A cooperative corporation is a specific type of business entity designed to differentiate a cooperative business from more conventional structures and practices. Laws governing cooperative corporations vary from state to state. In California, a cooperative corporation is a legal recognition of a cooperative as a business legal entity.
What is a Cooperative Corporation?
A “cooperative” may refer a specific type of corporation recognized under the law, and twenty-three states have statutes facilitating businesses to incorporate as cooperatives. Similar to other forms of corporations, operating as a cooperative provides shareholders with limited liability, allows transferability of ownership interests (shares), and ensures the existence of the corporation, even if the original shareholders have departed. Opting to form as a cooperative can additionally yield substantial tax benefits compared to other corporate structures. In some states, there are specific statutes for worker cooperatives, while others encompass statutes for consumer or general cooperatives that worker cooperatives can adopt.
California Cooperative Corporation
The legal requirements for establishing a cooperative corporation vary across states. For example, in California, cooperatives generally adopt the form of a corporation under the California Cooperative Corporation statute. This statute imposes specific legal requirements, including the provision that using the term “cooperative” in the business name is allowed only if the entity has formed as a cooperative corporation. Additionally, statutes usually offer guidance on crucial elements such as entity formation, capital accounts, governance rights, membership requirements, and other considerations.
A Cooperative Corporation’s Main Purpose is to Benefit it’s Workers
A cooperative corporation can be formed for any lawful purpose but they must be operated primarily for the mutual benefit of its owners, not for profit to investors.
The legal statute for Cooperative Corporation in CA addresses one of the core principles of a cooperative business: its purpose is to benefit its worker-owners based on the labor they contribute. According to the statute, “such corporations are democratically controlled and are not organized to make a profit for themselves, as such, or for their members, as such, but primarily for their members as patrons.” This specifically means that the largest share of profits cannot accrue to shareholders merely investing capital in the business (like a traditional shareholder in a public company would.)
Benefits and Considerations
Democratic Control
Cooperative corporations have the ideals of “one member, one vote” embedded in their DNA, meaning they are democratically controlled. This ensures that worker-owners continue to own and control the business. All worker-owners have equal power and their voting power is unconditional. Statutory provisions support democratic member control. Corp. Code section 12480 provides that each member with voting power has one vote, and under section 12404, the voting power of worker-members must be equal.
Avoiding Investor-controlled businesses in California
Note that the California Cooperative Corporation Law has no provision requiring worker-owners to have a majority of the voting power. So, it would be possible for a cooperative corporation to be controlled by investors that are not worker-owners. Any person who possesses a proprietary interest in a cooperative is a member, and members generally have the right to vote for directors. Because of this, practitioners should think about limiting the voting power of investor members in order to avoid any possibility of the cooperative becoming an investor-controlled business.
Governance and Formalities
Mandatory procedures for cooperative corporations include (this can vary by state):
- Having a Board of Directors
- Hosting at least one annual meeting,
- Organizing a method for putting issues up for vote,
- Hosting certain meetings
- Maintaining specific records
- Other due process rights and obligations
Naming the Business
In California, in order to use the word “cooperative” in its business name, a cooperative must be incorporated under the California Consumer Cooperative Corporation Law.
Cooperative Corporation Workers Are Not Automatically Employees
Generally, the people who form a cooperative corporation and work for that cooperative corporation are presumed to be employees. The question of whether cooperative corporation members are employees is a complicated legal issue. Another legal statute for the CA Cooperative Corporation addresses the fact that a Cooperative Corporation creates a class of worker-owners whose patronage consists of labor done for the cooperative. At least 51percent of the workers need to be worker-members or candidates. If the members are indeed considered employees, then members would have to be paid at least minimum wage. You would also have to comply with other employment requirements, including payroll tax deductions, issuance of W-2s, purchase workers’ compensation insurance, pay overtime, etc.
In order to meet the requirements of cooperative corporations, however, 51% of the workers need to be worker-owners.
Taxes
Typical corporations have to pay taxes once on their profits at the corporate level, and shareholders must pay taxes again when they receive dividends, hence the term double taxation. However, if it meets the requirements of Subchapter T of the Internal Revenue Code, the cooperative corporation would avoid double taxation. The cooperative corporation could avoid double-tax on some of its profits if they are derived from members’ labor, paid out to the members as patronage refunds/patronage dividends, and the cooperative complies with other requirements of Subchapter T.
Related Articles
Loconomics’ Conversion to a Freelancer-Owned Cooperative
Loconomics is an online platform where people may offer their services to strangers who use the platform to book, pay for, and review the services. Loconomics is a great example of a business conversion into a free-lancer cooperative that creates greater income security and better working conditions in this growing sector of the economy. Co-op
Cooperative LLCs
The page overview is a brief, 2-3 sentence summary that describes the key takeaway the reader will come away with from the page. It is generally a high-level snapshot of what’s to come. Add Your Heading Text Here Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus
