Governance refers to how the company is controlled and how decisions are made. Governance also includes how the cooperative and its workers are held accountable, both to their internal members and to external stakeholders. There is an art to governance design, with many policies, practices, roles, and rules that can be arranged into place to produce a desired outcome.
Governance Structure and Rights
In a worker-owned, democratically-governed business, the workers own the company’s assets, but equally important, they control the company and business. There are many factors to consider when creating a governance structure including taxation, entity choice, legal requirements and the desired outcome of the members.
Members should adopt and practice their governance procedures with care, to ensure the co-op’s practices reflect member values, maintain accountability, and support healthy relationships.
A Few Required, But Powerful, Governance Rights
At their legal core, cooperatives are obligated to give members a few basic governance rights:
- The right to an equal vote in the election of the Board
- The right to request and vote in an action to remove Board members
- The right to take part in at least one member meeting per year
- The right of access to information about the cooperative, its members, its Board meetings, and finances
- The right to approve/disapprove dissolution, mergers, and other major decisions
It is critically important that cooperatives adhere to rules they choose to adopt. Otherwise, actions can later be challenged and invalidated on the basis that they were taken without adherence to adopted procedures. It is very common for cooperatives to fall into habits of operating informally, without regard to the procedures they have adopted. Later, especially when there are disagreements, chaos can ensue as members seek to invalidate prior decisions.
The moral to this story is that members should become familiar with and practice their governance procedures with care.
Governance Structure Basics
The Board of Directors oversees governance
If you choose to form your business as a cooperative corporation you must have a Board of Directors and Officers. The Board of Directors is a group of individual coop members that serves as the governing body of the cooperative. The Board’s authority derives from its election by the coop’s membership. To prevent corrosive “us vs. them” scenarios, the Board should and/or must adopt measures to ensure it’s accountability.
The Board generally sets its company’s goals and strategies, and makes important decisions, such as:
- Borrowing money
- Purchasing capital assets
- Hiring executive management
The role of the Board in day-to-day decisions depends on the size and complexity of the coop. In a worker cooperative, if there are few employees, the Board may be composed of all of the workers, frequently referred to as a Collective Board. In this case, the Board functions as the policy-making body, deciding everything from whether to move to a larger location to the company’s return policy.
Under the California Cooperative Corporation Statute, the Board must have a minimum of three directors. Other states may vary.
Officers are board members with specific responsibilities
Unlike the Board, which has the ultimate governing authority over the cooperative, officers are executive agents who carry specific responsibilities within the cooperative. Many or most cooperative corporation statutes require that a cooperative have at least three officers on the Board:
- President: Signs documents on behalf of the cooperative.
- Secretary: Provides required notices to members and keeps meeting minutes.
- Chief Financial Officer or Treasurer: Manages finances and accounts, and often signs checks for the cooperative.
Things to consider when creating your governance structure
Begin with Cooperative Principles
It is important to be familiar with the cooperative principles because they can be a good place to start. For example the “one-member, one-vote” principle of cooperatives provides a starting point for decision-making in a cooperative. Consider these more advanced issues:
- When will a decision be final: when the board approves by majority, by a 2/3 vote, by consensus, by a vote of directors present, or by all directors?
- Should some decisions require a higher approval level than others?
- The Board will not make every decision. If incorporated under a specific cooperative statute, which decisions does the law reserve only to members instead of to the Board? What decisions can be made by the members? By work teams? By individual supervisors?
- Can the members appeal a decision of the Board? What kinds of decisions are eligible to be appealed?
Taxation and Legal Entity
Depending on your entity choice and taxation the requirements for your governance will differ due to legal obligations.
For example here are some legal requirements based on entity:
- Governance must have a Board of Directors and Officers.
- Governance can be more flexible and it may or may not have a Board of Directors. If your cooperative is an LLC, governance can be more flexible. LLCs may or may not have a Board of Directors (take note: without a Board, each LLC member’s actions has the legal power to bind the entire cooperative to those processes, unless explicitly restricted in its Operating Agreement).
A cooperative can benefit from pass-through taxation if it is registered as an LLC or a Cooperative Corporation and picks the option of being taxed under Subchapter T legal code. Benefiting from pass-through taxation means that any money that comes into the cooperative will only be taxed once at the individual level, as opposed to traditional businesses that get taxed both at the entity level (i.e the business itself pays taxes on earned income) and then again at the individual level when that money is passed down as wages or patronage.
- The IRS does not explicitly define who qualifies as a co-op and can benefit from pass-through taxation, but some past court cases have referred to the principles of democratic control, which include:
- Having the worker-members themselves periodically assemble in democratically conducted meetings at which each member has one vote and one vote only, and at which no proxy voting is permitted; and These workers there deal personally with all problems affecting the conduct of the cooperative.”
Related Articles
How Cooperatives Are Structured
Cooperatives are member-owned and democratically controlled businesses that distribute profits based on an equitable patronage system. Cooperatives are structured by type of cooperative, the tax status and the legal entity that is chosen by its members. The decision depends on the mission and needs of the co-op. Difference between Co-op Type, Legal Entity and Tax
How Money Flows Through a Cooperative
The way money moves from clients to the cooperative, to the worker owners and shareholders is based on the value of community wealth building. The system that keeps any value generated by individuals (such as profit, labor, etc.) within the co-op and distributed back to those individuals is called patronage. Sometimes, members are even called
