legal tools for worker cooperatives and the sharing economy: day 2
TRANSCRIPT
Welcome to Day 2 of:Legal Tools for Worker Cooperatives
and the Sharing Economy
Presented by:
Janelle Orsi, Executive Director of Sustainable Economies Law Center (SELC) and author of Practicing Law in the Sharing Economy: Helping People Build Cooperatives,
Social Enterprise, and Local Sustainable Economies (ABA Books 2012)
Ted De Barbieri, Assistant Professor of Clinical Law at Brooklyn Law School
Camille Kerr, Director of Field Building at the Democracy at Work Institute (DAWI)
Ricardo Nunez, Cooperatives Program Director at SELC
Take a piece of card stock, fold into a tent shape, and write on front:
Name, Title/Affiliation5-7 words describing
your interests
Possible Mini-Introductions Activity
When I hear the word “cooperative,” the first thing that comes to mind is:
________
Or
My favorite cooperative is: _______
Worker cooperative facts and figures
Number of worker cooperatives in the US: 300-400
Total number of people working at worker cooperatives in the US: approximately 7,000
Total annual revenues generated by worker cooperatives in the US: $400 million
Average size of a US worker cooperative: 50 people (the median is 10 people)
Largest US worker co-op: Cooperative Home Care Associates (CHCA), over 2,000 workers
Worker cooperative facts and figures (continued)
% of US worker cooperatives formed since 2000: over 50%
% of US worker cooperatives that began as traditional for-profit enterprises: 26%
% of US worker cooperatives that have annual revenues over $1 million: 31%
Average annual profit margin for a worker cooperative in the US: 6.4%
Why Worker Cooperatives?
Why Worker Cooperatives?
“I’ve been an activist my
entire life and being part of a
worker coop is the most
revolutionary act I’ve ever
done.”
A quick detour into the
world of possibilities
Emilia Romagna
Two major factors of Emilian Romagna’s success • regional government’s focus on support
small businesses – employee-owned and co-op owned alike
• Cross-sectoral cooperation
A quick detour into the
world of possibilities
Mondragon
Hitler, Franco, and the rise of the
Mondragon Coops
Meanwhile, back in Americaland…
By 2020, more than 40% of the U.S. workforce will be so-called contingent
workers, according to a study conducted by software company Intuit in 2010.
http://http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/intuit_2020_report.pdf
What do freelancers need?
• Marketing platforms that don’t take a 20% cut of their earnings, for one….
-making money-doing taxes right-tax system that work for freelancers-legal help-more leverage-work/life balance-building a career-freedom to work on projects we care about-careers that harnesses individual talents and skills and continual learning--self actualization-being able to choose clients-choose hours-demonstrate worth for pricing-build in time for health, a lot don't-a 360 healthcare (when sick, no pay)-encourage healthy living-location independence (work from anywhere)
-negotiating tools- information about market rates-what you want, and what you need-fair pricing...mechanism to get paid what you're worth-revenue management-public option-dental and vision-retirement and security that you get with a corporate job-guaranteed basic needs payment-freelancing not clearly defined-vacation and sick time-rights, laws, collective bargaining-need for feedback and quality of work-rights, laws, collective bargaining-getting paid on time-value of work....no cut in projects that generate extreme success after...negotiate for equity?
“The euphemism is the ’share’ economy. A more accurate term would be the “share-the-scraps”
economy.”
-- Robert Reich
http://readersupportednews.org/opinion2/277-75/28396-focus-the-share-the-scraps-economy
“The euphemism is the ’share’ economy. A more accurate term would be the “share-the-scraps”
economy.”
