This article dives deep into California cooperative law, exploring specific exceptions and laws that aren’t widely discussed elsewhere on the site including the California Worker Cooperative Act AB 816.
Cooperative Law Generally
For thousands of years the San Francisco Bay Area, along with various locations throughout California, has nurtured thriving communities like Ohlones, Miwoks, and Wintuns, who lived harmoniously in a sustainable and peaceful collective existence. There is a long history in California of cooperatives. For a more in depth history of California cooperatives read this article from Grassroots Economic Organizing.
In January 2016, the California Worker Cooperative Act (AB 816) went into effect. The bill created a business entity for worker cooperatives and made it easier for worker cooperatives to seek investments from their communities. AB 816 renames the California Consumer Cooperative statute to now be called the California Cooperative Law. The Bill creates a way under the existing law to form as a worker cooperative. Existing California worker cooperatives incorporated under the current CA Cooperative statute will be able to amend their articles of incorporation to be governed as a worker cooperative. New worker cooperatives can elect worker cooperative status during incorporation. Currently, there is no legal definition of a worker cooperative in California. AB816 provides a basic definition for worker cooperatives as “a corporation that includes a class of worker- members who are natural persons whose patronage consists of labor contributed to the corporation.”
Statutes
Most of the content about Act AB 816 is drawn from this Fact Sheet drafted by California Worker Coop Policy Coalition.
CA Worker Co-op Act (AB 816)
AB 816 California Act is the most prevalent statute that dictates the formation of cooperatives in CA. The law specifies the provisions that may be set forth in the articles of incorporation of a consumer cooperative. Notable amendments include the clarification of earnings distribution, definitions of different types of worker cooperatives, and provisions for governance and membership rights.
Taxes
AB 816 aligns with the tax perks for cooperatives outlined in the Internal Revenue Code. This means both existing and new worker cooperatives can keep enjoying the tax advantages provided by the Subchapter T, also known as “coop tax” treatment in the Internal Revenue Code.
Workplace Democracy
Another notable element of this statute is that it requires that 51% of workers must be worker-owners or in a candidacy period
Profit Distribution
The bill makes sure that most of the profits and extra money stay with the worker-owners. Even though the cooperative can give some earnings to investors as capital dividends, it’s limited to a maximum of 15%. Also, any extra money (surplus) from the cooperative’s customers can only be shared among the worker-members. This is to make sure that worker cooperatives are all about building wealth for their workers through these distributions, not for other types of members.
The Federal Corporate Transparency Act (CTA)
Although not CA specific, it is important to note the Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act includes the Corporate Transparency Act. The Corporate Transparency Act which took effect on Jan. 1 2024 represents the culmination of more than a decade of congressional efforts to implement beneficial ownership reporting for business entities. It is aimed at combating illicit activities such as money laundering and terrorism financing by increasing transparency and making it more difficult for individuals to conceal their identities behind anonymous shell companies.
The Corporate Transparency Act established the Beneficial Ownership Information program (BOI program), and is overseen by FinCen, the Financial Crimes Enforcement Network which is a part of the U.S. Department of Treasury. For businesses that are not cooperatives, this is a relatively straightforward reporting requirement for the owner(s) of the business. Because cooperatives have a broad-based ownership model, it is not clear currently who exactly within the business ownership needs to report. For worker cooperatives, this can be especially tricky to understand.
The law requires reporting from “Beneficial owners”, with the following definition:
- any individual who, directly or indirectly, either:
- Exercises substantial control over a reporting company, or
- Owns or controls at least 25% of the ownership interests of a reporting company
For more information on how this will affect worker cooperatives watch this informational video.
Legal Entities
Under the California Consumer Cooperative Corporation Law, that is, that a co-op corporation is the legal entity most appropriate to conduct the business of the members. Professional advice should be sought in selecting the most appropriate entity for your cooperative.
