accountable. The type of governance structure that your organization decides on will shape how you make decisions. Decisions that range from “will our company provide the workers coffee” to “should we sell our company?”
- In a worker owned cooperative, workers own and control the company! One member has one vote. If you are a CA Cooperative Corporation, the “one member, one vote” rule is mandated by law. This is different than a typical business where your vote depends on how much money you have invested in the business. In a cooperative business, money doesn’t equal speech! This is where democracy in the workplace really comes alive. The workers are able to make key business decisions. But what’s this actually look like?
- This is what I used to think governance looked like in a cooperative. There’s no real system in place for who’s making the decisions, how their making the decisions, and how they’re being held accountable. Deciding on no or very little hierarchy is one thing, but having no clear governance structure is another. So how do we make our cooperatives function better?
- There are a few main options when considering how to structure your cooperative. One is having a relatively small Board of Directors that is elected by the members, a.k.a. worker-owners. Another option is to have all of the members directly control the operations of the company by all being on the Board. This second type of cooperative, where all the worker are involved in management decisions, is typically known as a collective. And a third option is to have no Board of Directors. The way you structure your business will effect how employment, securities, tax, and other laws that will apply to your company.
- And while the Board typically must be at least 3 members there aren’t restrictions on who those members can be. So members of the cooperative are free to sit on the Board. In fact, all of a cooperative’s members can sit on the board, if desired. This, however, is really only advisable for relatively small cooperatives. If the board becomes too large it makes the decision-making process more difficult. When all of a cooperative’s members sit on the Board it is referred to as a “collective Board.” Many organizations have a collective Board to ensure that the cooperative ideals of direct democracy and worker control over operations are fully embodied in their governance structure. Like we said before, The Arizmendi Bakeries, a local chain of bakery cooperatives, has a collective Board. ----- Meeting Notes (4/18/14 22:04) ----- in a cooperative with a small, elected board of directors, there usually must be at least 3 members. But, you aren't restricted n who those members can be, or how many there can be.
- The Board of Directors also appoints the company’s Officers, who are empowered as “executive agents” of the company to carry out specific responsibilities within the cooperative, like signing legally binding documents on behalf of the cooperative. A few important notes on Officers: • For companies formed as California Cooperative Corporations, the law requires 3 Officer positions to be filled –President, Secretary, and Chief Financial Officer a.k.a. Treasurer. But, one person can hold all of these titles simultaneously. • Additionally, while cooperatives have to have 3 Officer’s positions filled, they do not have to give these positions any kind of managing power or decision-making authority. Meaning, Officers don’t necessarily have more power than others. It is up to the Board of Directors to decide how much authority is given to the Officers. The State of California just wants to know that SOMEONE is doing this stuff for administrative reasons. The president signs contracts for the corporation, the secretary keeps records and provides notices, and the treasurer tracks finances. If the cooperative chooses, the Officer positions can simply name individuals to these positions to comply with the statute, but divest these positions of any authority to manage or make decisions for the cooperative. Officers without any real authority are called “figurehead Officers.”
- Let’s look at a cooperative with a relatively small Board of Directors. In this company, the worker-owners elect the Board of Directors. The Board has legal responsibilities to act with care, loyalty and honesty, and to operate the company for the benefit of the membership. The members of the cooperative delegate responsibilities to the board to make high level decisions that steer the company or organization toward its goals. The Board does not serve as managers of the cooperative, though. Instead they set the company’s broader policies and empower others to take on day-to-day management responsibilities. Managers are usually hired by the board for their expertise in a certain field, like distribution, marketing, or sales. ----- Meeting Notes (4/18/14 22:04) ----- Take off text from union coop model.
- The Board of Directors are usually elected positions, so if the workers don’t agree with the policies and decisions being made, they can vote the bums out! ----- Meeting Notes (4/18/14 22:04) ----- put in word "boards"
- It helps to remember the different areas that people exercise control. Managers, Board of Directors, Officers, and Members.
- People want to work in organizations where they can be creative and get better and stuff (mastery), have autonomy (self directed), and have control. That’s why cooperatives are the next evolution in business.
- But with everyone behind the wheel, how do we manage the operations of the business since, effectively, we ALL are the boss? Beyond the “One Member, One Vote” rule how do we carry out the principles of Member Governance, Control and Ownership?
- Sometimes organizations are so against any hierarchy that we find new types of hierarchies emerge that you can’t even acknowledge, like when there are strong personalities in the room and other members aren’t as vocal. We call this..