-- Robert Reich
http://readersupportednews.org/opinion2/277-75/28396-focus-the-share-the-scraps-economy
Sharing economy companies have created a new species of economic dependence not accounted for in
our current employment law framework.Even while workers have substantial control over the manner, means, hours, and conditions of their work, the workers are vulnerable because they may rely on a single platform to make their livelihoods, and the platform can:• Terminate user accounts for a variety of reasons,• Influence search results to advantage or disadvantage workers,• Change pricing or fees,• Limit mobility by prohibiting transferability of user reviews and reputation
data, and• Impose new rules and practices that can profoundly affect the worker's
ability to make a livelihood through the platform.
All of this may point to the fact that there is a new variety of economic relationship that does not rise to the level of employer-employee, but which does require some level of protection for vulnerable workers.
Hint:
It has something
to do with
sharing.
Share Control
Share Earnings(on the basis of patronage)
Freelancer-Owned
Cooperative
Freelancer-owned cooperatives: A platform owned and democratically governed by the freelance workers (the drivers, hosts, service providers) would behave quite
differently than the conventional companies.
It would:• Help ensure predictable work for freelancer members• Keep fees low• Distribute dividends to freelancers• Offer benefits and supports services to the
hosts/drivers/service providers• Bargain on behalf of freelancers (for insurance and other
benefits)• Create rules and culture that benefit freelancers and help
maintain freelancer independence and mobility• Empower freelancers to propose and carry out initiatives
within the company
Freelancer cooperative patronage dividends…Do you need them?
How might that be measured? • Dollars earned for the coop• Dollars spent for coop services• Hours worked• Recruiting new members• Recruiting clients for other members• Providing pro bono services to community members in need• Receiving positive customer feedback (that could be tricky)• Voting in elections• Watching videos of Board candidate statements• Attending in-person community-building events• Creating content, blogging• Covering for another member who is sick or on vacation• Quick response time to clients (we can measure how quickly
they respond in the ole database)
Pomeroy Cooperative Grain Company v. Commissioner of Internal Revenue, 288 F.2d 326 (8th Cir. 1961)
"A general analysis of the business operations of cooperatives reveals the impracticability if not the impossibility of relating patronage dividends to gain or loss upon any particular transaction with any particular patron."
“There is some doubt whether the Commissioner has sufficient standing to object to the taxpayer's method of allocating what would normally be income excludable to the taxpayer among its member-patrons in a manner apparently acceptable to such members as an equitable distribution of profits.“
Worker Cooperative Entity Types
• Cooperative corporations: Twenty-three states have statutes that enable businesses to incorporate as a cooperative. Some states have worker cooperative specific statutes, while others have a consumer or general cooperative statute that worker cooperatives can incorporate under. These statutes create a corporate form that is owned and controlled by its members, and which operates for their benefit. Statutes vary in their specificity, but often have guidelines around issues such as entity formation, capital accounts, governance rights, membership requirements, and more.
• LLCs: A limited liability company is a business entity that provides limited liability to its owners, but has the flexibility to operate like a general partnership. In an LLC, owners are referred to as members.
• C Corporations: C corporations are business entities that are a separate legal entity—and that are taxed separately—from their owners.
Worker Cooperative Entity Types (Continued)
• S Corporations: S corporations are very similar to C corporations in that they are a separate legal entity from their owners. However, S corporations elect to pass through their income and losses to their owners for federal tax purposes.
• General Partnerships: A general partnership is a business entity with more than one partner (distinguishing it from a sole proprietorship). Each partner contributes to the business and shares in the profits and losses of the business.
____________________________________________________________________________
Benefit Corporation: A benefit corporation is a new class of corporation for socially conscious businesses, which is currently available in more than half of the states as well as the District of Columbia. Companies that register as a benefit corporation maintain their tax status as a C corporation, S corporation, LLC, etc., but have additional protections and responsibilities relating to their social purpose.
Worker Cooperative Entity Types (Continued)
44%
26%
14%
16%
Cooperative Corporation Limited Liability Company
Standard Corporation Other
Considerations in Choosing an Entity Type
• Personal liability: Are owners personally liable in the case of a lawsuit against the business?