Governance & Management
AB 816 streamlines the process for worker-members to convene and make crucial business decisions by shortening the notice period for meetings from 10 days to a mere 48 hours. It also mandates that only workers have the authority to call special meetings, excluding any other category of members from this privilege. Additionally, the bill introduces the option for cooperatives to operate as a Collective Board Cooperative, allowing them to conduct meetings in the format of a board of directors, thereby eliminating the necessity for an additional annual meeting exclusively for worker members.
Bylaws
- Use these bylaws and articles of incorporation if your co-op will have a collective board.
- For co-ops with a representative board and community investors, use these bylaws and articles of incorporation.
Operating Agreements
- Use this bilingual (English/Spanish) template operating agreement for a worker owned LLC.
- For a more accessible version, try using this operating agreement with cartoons!
Employee Handbooks
Non-profits
- Check out this template for bylaws for a worker self-directed nonprofit.
Disclosure Document
Here is an example of a disclosure document for worker cooperatives in CA.
Employment Law
At the California state level, the Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE) is the primary body that enforces wage and hour laws, child labor laws, etc..The Division of Occupational Health and Safety (Cal/OSHA) and the Division of Workers’ Compensation (DWC) also play a role in enforcing employment-related laws and regulations. The Department of Fair Housing and Employment protects employees from discrimination. Although it is somewhat rare, employment law agencies may audit a business and fine it for violations. Most of the time, however, employment laws are enforced by workers that bring claims for back wages, health and safety violations, or some other complaint.
Financing Cooperative Enterprises
Security Law
AB 816 Increases the securities law exemption for member equity contributions from $300 to $1000. This allows for worker members who are not on the board to invest more money in their cooperatives without having to register these investments with the State (avoiding expensive lawyers and fees).
Outside Investors
AB 816 lets worker cooperatives bring in outside investment, but it puts limits on how much influence, ownership, and control those outside investors can have. If a worker cooperative decides to have non-worker or “investor” members, these members are only allowed to have limited say in certain decisions that could affect their investment, like approving a decision to sell the cooperative’s assets or merge it with another cooperative. However, they can’t suggest or propose such decisions themselves. This bill also allows support organizations, such as cooperative developers or non-profit groups, to invest in and help develop cooperative businesses. With the growth of worker cooperative development in recent years, new ways to start businesses are emerging, and this provision gives flexibility while still ensuring that the workers who own the cooperative remain in control.
Indivisible Reserves Provision
The Canadian Worker Cooperative Federation explains that an indivisible reserve in a worker co-op is money owned by the cooperative or the cooperative movement that can’t be divided among individual members. It’s created by putting a certain percentage of annual surpluses into the reserve. While the cooperative is operating, it can use this reserve like any other saved money. However, individual members can’t access it for their own use. If the cooperative stops being a cooperative, like if it’s closed or sold, the reserve goes to a cooperative development fund or another cooperative organization, not to individual members. Indivisible reserves provide long-term investment capital that helps the cooperative last through generations, showing a strong commitment to the cooperative movement and its values.
AB 816 allows, but doesn’t require, a worker cooperative to set up an indivisible reserve. The worker-owners decide in the cooperative’s rules which cooperative support organization would get the reserve if the cooperative ends. If the cooperative’s rules don’t say, under AB 816, the reserve would go to a well-known cooperative development support organization.
Using indivisible reserves is common in Italy, Spain, France, and Quebec and is known for strengthening cooperative movements there. In fact, in those countries, cooperatives get a tax benefit for money invested into the reserve. The aim of AB 816 is to introduce the practice of using indivisible reserves.
Types of Cooperatives
CA Co-op law isn’t just for consumer co-ops. Workers, producers, and others can also use it for their businesses. The law seems to be flexible enough to fit many different kinds of ventures where members work together for mutual benefit. However, some co-op-style businesses might choose not to officially incorporate as a cooperative.
Agricultural cooperatives stand out in California with over 200 agricultural cooperatives in the state.
Cooperative Support Organizations
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