Cooperative Law Generally
In D.C., the operation and management of cooperatives are regulated by specific statutes. These include Chapter 9, which outlines the governance of General Cooperative Associations, and Chapter 10, which details the provisions for Limited Cooperative Associations. These legal frameworks are crucial for anyone considering the forming a cooperative. Additionally, understanding associated employment laws, workers’ compensation, and other relevant regulations is important and explained below.
District of Colombia has a long-standing tradition of cooperative communities that have flourished in areas like housing, food, and credit unions. This led to creation of the District of Columbia Mayor’s Commission on Cooperative Economic Development back in the 1980s. When it comes to legal frameworks, DC offers two key statutes that are crucial for cooperative law: Chapter 9, which focuses on General Cooperative Associations, and Chapter 10, which specifically addresses Limited Cooperative Associations (LCAs). Cooperatives in DC also have the option of adopting as a general Limited Liability Company (LLC) structure as their legal entity, providing flexibility in how they operate and grow.
Statutes
General cooperative associations (GCAs)
Chapter 9. General cooperative associations (GCAs) may be incorporated to engage in any one or more lawful mode or modes of acquiring, producing, building, operating, manufacturing, furnishing, exchanging, or distributing any type or types of property, commodities, goods, or services for the primary and mutual benefit of the patrons of the association, or their patrons, if any, as ultimate consumers. GCAs have strong limits on the return of capital and are typically better suited for housing cooperative models.
Limited cooperative associations (LCAs)
Chapter 10. Limited cooperative associations (LCAs) are autonomous, unincorporated organizations of persons united to meet their mutual interests through a jointly owned enterprise primarily controlled by those persons. This structure permits combining ownership, financing, and receipt of benefits by the interested members and separate investments in the association by members who may receive returns on their investments and a share of control. This entity may be organized for any lawful purpose, whether for profit or not. LCAs impose strong limitations on the roles of outsider investors, and therefore are not so useful because many cooperatives are not well-resourced.
For more information on how to incorporate in DC, the District provides registration instructions for LLCs, general cooperatives, and limited cooperatives. The link for registration itself can be found here.
Legal Entities
Cooperatives typically opt for these legal structures, which include but aren’t restricted to:
- Limited cooperative associations (LCAs)
- General cooperative associations (GCAs)
- Limited liability company (LLCs)
- Nonprofit Corporation
Steps to Incorporating in D.C.
Step 1: Choose a Business Name
Choosing a name for your business is a big deal and should be given significant thought.. In fact, rushing the process of choosing your business name can be a big mistake. take some time to choose a name that will reflect positively on your business.
After you have decided on a name for your business, use the DC Secretary of State website to check the availability of your desired business name.
Step 2: Choose the Appropriate Business Entity
Many businesses today are choosing to incorporate as Limited Liability Companies (“LLC”) due to its flexibility and cost efficiencies. But, the LLC may not be the best form for your cooperative business. Be sure to carefully consider your business goals and objectives when choosing the best legal form for your cooperative business.
Step 3: Register with the DC Department of Consumer and Regulatory Affairs
You may need to file business formation documents with the Department of Consumer & Regulatory Affairs (“DCRA”) in order to properly register your business in DC.
Regardless of what type of business structure you choose in DC though, all businesses must obtain a Certificate of Occupancy or a Home Occupation Permit as well as get a Basic Business License (BBL).
Step 4: Obtain an Employer Identification Number (“EIN”)
An EIN Number is also known as an Employer Identification Number (EIN) or Federal Tax ID Number (FEIN). It is used by the IRS to identify your DC business for tax purposes.
The EIN Number for your Washington DC business will be used to open a bank account, file taxes, get financing, and handle employee payroll. You can get an EIN for your Washington DC business by mail, fax, or online. Getting your EIN online is the fastest option, since it only takes about 15 minutes to complete the application.
The IRS EIN Online Application can be accessed here: EIN Online Application
Step 5: Register With the Office of Tax & Revenue
After your Washington DC business is formed, you’re required to register it with the DC Office of Tax & Revenue (OTR).
Form: FR-500
Filing method:
Done online, via the OTR’s online filing portal called MyTax.DC.gov
• Click “Register a New Business: Form FR-500”
Fee: Registering your Washington DC business for tax purposes is free.
By going through the FR-500, you will be answering a number of questions about your DC business. Based on your answers, the online system will register your business for its applicable taxes and let you know when they need to be filed. It would be a great idea to call the DC tax office to receive confirmation of the dates listed.
Approval: Within about 1 week the OTR will mail you a Notice of Business Tax Registration as verification and approval.
Sales tax: If your Washington DC business will sell tangible personal property, you’re required to collect sales tax from your buyers.
When it comes to taxes, it is always a great idea to speak with a Certified Public Accountant (“CPA”) to ensure that your understanding of your tax obligations are accurate and consistent with DC laws. There may be additional fees associated with speaking with a CPA.
Step 6: Obtain Certificate of Occupancy Certificate
All DC businesses must get either a Certificate of Occupancy or a Home Occupation Permit in order to legally operate. If not, the District imposes fines and penalties.
Certificates of Occupancy are used for commercial businesses not located in a home or residence.. If you own a commercial building or are developing a new one, you will need to apply for a new Certificate of Occupancy. If you plan to rent space in DC, you likely don’t need to apply for a new Certificate of Occupancy, but be sure to speak with the owner or management company of your space and make sure their Certificate of Occupancy allows for your type of business to operate within its building. You’ll want a copy of their Certificate of Occupancy and/or their Certificate of Occupancy Number.