• Entity name: Can the organization call itself a cooperative?
• Demutalization: How easy is it for the organization to revert to a non-cooperative structure?
• Retaining capital in the business: How easy is it to retain capital in the business for growth or other purposes?
• Employment law: Are workers presumed to be employees under this corporate form, such that labor laws apply? This is especially important in the context of businesses that hat cannot pay minimum wage from the onset or prefer having the staff structured as owners as opposed to employees.
• Capital access: To what extent is the business entity friendly to outside investment in a way that maintains cooperative principles?
Considerations in Choosing an Entity Type
(Continued)
• Democratic ownership: How well is the entity suited to support a democratic ownership structure?
• Scale and growth: What issues arise when a worker cooperative incorporated under this entity type experiences significant growth?
• Entity taxation: Does the entity get taxed twice (once at the entity level and once through dividends to individual owners)? Is there a minimum annual business tax?
• Formation costs and requirements: What are the filing fees and how burdensome are the incorporation requirements?
• Administrative requirements: What are the ongoing administrative requirements, such as annual reports, board elections, annual meetings, etc.?
Worker Cooperative Entity Types Examined
• Cooperative corporations
• (+) Always allowed to be called a cooperative
• (+) Some states have demutualization disincentives built into statute
• (+) Built for democratic ownership
• (-) Hard to attract capital
• LLCs:
• (+) Employment law presumed not to apply
• (+) Minimal administrative requirements
• (+) Flexible on ownership structure
• (-) No retained earnings unless you use a work-around/ or tax as a corp
Worker Cooperative Entity Types Examined
• C Corporations:
• (+) Easier to attract capital
• (+) Can retain earnings
• (-) Double taxation
• S corporations
• (+) If used with ESOP, no federal corporate income tax
• (-) Max of 100 owners (unless you use an ESOP)
• (-) Only one class of shares
• General partnerships:
• (+) No administrative requirements
• (-) Full personal liability
How Money Works in Coops
I moved this here from later in the
day
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
A B
My Capital Account:
$10,000
My Capital Account:
$10,000
IN
OUT
(Business expenses)C
$5
,00
0
I just work here.
A B
IN
OUT
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
Wag
es:
$3
0,0
00
A B
IN
OUT
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
Wag
es:
$3
0,0
00
Not!
A B
IN
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
How much is “surplus?”
How much is “profit?”
OUT
A B
IN
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
How much is “surplus?”Member hours = 3000
How much is “profit?”Non-member hours = 1500
OUT
A B
IN
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
How much is “surplus?”Member hours = 3000 (2/3 of total hours)
How much is “profit?”Non-member hours = 1500(1/3 of total hours)
OUT
A B
IN
C
(Net income)
Worked1200 hours
Worked1800 hours
Worked1500 hours
surplus = 2/3
profit = 1/3
OUT
A B
IN
C
(Net income)
surplus
profit
OUT
A B
IN
C
(Net income)
surplus
profit
The Collective Account
OUT
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.
A B
IN
C
(Net income)
surplus
profit
The Collective Account
OUT
X
A B
IN
OUT
C
(Net income)
surplus
profit
The Collective Account
Worked1200 hours
Worked1800 hours
I should get a
bonus…
$12,000A’s share
B’s share
A B
IN
OUT
(Net income)
surplus
profit
The Collective Account
$12,000A’s share
B’s share
They decided to pay 1/3 in cash and 2/3 in a “Written Notice of Allocation.”
A B
IN
OUT
(Net income)
surplus
profit
The Collective Account
$12,000A’s share
B’s share
They decided to pay 1/3 in cash and 2/3 in a “Written Notice of
Allocation.”
A B
IN
OUT
(Net income)
surplus
profit
The Collective Account
$12,000A’s share
B’s share
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
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
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
What on earth is this???
Self-employment income? (15% extra in taxes)
orRegular income??
