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HOW COOPERATIVES ARE CHANGING
THE LANDSCAPE OF THE NEW
ECONOMY:
WHAT LAWYERS NEED TO KNOW
PROBLEM STATEMENT Oxfam: 85 richest people as wealthy as poorest half of the world
TONIGHT’S ROADMAP
Introductions and Expectations
Why coops
Examples of impacts of coops at different levels of society/economy- personal to systemic
Basic legal concepts with coops
Role Play
Discussion
WHY COOPERATIVES?
THE COOP 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
DISTINCTLY COOPERATIVE:
INDIVIDUAL IMPACT
DISTINCTLY COOPERATIVE:
REGIONAL IMPACT
DISTINCTLY COOPERATIVE:
REGIONAL IMPACT
DISTINCTLY COOPERATIVE:
REGIONAL IMPACT
DISTINCTLY COOPERATIVE:
SOCIAL IMPACT
ORGANIZATIONAL FORMS
Partnerships
General Corporations
Flexible Purpose or Benefit Corporations
Mutual Benefit Corporation
Nonprofit Public Benefit Corporations
_________________________________________
Limited Liability Companies
Corporations
ORGANIZATIONAL FORMS
Partnerships:
• Unlimited liability; Joint and several liability for actions of the partners
• May be a good option for startup, particularly for immigrant or low-income workers
• No $800 annual franchise tax
• Partners are not employees
Corporation
• “C”- Separate person for tax purposes
• “S” – No separate person for tax purposes
Benefit Corporation/Social Purpose Corporation
• Both provide protections for boards of directors to allow them to pursue non-shareholder profit maximization goals; accept tradeoffs that will lower shareholder value.
In CA, and many other states- co-ops are corporations
• Separate person for legal and tax purposes
• Membership structure
How Formed:
• Incorporator files Articles of Incorporation
• Prepare bylaws for cooperative and draft a membership certificate/ disclosure
document
• Hold first board meeting with at least three members
• Adopt bylaws
• Issue memberships to co-op members
COOPERATIVE CORPORATION
KEY GOVERNANCE REQUIREMENTS:
Board of Directors
Officers
Members
Annual Member Meeting
Elections for Board
Bylaws
One-member, one-vote required
CAPITAL STRUCTURE AND
TAX
Capital structure:
• Individual Member Capital Accounts
• Taxed at member level
• Collective Account
• Taxed at entity level
Can qualify for any corporate tax treatment: C, S or T.
Taxation: Subchapter T
• Profits- taxed at entity level (like a corporation)
• Surplus- taxed at member level (like an LLC)
• No self-employment tax on wages
• There may be a self-employment tax on patronage (i.e. surplus)- unresolved question
• In CA, annual minimum tax of $800
EMPLOYMENT LAW ISSUES
Presumption that worker-members are employees
• Must comply with employment law: minimum wage; overtime; workers’ comp; civil
rights, etc.
• Payroll withholding for wages
Can also have non-member employees
SOME ADVANTAGES OF THE
CORPORATE FORM OVER THE
LLC:
Can use the term “cooperative” in its name
Corporate taxation is more stable than partnership taxation
No $800 minimum franchise tax (CA) in first year
Securities exemption for coop memberships up to $300
THE LIMITED LIABILITY
COMPANY
WHY ARE LLCS SO POPULAR?
Flexibility
• Tax
• Employment
• Little formality required
What is an LLC?
• A limited liability entity, but not a separate tax payer
• Separating the incorporated form from tax characteristics
This allows you to have a general partnership, with limited liability, something you
couldn’t achieve with the corporate form.
What does this achieve for worker coops?
HOW FORMED
Similar to a corporation, file Articles of Organization
• Indicate whether the LLC is member-managed or manager-managed
• Note: Most worker coop LLCs are member-managed, not manager-managed
The Most Important Agreement in an LLC is the Operating Agreement
THE OPERATING AGREEMENT
DEFINES:
Purpose as a worker cooperative
Member Rights and Duties
How to become a member
How to leave the co-op
How to govern the coop
How to manage conflicts
What to with the member capital
How to make decisions in the coop
But the Operating Agreement can be amended!
EMPLOYMENT FLEXIBILITY
Worker members of an LLC are not presumed to be employees of it if they behave
as partners
• The test for partner is someone who has managerial control over the business and
their own work.