- The Tyranny of Structurlessness! The “tyranny of structurelessness” was a term coined about the organizations during the women’s liberation movement. The organizations were resisting the idea of leaders and even discarded any structure or division of labor. However, “this apparent lack of structure often disguised an informal, unacknowledged and unaccountable leadership that was all the more pernicious because its very existence was denied.” These earlier versions of cooperative and collective management inform our work today in advising clients on how to structure their businesses. What does that mean for the next gen of cooperatives?
- It means that we shouldn’t make these mistakes again. We can move our cooperatives forward by adopting clear governance structures, including for our day to day operations. The document that defines the day-to-day rules for your organization and provides guidelines to keep things running smoothly are the by-laws. You want your day-to-day governance structures to be defined in your by-laws, as opposed to your Operating Agreement or Articles of Incorporation, because the by-laws can be modified without having to send any paperwork to the State.
- Usually, by-laws are drafted by attorneys and use a bunch of gobbledeegook legal lingo. We can’t have hard to read documents for coops! They need to be easy to read so everyone can understand them! Members need to follow the procedures put in place to create a more efficient and profitable business.
- That means you need to have some governance models that have some teeth. Here are some things you should be REALLY specific about when you’re describing how your business will be governed and managed.
- These procedures will hopefully stop you from having situations like this…
- To having meetings like this. That’s why its so important to have clear by-laws and to train yourselves and new worker members on these processes.
- Some coops are looking toward new governance models, like holacracy. At SELC, we use holacracy, which gives each member the autonomy to be creative and fulfill the mission of the organization while still being accountable to the other members for their work.
- Instead of individuals creating fancy titles with nebulous responsibilities, there are roles that each person fills to complete the project in that circle.
- Holacracy has highly stuctured meetings, so we don’t replicate the mistakes of the past.
- And, anyone in any circle can bring forward proposals.
- WE LOVE COOPS!
- Roadmap: This presentation focuses on the intersection between cooperatives and employment law. -We’ll be covering when employee/employer relationships exist under the law (thus when employment laws apply), the four major categories of workers that are NOT considered employees, and the major ways in which employment laws are enforced.
- Roadmap: This presentation focuses on the intersection between cooperatives and employment law. -We’ll be covering when employee/employer relationships exist under the law (thus when employment laws apply) AND the four major categories of workers that are NOT considered employees
- -Employment laws exist mostly to balance the relationship between “master” and “servant” in traditional forms of employment. -Namely, when you are working for others. -Employment laws recognize that employees are vulnerable in the master/servant relationship because they are dependent on and work under the control of employers. -Can anyone tell me what some of the obligations are of employers in a traditional employment relationship? -Employment laws give certain rights to employees in this “master-servant” relationship, like the right to minimum wage, to reasonable work hours, to a safe and healthy workplace, to protection from discrimination, to compensation for workplace injuries, and so on.
- Coops, on the other hand, are characterized as working with others Coops differ from the master/servant relationship because: Members of coop are in Control Members of coop benefit from the profits
- Okay, quick quiz: is it true or false that coops DO NOT have to worry about employment laws? Note: Take a quick show of hands in the audience to see who thinks it’s true or false.
- False. Employment laws are designed to cover as many people as possible, so that no workers are left unprotected by a loophole. So employment laws even cover collaborative, democratic, participatory, self-sufficient, and accountable economic relationships that are created in a cooperative economy.
- In practical terms, how does “being safe” work? Coops have to provide workers comp, etc.? Coops need start up capital to cover cost of workers comp, etc?
- -Employment laws do not apply to workers who fall within the four categories of (1) partners, (2) volunteers, (3) interns/trainees, and (4) ICs
- Many tests to determine who is a partner to an enterprise. Factors that are considered include: -The right and duty to participate in management -Use of the term “co-owners” to indicate each partner’s ‘power of ultimate control’ -Participation in profits and losses As opposed to a guarantee of wage/salary (this is indicative of an ‘employee’) -Investment in the organization -Partial ownership of assets -Voting rights
- -Volunteer = A person who donates services without contemplation of payment for humanitarian, public service or religious purposes. A volunteer is not considered an employee and therefore is not subject to the wage-hour laws. -As a general rule, you CANNOT volunteer for a for-profit business, UNLESS you can be classified under one of the three other categories (intern, independent contractor, or partner). -You MIGHT be able to volunteer for a for-profit business if it has a defined and separate charitable project. -You MIGHT NOT be able to volunteer for a nonprofit if it is operating a commercial enterprise serving the general public -Also, keep in mind that “paying” volunteers with FOOD or other valuable perks might mean they are employees.