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
B
My Capital Account:
$10,000 + $12,000
My Capital Account:
$10,000 + $8,000
A
OUT
B
My Capital Account:
$10,000 + $12,000
My Capital Account:
$10,000 + $8,000
A
OUT
IN
B
My Capital Account:
$10,000 +
$12,000
My Capital Account:
$10,000 +
$8,000
A
OUT
IN
$6,000
$9,000
Free money! You already paid taxes on it!
B
My Capital Account:
$10,000 + $6,000 +$8,000 =
$24,000
My Capital Account:
$10,000 + $4,000 +$6,000 =
$20,000
A
B
My Capital Account:
$10,000 + $6,000 +$8,000 =
$24,000
My Capital Account:
$10,000 + $4,000 +$6,000 =
$20,000
A
It’s time for something new.
I’m leaving.
B
My Capital Account:
$10,000 + $6,000 +$8,000 =
$24,000
My Capital Account:
$10,000 + $4,000 +$6,000 =
$20,000
A
I’ll sell my share and get RICH!
Me:
Not really.
B
My Capital Account:
$10,000 + $6,000 +$8,000 =
$24,000
A
$500$500$500
B DC
Member hours worked over the years =
20,000
Member hours worked over the years =
15,000
Member hours worked over the years =
10,000
Let’s sell this business for $1,000,000 and retire!
B DC
Member hours worked over the years =
20,000
Member hours worked over the years =
15,000
Member hours worked over the years =
10,000
We’re gonnaget RICH!
Us:
B DC
Member hours worked over the years =
20,000
Member hours worked over the years =
15,000
Member hours worked over the years =
10,000
Hey! ‘Member
me?
A
B DC
Member hours worked over the years =
20,000
4/10of all hours
Member hours worked over the years =
15,000
3/10of all hours
Member hours worked over the years =
10,000
2/10of all hours
A
Member hours worked over the years =
5,000
1/10 of all hours
B DC
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
A
Member hours worked over the years =
5,000
1/10
of all hours
A B
My Capital Account:
$10,000
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….
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
Should you share losses equally, even if one
person worked more?
A B
My Capital Account:
$6,000
My Capital Account:
$4,000
IN
OUT
(Business expenses)
Should you divide losses based on patronage??
Well that doesn’t seem fair…
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
If next year brings lots of surplus, should you divide it only based on next year’s patronage?
Well that doesn’t seem fair….
DC
My Capital Account:
$10,000My Capital Account:
$10,000
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
If next year brings lots of surplus, should you divide it only based on next year’s patronage?
DC
My Capital Account:
$10,000My Capital Account:
$10,000
Surplus!
A B
My Capital Account:
$15,000
My Capital Account:
$15,000
IN
OUT
(Business expenses)
If next year brings lots of surplus, should you divide it only based on next year’s patronage?
DC
My Capital Account:
$20,000My Capital Account:
$20,000
Surplus!
A B
My Capital Account:
$18,500
My Capital Account:
$18,500
IN
OUT
(Business expenses)
Can you reward A and B for their risk taking and hard work in creating new jobs?? Probably.
DC
My Capital Account:
$16,500My 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.
A B
My Capital Account:
$10,000
My Capital Account:
$10,000
IN
OUT
(Business expenses)
You could also let the Collective Account go into the negative and require that next year’s earnings restore it.
The Collective Account
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
Ok, we took a loss. Can we use that on our taxes to offset other income?
In a cooperative corporation, that’s awkward.You can’t issue a negative 1099-PATR.
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
Ok, we took a loss. Can we use that on our 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:
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
Ok, we took a loss. Can we use that on our taxes to offset other income?
You can show a capital loss when you cash out of the cooperative down the road.
A B
My Capital Account:
$5,000
My Capital Account:
$5,000
IN
OUT
(Business expenses)
Ok, we took a loss. Can we use that on our 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:
Cooperative finances will change our economy!