Implications for undocumented workers:
• IRCA/INA bans employers from “hiring for employment”
• An LLC is not an employer under IRCA, because partners are not hired for
employment
TAX FLEXIBILITY
LLC defaults to partnership taxation
• The basics are that the LLC is not a separate taxpayer, the partners pay the taxes
• This means that all of the LLC property and profits are allocated to the partners, and
the partners must report their allocations on their individual partnership returns
• Tax forms;
• Schedule K-1 – Partner’s Share of Income, Deductions, Credits
• Partners must pay self-employment taxes on their earnings
CAPITAL STRUCTURE
If partnership taxed, then:
It is not a corporation. There is no collective account, all earnings are allocated to
the member accounts.
• This can lead to instability in the co-op.
• Accounting/bookkeeping can be more complicated if you have a lot of members/or
members coming in and out
BUT AN LLC CAN ALSO ELECT
CORPORATE TAXATION
File form 8832
• Tells the IRS that your LLC wants to be taxed as a corporation
Why do this?
• Eligiblity for sub-chapter T treatment
• Ability to pay your worker-members as employees
• Members no longer pay self-employment taxes
• Ability to create a corporate account that is not allocated to the members
OTHER ISSUES:
Cannot use the word “cooperative” in its name
Can convert to a co-op or other corporation
LLC memberships are likely not considered securities if all members are actively
involved in the management (Cal Corps Code 25019, providing for definition of
“security”)
Conclusion: the 2 things to know about
cooperatives:1.Board elected on a one-member, one-vote basis.
Capital ownership doesn’t determine voting power.
2. Profits distributed on the basis of patronage.
Capital ownership doesn’t determine profit share.
GOVERNANCEA Few Things Everyone Should
Know About Governance
Whoa! It’s all about governance!
Every member has one vote…In the election of the board and major decisions
Power
Power
Cooperatives don’t have to be this:
Alvarado Street Bakery
Elects a Board
Arizmendi Bakery
is a Collective
Members
Board
Every Member
is on the
Board
Members
Board Every Member
is on the Board
Cooperative with a small
Board of Directors Collective
Officers don’t necessarily have more power than othersSecretary: Gives notices, tracks membership, keeps minutes, etc.
President: Signs official documents
Treasurer: Keeps accounts
The State of California wants
to know that SOMEONE is
doing this stuff.
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.
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.
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!
Everyone is behind
the wheel!
Beware of the
Tyranny of StructurelessnessI know
what we
should do!
Rex
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.
Documents can’t look like this:
Give Governance Models Some Legal
TeethNeed 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
Meetings can’t feel like hell.
Get trained. Learn the system. Practice
it. Grow to love it.
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.
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
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.
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.
Let’s encourage hundreds of thousands
of existing businesses to sell to workers
and convert to cooperatives!
Because
GETTING THE GREEN I: BANK
LOANS AND MEMBER
CONTRIBUTIONS
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
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
FINANCING A WORKER CO-OP
GENERALLY….
Member contributions/Outside Investors = Equity Financing
Loans = Debt Financing
Member Contributions/Outside
Investors
Loans
Alternative Financing
Successful Worker Cooperative
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
BEST PRACTICES
Preparation
Understanding their Perspective
Attention to Detail
Research
Follow-up/Keep at it!
ALTERNATIVE WAYS TO RAISE $$$
Membership Capital
Donations
Micro Loans
Pre-Selling
Bartering
QUICK
COMPARISONTraditional 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
GETTING THE GREEN II:
SECURITIES LAW
THINGS
TO KNOW
The definition
of security
You cannot
offer or sell a
security
without
registering it
…
… unless you
have an
exemption.
You create a security
when you ask people to
put money into your
business or venture,
and you offer them a
return.
BASIC DEFINITION
SECURITY
Walt Disney Stock Certificate (a security!)
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.
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
HERE ARE A FEW
EXEMPTIONS TO
HELP YOU OUT!
CA LIMITED OFFERING EXEMPTION § 25102(F)
In California
Up to 35 lenders or investors
People with whom you have a
pre-existing relationship
No Advertising
Simple online filing with the CA
Department of Business
Oversight
UNLIMITED # OF ACCREDITED
INVESTORS
Really rich people Directors and Officers
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
CROWDFUNDING
CROWDFUNDING
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
DIRECT PUBLIC OFFERINGS
Can publically advertise
investment opportunities to
the public
Can DIRECTLY sell securities
without a 3rd party intermediary
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 crowdfundingin the future.
5. Don’t fit into an exemption? Don’t forget DPOs.
OUTSIDE INVESTING VS. COOPERATIVE PRINCIPLES
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
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!!