- I won’t review all of the criteria but they can be found on pages 60-62 in your TOTB Manual. The most important thing to remember is that if your cooperative chooses to have interns, the focus should be on teaching them! Training for interns: The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school; The training is for the benefit of the trainees or students; The trainees or students do not displace regular employees, but work under their close observation; The employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded; The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training. There, you will also find some recommendations on how to create an internship program: Create a curriculum to accompany the work. Implement a systematic training program whereby interns will be exposed to nearly all aspects of running the business. Limit the amount of time that interns spend doing rote tasks or work normally done by employees. Create an affiliation with an educational institution or nonprofit.
- The test for who is an independent contractor has been summed up by weighing together a number of factors: (see below) The hiring party's right to control the manner and means by which the product is accomplished; The skill required; The source of the instrumentalities and tools; The location of the work; The duration of the relationship between the parties; Whether the hiring party has the right to assign additional projects to the hired party; The extent of the hired party's discretion over when and how long to work; The method of payment; The hired party's role in hiring and paying assistants; Whether the work is part of the regular business of the hiring party; Whether the hiring party is in business; The provision of employee benefits; and The tax treatment of the hired party. But the most important consideration is the level of control the cooperative has over each member’s work. Baker Example: -A group of home bread bakers form a cooperative to jointly market their breads and to collectively purchase ingredients. If the bakers work in their own homes, use their own appliances, hire their own assistants, set their own hours, decide on the manner in which they bake, and have the freedom to sell bread elsewhere, then a court would likely find that the bread bakers are not employers of that cooperative. -However, if the cooperative dictates how much each baker must produce, sets specifications for ingredients, fixes prices on the breads of all bakers, and if one managers has the power to hire and fire bakers, this could potentially be ruled to be an employment relationship.
- If you want to argue that members of your worker cooperative are not employees, then the safest thing to do is to argue they are partners and do the following: (1) Have all members serve on the Board of Directors. (2) Make decisions by a consensus process or with supermajority voting; this arguably gives each member a strong voice in each decision. (3) Give each member a lot of control over their own work, or create many semi-autonomous departments or committees that control their own work, procedures, and hours. (4) Make it somewhat difficult to fire people, by requiring a vote of a large number of members.
- [Narrator -] “One bright and sunny day in Oakland, California, four landscape architects develop an idea.” [Narrator -] The owners of Green Commonwealth will now embark upon a challenging journey. They must navigate through the murky waters of starting a business: choosing a business entity, talking to lawyers and banks, and thinking about how to create a successful and sustainable business. You or your clients may be in a similar position as these founders and we hope today to give you a broad overview of the legal needs around starting a cooperatively run, worker-owned business.
- KC Presents this Slide: I want you to think back to the landscaping company presented to you earlier. They owners may want to start a landscaping business, but how will they afford to buy tools (shovels, lawn mowers, fertilizer). Where will their workplace be? Will they rent a building. Will they need trucks? Obviously, you need money to do all of these things. That is exactly what I want to talk to you about today. It is a fact that business, either cooperatively run or otherwise, need money to succeed. So how do you get money?
- Gaining capital is one key to success. Capitalization is the money that a business needs to start and continue running. Some main sources of capital are private loans, micro loans, personal savings and member contributions. Now, its important that you realize that worker cooperatives are a UNIQUE business entity. Most worker cooperatives don’t have a lot of equity capital. Equity capital is one way banks will gauge a business’ potential for receiving loans. Equity capital refers to money/resource that are not debt. This means positive sources of funds like your personal savings. By contrast, debt financing is borrowing money that the business will have to pay back. The lender wants to see more equity capital then debt.
- In contrast, a worker cooperative may begin with each member making a contribution to the business. Capital is one key to success Member Contributions – the $$$ that each member puts in (e.g., each of 5 founding members contribute $300.00 for a total of $1,500.00). Worker Cooperative are different from traditional business because the founding members/also workers are a group. Initially, money raised is based on what is contributed by each member. Gaining capital is one key to success. Capitalization is the money that a business needs to start and continue running. Some main sources of capital are private loans, micro loans, personal savings and member contributions. Now, its important that you realize that worker cooperatives are a UNIQUE business entity. Most worker cooperatives don’t have a lot of equity capital. Equity capital is one way banks will gauge a business’ potential for receiving loans. Equity capital refers to money/resource that are not debt. This means positive sources of funds like your personal savings. By contrast, debt financing is borrowing money that the business will have to pay back. The lender wants to see more equity capital then debt.