B DCA
Cooperatives are meant to PROVIDE stable jobs, to reward workers EQUITABLY, to
keep wealth LOCAL, and to create LASTING enterprises in our COMMUNITIES.
Master – Servant Relationship
Working for others…
Cooperative Relationship
To working together!We’re not
employees, we just love working together in the
mines!
So, how do we approach this?
1. Be Safe! Assume everyone is an employee.
So, how do we approach this?
1. Be Safe! Assume everyone is an employee.2. Work backwards from this point and see if you
can find exceptions.
Why would cooperatives not want to
treat themselves as employees?
• Paying minimum wage and overtime;• Complying with standards for hours and working conditions;• Withholding of payroll taxes and other withholdings;• Maintaining workers compensation insurance;• Complying with occupational safety and health laws;• Verifying eligibility to work in the U.S.;• Posting of certain kinds of notices and posters related to
employees rights; and• Adhering to certain recordkeeping requirements.
Having employees comes with a list of obligations and requirements, including:
However, if someone is not an employee, most of those requirements do not apply.
What is an “employee?”
There is no single definition
Fair Labor Standards Act• an employee is “any individual employed
by an employer.”• To “employ:” to suffer or permit work.
Usually, courts will apply a test, or a series of factors todetermine whether an employment relationship exists.
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
Partners
Mutual Benefit
Precedent: Clackamas Gastroenterology Assocates, P.C. v. Wells, 538 U.S. 440 (2003)Court adopted the Equal Employment Opportunity Commission’s Guidelines for determining whether a master-servant relationship exists based on the following criteria:
• Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work;
• Whether and, if so, to what extent the organization supervises the individual’s work;
• Whether the individual reports to someone higher in the organization;• Whether and, if so, to what extent the individual is able to influence the
organization;• Whether the parties intended that the individual be an employee, as
expressed in written agreements or contracts;• Whether the individual shares in the profits, losses, and liabilities of the
organization.
Partners
Mutual Benefit • If NO “master-servant”
relationship, then NO employment laws apply
• Partner Factors:• All members of Board • Decision-Making • Control• Hard to Fire
Partners
Mutual Benefit
Note: Size Doesn’t Matter… Sort of
Wheeler v. Hurdman, 825 F.2d 257 (10th Cir. 1987)
• Court held that a 502-member accounting firm was a partnership for employment law purposes.
• Court even acknowledged that size shouldn’t be a determining factor in finding whether a worker takes meaningful part in management.
Volunteers: Public Benefit
• As a general rule, you CAN volunteer for nonprofit organizations that are engaged in charitable, religious, or humanitarian purposes.
• But having volunteers in a for-profit business….
• NOTE: most coops do NOT fit under the charitable, religious, or humanitarian categories unless they are 501(c)(3) nonprofits.
Interns/Trainees
Own Educational Benefit
• YES, for-profit businesses can have unpaid interns!
• BUT Interns should be there to LEARN!• Interns work for the primary purpose of their own learning or
therapeutic benefit.
Interns/Trainees
Own Educational Benefit
Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1998) + DoL=
• 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.
Interns/Trainees
Own Educational Benefit
How to Have an Intern
1) Create a curriculum to accompany the work
2) Implement a systematic training program whereby interns will be exposed to nearly every aspect of running the business
3) Limit the amount of time that interns spend doing mindless tasks or work normally done by employees
4) Create an affiliation with an educational institution or nonprofit
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 when and how long to work•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
Employment Law and Legal Entities
Does it make a difference if you form a partnership, LLC, or cooperative corporation?
A Qualified “Yes:” • In some jurisdictions and under some statutes, courts have leaned
heavily toward the assumption that shareholders of corporations are employees when they work for the corporation they co-own.
Good news: Clackamas case rejected the presumption that the Simple fact of incorporation is determinative of whether an employment relationship exists.
A Short Guide to What Lawyers Can Do
• Help clients implement legal solutions that balance the protection of individuals and preservation of client’s cooperative vision.
• Find ways for clients to restructure their relationships and to legitimately argue that there is no master-servant relationship.
• Carve out a space for people who thrive by working together for mutual, cooperative, nonprofit, low-profit, and/or non-monetary benefit.
• Create exemptions like the Hawaii volunteer exemption for cooperatives!
Lunch
Worker Cooperative Conversions
Sole Proprietorship Worker Cooperative
Worker Cooperative Conversions
Worker Cooperative Conversions
Prepare the groundworkOwner(s) discuss goals and sets basic requirementsAsses financial feasibility of dealAssess leadership capacity to continue operation as a worker cooperativeFormal business valuation process
Owner(s) decide to go forward
Make decisions about the cooperative (with workers)Determine entity type and tax status
Determine governance structure and transition timelineDetermine management structure and transition timeline
Determine capital/investment structureFinalize price and buy-in
Prepare for the transitionDraft cooperative bylawsStructure sale to workers (asset or stock, timeline, etc.)
Find necessary financing
Roll outExecute sale and new governing documentsEmployee Training
• Martha’s Vineyard, MA• Design/build and renewable
energy firm offering architectural services for residential and commercial spaces
• 32 worker owners• Founded 1975, converted to
worker ownership in 1987.• Through worker ownership
they have:– Built employee wealth– Become an advocate,
and a designer of affordable housing on Martha’s vineyard
– National green building advocate.
– Advocate for employee ownership.
Let’s encourage hundreds of thousands of existing businesses to
sell to workers and convert to cooperatives!
Because
Converting to Co-op:
• It’s easy….if the business isn’t worth too much….
• It’s a little trickier….if the business is worth a lot…
Transition Governance Considerations 1What are the types of issues former owners would want control over? • If they still have capital at risk in the business:
• Major expenditures and distributions• Borrowing money• Etc.• But how much voice should we give to capital?
• If they don’t still have capital in the business• Change in mission• Prevent company from selling out dissolution
Transition Governance Considerations 2
In what way does the cooperative statute allow for extra control by former owners?• Special veto powers• Board seat appointments • Unanimous approval for certain decision and give prior
owners one membership, etc.• Write provisions into the Bylaws that prohibit major
actions unless certain individuals approve a change to those provisions.
• Give power to prior owners through other agreements, like promissory notes.
Island Employee Cooperatives Financing• Workers: $250K-$300K in capital commitments from workers at the time of closing
(some of that is being taken as salary deductions)• Loans:
• Associated Grocers of New England: $500,000• Coastal Enterprises (CDFI) loan: 1 million• Cooperative Fund of New England: 8 million.• Seller provided 3.3 million (by receiving promissory notes)
• 1.5 million promissory note (in last position)• 1.8 million promissory note (will be taken over by the National
Cooperative Bank)• Inter-creditor agreement: Associated Grocers has first priority for inventory as a
security. All the lenders conditioned their loans on the appearance of other financing, meaning they all went in together.
• Types of security interests: Inventory, real estate, equipment, and stock of the Corporation.
• Technical assistance contracts: Loan agreements specified that the cooperatives needed 5 year contracts with all three technical service providers
• Covenants: Capital expenses over $100,000 require pre-approval of lender. Distributions beyond normal wages and salary are not permitted without permission of lender. If they were to wrap pay into patronage, they could only pay patronage to the extent that it doesn't exceed customary wages for the work.
Form a new entity or convert the original entity?
• Island Employee Cooperatives:• LLC converted to C Corp to use the 1042 rollover• Workers formed Cooperative and bought all stock
from C Corp. Did not dissolve C Corp.• The lenders wanted it that way. The C Corp pledged
stock as a security. The cooperative can't pledge stock as a security.
• Dual structure is sub-optimal because you need an employee leasing arrangement.
• Asset sale is generally a taxable event. Restructuring is not.