- KC Presents this Slide: The idea is fairly simple no equity no LOANS. Many business will fail if they can’t obtain the money the need to buy tools, a space to work etc. Before we go over how you can obtain a loan or alternative sources of funding, it is important to understand WHY it is so difficult for worker cooperative to get money. First, worker cooperatives, cooperatives in general, are a fairly new thing. Banks and other financial institutions typically don’t know much about cooperatives. On top of being unsure what cooperative are, our research suggests that banks usually think of cooperatives as risky. Banks are in business to make money. So, you will need to convince them that lend to your worker-owned business is a worthwhile investment. We want to help you to be able to do this by educating you, so you can educate the lender and helping you to be prepared. (When analyzing the creditworthiness of a business, lenders like to see that the members of the business have invested their own money in the business first, before seeking outside funding. Lenders are also more comfortable giving loans if they feel that a business has its own resources to pay the loan back. Banks are not in business to lose money, so you need to convince them that lending to your worker-owned business is a worthwhile investment. Thus, in the eyes of banks and other lenders, the more equity capital the cooperative holds in the form of membership shares and other capital contributions, the more deserving of the loan it is.)
- Obtaining a loan may be challenging. It may work out or it may not. Loans are NOT the only way you can earn money for your business. There are other ways to earn money for your business. Member Capital Contributions If cooperative member will be participating in the management of the business, the members’ capital contributions are generally not considered a security. Donations When people give money without the expectation of receiving anything in return, they are donating. Many entrepreneurs are using so-called crowdfunding websites such as Kickstarter.com and Indiegogo.com to raise money for various enterprises. Entrepreneurs that solicit donations often provide non-monetary rewards to donors. Micro Loans While traditional banking loans are sometimes difficult for cooperatives to obtain, an alternative is a micro loan. A micro loan is a small, low interest rate loan, supplied through various sources. . Typically, the organizations that provide micro loans are socially conscious about the difficulties that community entrepreneurs face when trying to secure financing. Two examples of micro lenders are Kiva Zip and Working Solutions Pre-Selling If you’re an existing business and want to expand your business, one possible way to raise funds is to pre-sell gift certificates. For example, you might sell a $150 gift certificate that a customer can redeem at your business, but only charge $100 for the gift certificate. Charging less than the value of the certificate gives the buyer an extra incentive to purchase the gift certificate. Loans with Return of Principle Only Return of principle only means giving back the money that the funder gave, and not offering a return on the investment. Not offering a return means that the business will not offer anything more than the original investment amount, such as an additional dividend, interest, or appreciation in value. It is important to note that, in California, this is likely considered to be a security, so you should proceed with caution and consult with a lawyer if you choose to utilize this funding method. Product Discounts Another way to raise capital for your business is to charge a membership fee and offer product discounts in exchange. REI provides an interesting model for product discounts funding. REI is a consumer cooperative that sells memberships to its customers. At the end of the year, REI members receive a “dividend” based on the amount spent at REI during the year. This “dividend” can then be used to shop at REI. Bartering One unique and sometimes unthought-of way to gain needed resources is to avoid money altogether for certain goods or services your business needs. Bartering, or exchanging services or goods directly, is a means of obtaining resources. If you need to raise money to pay for something such as web design or compostable cups, consider whether you might be able to barter your goods or services to get what you need. This is not a traditional means utilized by businesses when financing their business; however, it can be utilized as an alternative way to obtain much needed resources for your business. However, you should note that bartering may be subject to taxation.
- KC Presents this Slide: One thing to keep in mind when raising money for your cooperative is securities law. A security is a financial instrument that represents money. For example, selling stock in your company would trigger securities law. Asking people to lend money to your business. Offering a share of your busines’ profits. Now, there is nothing wrong with doing these things. BUT there are certain regulations and rules of disclosure that go along with doing these things.