Need to defer capital gains?• 1042 rollover• Redeeming interest for a promissory note?
Read about doctrine of cash equivalence to understand circumstances where receipt of a promissory note can result in immediate income for tax purposes.
Other Considerations:• Valuation!• Legal representation
Role of lawyers• Advising parties on their rights, risks, and obligations• Choosing and structuring the business entity• Drafting and reviewing documents• Filing paperwork• Ensuring that the conversion process complies with
employment, corporations, and securities laws
Which parties need their own lawyers?• A single lawyer cannot effectively consider and protect
everyone's interests simultaneously. • It is common for business partners to seek separate counsel
when negotiating the terms the partnership or operating agreement. After formation, however, it is typical for only one lawyer to work with and represent the business entity.
• With conversion to a worker cooperative is that each worker and each selling owner is technically a separate party, and each might want to consider seeking independent advice on her/his personal financial and legal considerations.
• The best affordable option may be for one lawyer to advise the group of owners selling the business and another lawyer to advise workers as a group. Require that everyone sign a waiver to acknowledge the potential for conflicts of interest. But be careful if one individual plans to put substantially more capital at risk than others.
Documents involved in the Island Employee Cooperatives Conversion:
• Stock purchase agreement and corresponding separate agreements• Non-competition agreement • Trustee deed • Tax clearance letters • Tenant letter• Release • Opinion of seller’s counsel • Inventory cost agreement • Seller’s promissory note • Action in writing (asset purchase) • Action in writing (increase # of shares and Clerk powers) • Stock certificates • Stock power statement • Officer and directors resignations • Clerk resignation • Asset purchase agreement • Bill of sale • Vote of member and manager • Certificate amendment
Select Machine sold to its 8 workers as a cooperative
Nonprofits Incubating Cooperatives
• Target population: • Low-income Latinas in the Bay Area
• Model:• Member-managed LLC
• No separate board—governed by members (worker owners)
• General manager half-time Prospera, half-time coop• Prospera developed business plan, recruited women to
participate• Provide business literacy, English, other training• Phase out over a 3-5 year period• Continues to provide/contract for administrative and
other support
• Emma’s Eco-Clean• $9M in sales since 1999 launch
• 27 worker owners
• Benefits: health and dental, flexible vacation
• Eco-Care• $4M in sales since 2001 launch
• Natural Home Cleaning Professionals• 2003 launch
• $14/hour (twice the average for the profession in the county)
• Over 30 worker owners
• Home Green Home• 2009 launch
• Increase in sales every year
• Green & Clean Professional Housecleaning• Newest coop in Contra Costa
The IRS looks to see if the nonprofit’s assistance is targeted to:[4](1) benefit a “charitable class”, such as minorities, the unemployed
or underemployed, or other disadvantaged groups (i.e., by providing them jobs);
(2) aid an economically depressed or blighted area;(3) aid businesses that would locate or remain in the economically
depressed or blighted areas and provide jobs and training to the unemployed or underemployed from such area only if the nonprofit’s assistance was available; and
(4) aid businesses that have actually experienced difficulty in obtaining conventional financing due to the deteriorated nature of the area in which they were or would be located or their composition by minority or disadvantaged people.[5]
While all of these factors are important, the IRS generally considers the first factor to be most important because it provides a direct link between the economic development activity and assistance to the disadvantaged through the provision of jobs.
Break
Worker Cooperative Bylaws
Governing documents clarify and codify the democratic governance and ownership of your cooperative, help provide a structure through which the cooperative can grow, and provide a last resort for conflict resolution if relationships break down. Some of worker cooperative specific issues addressed by governing documents include:
• Membership: member eligibility, buy in, admission, removal
• Capital: internal capital accounts, distributions, patronage definition, guidelines for amount of retained earnings
• Board of directors: election process, representation of members
• Investment: initial contributions of members, outside investment (if any)
• Dissolution: demutualization disincentives, asset distribution