- Here is a problem budding worker cooperatives will face when trying to bring in outsider investors, the types of investments that often run into securities laws issues: You of course want the money and resources represented by outside investors. But these investors rarely are willing to invest without getting some skin in the game, in terms of profits or control. Giving up profits and control goes up against two core principles in worker cooperatives. Under the classic worker cooperative, profits are distributed based on how much work the workers put in, and control decisions are made under a one member, one vote basis. By constrast, outside investors are going to want profits and control to be distributed based on how much money THEY put in.
- So what do you do as a co-op? You need the money. You don’t want to not be a worker-cooperative. This is why it can be hard for co-ops to raise money. You guys are stuck between a rock and a hard place.
- [Narrator -] Let’s fast forward and time travel past all the tumultuous ups and downs of the coop, the weeks and months where they don’t know if their business is going to “make it.” After a year (or two), the Green Commonwealth’s business is booming! Let’s see what happens next.
- Small co-op to keep the math simple. Many co-ops start by having members contribute capital. A and B decide that they will need to spend at least $20,000 to really get things started In this case, A and B each contribute $10K. This amount will then be reflected in each of their capital accounts. A capital account is not a bank account. It is a number that the cooperative keeps track of for information and accounting purposes. That money is not going to just sit there. It’s going out the door! In fact, they quickly realize that they need on extra hand, so they hire C to help sometimes. C is not a member of the cooperative. C is an employee and they are paying wages to C.
- Throughout the year, they all work very hard, each putting in a different number of hours. $150,000 comes in the door. This is the total of payments from their customers. This isn’t profit. It is their gross income. The reason it isn’t profit, is that they had a total of $105,000 in business expenses, meaning money going out the door. But technically, it’s not all going out the door. In the case of this cooperative, the members decided to treat themselves like employees and pay regular wages of about $20 per hour. So the majority of their expenses went to wages. And just like any employee, they will owe tax on the wages, which the cooperative will withhold. But even after paying all those expenses, they still had $45,000. That is their net income. You’ll notice that I’m actually not using the word “profit” here. I’ll tell you why in a minute.
- Now the question is, what are they going to do with this net income? In a TYPICAL business, this money goes to the owners or shareholders of the business. The owners usually being the people who had capital to invest in the business. Even if they had nothing to do with the work that generated this income. It’s important to acknowledge that, to so many people in this society, this is considered common sense! Everyone expects the sharedholders to get the profits!
- Cooperatives challenge this common notion, and point out how silly it is that typical businesses are basically designed to get rich people richer. I think the role of money should be to reward people for the tangible contributions they make to our communities. - And I’m using this mini cartoon interlude to visually embed this concept in our minds. If your dollar could have a say and express its feelings about where it goes….
- - The dollar should feel good about going to the people who did the work to make the dollar.
- - What your dollar is really feeling and what is really happening to it is this….
- Basically, the dollar is leaving some part of itself behind with the workers, and sending the rest to shareholders. The employees do get rewarded in the form of wages. But wages are so depressed in the current marketplace, that’s not enough of a reward.
- Now notice what happens to the earnings of a cooperative. First you want to determine how much of the earnings are profit and how much are surplus. The difference between profit and surplus is a concept unique to cooperatives.
- Profit refers to the money earned as a result of the “patronage” of workers who are not members. Patronage is a somewhat strange sounding word in the context of a worker cooperative, but it basically refers to the work that members do for the cooperative. A member patronizes the cooperative by working for it. Surplus refers to money earned as a result of the patronage of workers who ARE members. And how do you know what money is earned by members and what is earned by non-members? By measuring the quantity or value of the work of each category of worker. Worker cooperatives usually use a few different measures of patronage. This particular cooperative, and many cooperatives in the bar area, use a straightforward measure of hours. In this case, the members worked a total of 3000 hours, and the non-member worked 1500
- That means that 2/3 of the net income is surplus and 1/3 is profit.
- - So we have $30K in surplus and $15K in profits.
- First let’s find out what happens to that $15,000 of profit. The cooperative corporation is going to pay taxes on it, so a little of it will head of to the IRS.
- The remainder of if, and this is according to the sample bylaws that we have included in the handbook, will be allocated to what is called the Collective Account. That refers to an account that is available to the business as a whole. It is generally retained and reinvested in the cooperative, because if the cooperative were to give it to A and B, it might lose it’s special tax status.
- Cooperatives have a special tax status if they meet a few criteria. Including that they are democratically run, and they are distributing their earnings on the basis of quantity or value of business done with the workers. Because of this special tax status, the cooperative does NOT pay taxes on the portion of the funds distributed on the basis of patronage.
- - Since the cooperative is going to distribute this to A and B, they cooperative will not pay tax on this portion.
- But the next step is to figure out how much A gets and how much B gets from the 30K in surplus. Again, we measure it by the number of hours each work. A worked 1200, B worked 1800. So A’s share will be 12,000 and B’s share will be $18,000. But they’re not necessarily going to get that cash in hand right now…
- Because A and B foresee future business expenses and they may want to grow the business, they decide that the majority of that money will be reinvested in the cooperative. They decide to pay 1/3 in cash. And they are going to keep the other 2/3 in the cooperative to re-invest.
- - So there’s the part they get in cash. $4000 for A! $6000 for B!
- And the other thing they get is a piece of paper that informs that that the other 2/3 of the money has been allocated to their capital accounts. This is called a WNA
- So in their capital accounts, as represented by those thought bubbles up there, A now has $18,000 and B has $22,000, because this is added on to the original money they invested.
- But guess what: even though they didn’t receive the full amount as cash in hand, they will have to pay taxes on it. So at the end of the year, the coop will file with the IRS and give each a 1099-PATR which is a statement indicating the full amount of patronage allocated to them. At that time, they will pay taxes on it. Note that cooperatives always need to pay at least 20% in cash in these circumstances, so that the members have some money with which to pay the taxes. One note is that it is possible for the cooperative to decide retain that money and NOT make the members pay tax on it. Instead, the cooperative corporation pays tax on it. In that case, the members get a non-qualified WNA (meaning it doesn’t qualify for the special tax exemption at the corporate level). And the members don’t pay tax. Later, when they eventually get that money in hand, the members do pay tax, and the cooperative gets to reduce its taxes at that time.
- Here’s an interesting fact: the IRS isn’t totally sure how much taxes people owe on their patronage dividends. Many cooperative members have reported it as regular income (like interest income or stock dividends), different than income you receive through self-employment or employment. That is taxed at a lower rate, because there are many extra taxes associated with employment: SS, Medicare, etc. But the IRS thinks that since patronage is earned as a direct result of work people do, the IRS may soon declare that patronage dividends are taxable as either SE or employment income, meaning that cooperative members will have to pay higher taxes. And the coop may even need to withhold! In the meantime, this is unsettled, and most cooperative members continue to pay the lower amount. One reason the IRS may declare this to be SE or employment income is that cooperative members, at present, can give themselves slightly lower wages in order to have higher patronage dividends. They can’t go too low with their wages though. Market rate is acceptable.
- - While we’re on the topic of papers that the coop gives members. In the case of cooperatives that decide to treat members like employees, they will also get W2s at the end of year, which are a record of wages paid, and taxes withheld be the employer.
- So in this case, by retaining 2/3 of the surplus, A and B have $40 to reinvest in the cooperative. This is capital that they are putting at risk again. There’s no guarantee that they’ll get this money. But if they spend the $40,000 and bring in $40,000, then they haven’t had loses and the money is still available to them. The question is: when and how do they get it?
- Most cooperatives will make an effort to pay the funds out slowly over time, either on a regular payment schedule, or when the cooperative feels that it is on solid enough financial ground. So in this case, they decide to pay 1/3 of the amount later in the year, A and B each get some cash, and the amount in their capital account goes down And when they get this cash, they don’t have to pay taxes on it, because they already paid taxes on it.
- So over time, the capital in the account is going down, as they pay our prior allocations. And it is also going up as patronage is allocated to the account in subsequent years. So after the second year, here’s what A and B each have in their accounts, from two different allocations. Note that some cooperatives decide to pay a small amount of interest on the amounts in people’s cooperative accounts.
- The amount in the capital account is also what most cooperative members get when they leave. Let’s imagine that A decides to leave the cooperative.
- She’s not going to be leaving with the expectation that she’s suddenly going to cash out a lot of money. In a typical business, when owners sell out, their share of the business is often appraised and/or they receive market value for it. That is not the case with cooperatives usually, since the ability to cash out in that way would destabilize the cooperative and put a strain on remaining members. It’s also a little hard to measure the value of cooperatives – most business appraisers would not know how.
- So what A gets when she leaves is the amount in her capital account - $20,000 But she may not all of that, because the cooperative may not have the ability to pay out so much cash at that moment. So she terminates her membership, and the cooperative gives her a promissory note, promising to pay her $20,000 over a period of time. It is like a loan from A to the cooperative. It may even accrue interest.
- So here’s the cooperative 10 years from now Somebody or some business has offered to buy the business from the cooperative members. This is somewhat uncommon, but it happens. Some cooperatives, like equal exchange, require that the proceeds be given to a nonprofit (which creates a major disincentive for the cooperaties members to sell out. The next question is, how do you divide the proceeds.
- The current members might think they are about to get really rich from the sale.
- But guess what – Most cooperatives have a provision in their bylaws that says that both present members and past members will get a share of the proceeds. So cooperatives should keep the contact info of past members, AND keep a record of how much those members worked over the years.
- Because the number of hours people worked over the history of the cooperative will determine their share of a payout like this. This makes sense given cooperative financial principles. People should be rewarded for the value of the work they did. Even if A is no longer an owner, she took part in making the cooperative valuable.
- Over the history of the cooperative, she put in 1/10 of all hours ever worked. So she will get 1/10 of the proceeds. Since past members get a share, this reduces total pay out for current members, which is good, because eit’s another discinicentive to sell out. In theory, we want cooperatives to stay cooperatives, so they can stay focused on creating good jobs.
- Well that was a very sunshiney story of a cooperatives finances. What if a cooperative isn’t so successful in the beginning. What if it’s like most businesses and loses money in the first year or two. If A and B put in $20,000 and only earn $10,000, that’s a loss.
- A question that A LOT of cooperaives struggle with is how to allocate the loss. Maybe they should allocate it equally.
- Some coops allocate it on the basis of patronage, meaning that the person who worked hardest gets allocated the larger portion of the loss. That doesn’t quite seem fair.
- Supposing they allocate it equally, the next question is: what happens the next year when they DO earn money. Let’s say they bring in two new members who contribute $10K each.
- - And they have $40,000 in surplus to allocate in the 2nd year. If they allocate it all based on the second year’s patronage, then the two new members will end up with more valuable capital accounts than the two founders.
- And that hardly seems fair.
- So a lot of cooperatives are asking this question: how do you reward founders. Founders are creating new enterprises, new local wealth, new jobs, and they take a huge risk and do lot of work in the process. How can we measure the value of that? It’s a little tricky, because the IRS doesn’t want people to come up with arbitrary measures of value, because it could become a sneaky way for a cooperative to devolve into a less equitable business. But some cooperatives give greater value to some members contributions because they have seniority, because they have experiences., etc In this case, they maybe decide to reward A and B for their efforts to create the cooperative and jobs, so the allocations come out somewhat more equitably Just talk to a lawyer about the system you plan to use
- Another way to deal with losses is to not allocate them to members at all, but to allocate them to the collective account. Even if the collective account goes into the negative. Then the members don’t directly bear the losses. One problem with this is that if there’s no risk to A and B, they might behave recklessly, and then future members will share in the consequences of that…but that is somewhat less likely, because they likely do want the coop to succeed. Many coops simply decide to allocate it all to the collective account, but only for the first few years when they expect to have a loss. Then, when they begin to show profits, founders and new members are starting off on equal footing with their capital accounts.
- - Even if you find fair ways to allocate losses, it’s important to acknowledge that one problem with cooperatives is that members have trouble taking advantage of any tax benefits that come with losses. It would be nice, especially if the members are working other part time jobs, if the members could offset their other income with the losses of the cooperative, and reduce the amount of taxes they pay.
- When there are patronage dividends, people get 1099-PATR. But you can’t issues a negative 1099-PATR showing a loss.
- It’s not that they won’t get a tax benefit at all. When they cash out of the cooperative, they will show a capital loss. But that could be years down the line.
- Here’s where it’s helpful to note that being a corporation is less advantageous if the cooperative is losing money. If you are an llc or partnership, and you chose to be taxed as a partnership, then you can have a tax benefit from the losses. LLCs and partnerships give their members K-1s at the end of the year, and that shows the members share of the profit OR loss. So if you don’t expect to be raking in the dough in the first year or two, it might make sense to structure as a partnership or LLC.
- Overall, the way that money moves through cooperatives is really powerful. It doesn’t move toward people who are already rich. It moves toward workers and moves toward them in ways that fairly and equitably reward them over time. It creates disincentives to sell businesses, which helps to ensure that cooperatives will be lasting institutions in our communities.
- [Narrator -] The Green Commonwealth goes on to be a very successful business. We hope the same for you and the businesses you support and cultivate.