If you plan to run your cooperative business from home, you will need a Home Occupation Permit.
Step 7: Obtain a Business License
In addition to a Certificate of Occupancy or Home Occupation Permit, all businesses in Washington DC must also apply for a Basic Business License in order to legally operate. If not, your business will be illegally operating without a license and DC will impose fines and penalties.
Before you can obtain your business license, you must complete the previously cited steps, including:
- Having your business entity approval documents the DCRA
- Have your EIN number assigned from the IRS
- Register your business with the Office of Tax and Revenue
- Receive your Certificate of Occupancy or Home Occupancy Permit
The Business License Application can be completed online here: My DC Business Center
Additional Steps:
After you have completed steps 1-7, you may also want to consider starting a website. Also,opening a business checking and savings account may be a step to consider. Both of these steps should come after you have completed the process of legally registering your business.
Types of Cooperatives
Worker Cooperatives
When forming, worker cooperatives have an important choice to make regarding their legal entity. The business entity types most commonly used by worker cooperatives are the cooperative corporation, the limited liability company (LLC), and the C corporation. Less commonly, cooperatives incorporate as general cooperative associations or limited cooperative associations. Both are treated as nonprofit corporations for the purposes of both taxation and securities regulation under DC law. Worker cooperatives may also choose to operate as an S corporation or general partnership. Each entity type has implications on important issues including taxa- tion, employment law, and access to capital.
Below are some advantages and disadvantages of cooperative LLCs, C and S corporations.
Advantages:
- Limited Liability – If you operate your cooperative without a legal entity, you will be personally responsible for the debts and liabilities of your cooperative.
- Legally Required Cooperative Practices – The statute governing cooperative association requires democratic member governance & profit sharing based on member participation.
- Funding Opportunities – Member investments are exempt from securities filing requirements. Members may invest up to $1,000/person without triggering cumbersome securities regulation.
- Tax benefits – A cooperative association allows workers to be W-2 employees, while avoiding entity-level tax on profits distributed to members.
- Attractive Share Structure – As the value of the shares of a co-operative society is limited, it attracts many people.
- More Representative Organization Style – The control and management of cooperatives is democratic. No middleman is required.
- People-minded products and services provided – Since the control and management of the society is in the hands of the members, it encourages better quality of goods to the members and at more affordable prices.
- Full-bodied growth and involvement – Cooperatives are helpful in inculcating and developing managerial abilities among the members.
- Perpetual Existence. Members in a cooperative can routinely join or leave the business without causing dissolution
Disadvantages:
- Financial setbacks – Obstacles can arise from inadequacy of finances, as the majority of the members might not have a lot of available investment capital. Thus, the cooperative may need to obtain capital through (often self-serving) Investors.
- Lack of Membership and Participation – Because there can be general unfamiliarity surrounding cooperatives, this can be a dissuasive and daunting process to begin.
- Potential setbacks surrounding lack of skills – Many members might not have managerial, business, financial, or real estate training, and might suffer to manage the society and its property.
- All can be significantly affected by financial setbacks- Because cooperatives function democratically, non-loyal or dishonest members may disrupt the smooth function of the whole society. And depending on the cooperative’s financial structure, if capital can be withdrawn by the members at any time, periods of depression and slackness of business activities might disrupt or cripple the business.
- Motivation for more – There can be a lack of inherent salesmanship (as opposed to a typical competitive drive behind other business organization types) and profit-seeking which may result in lesser revenues.
Before incorporating as a Cooperative Association, you should think about some preliminary details such as choosing a business name; identifying potential members and board of directors; if and how to issue membership shares; prepare bylaws (samples below); and determine which, if any, licenses, permits, and insurance must be procured.
Worker Self-Directed Nonprofits
Some nonprofit organizations may be interested in converting to a worker self-directed nonprofit. Though this is context-specific, the board of a nonprofit has great flexibility in adding employees as board members. Assuming the nonprofit continues to have 501(c)(3) status, the nonprofit can continue to use the DC nonprofit issuer exemption. Beloved Community Incubator is a worker self-directed nonprofit that advises and provides support for cooperative businesses in the District of Columbia.
Consumer Cooperatives
In general, consumer cooperatives in the District form as general cooperative associations under Chapter 9 of the D.C. Code Title 29, Business Organizations. This allows an association to incorporate under this chapter to engage in the lawful mode(s) of acquiring, producing, building, operating, manufacturing, furnishing, exchanging, or distributing commodities, goods, or services for the primary and mutual benefit of the patrons of the cooperative association.
Alternatively, consumer cooperatives may organize as a limited cooperative association under Chapter 10 of D.C. Code Title 29, Business Organizations. Limited cooperatives offer a more flexible economic structure to general cooperatives. Limited cooperative associations offer with a dual purpose, to benefit their members and tend to the interests of their stakeholders, including investors.
Membership: Membership is open to any individual, business or corporation, nonprofit organization that has met eligibility requirements set forth by the bylaws.
Annual License Fee: Consumer cooperatives are responsible for paying an annual license fee.
Producer Cooperatives
In general, producer cooperatives in the District form as general cooperative associations under Chapter 9 of the D.C. Code Title 29, Business Organizations. This allows an association to incorporate under this chapter to engage in the lawful mode(s) of acquiring, producing, building, operating, manufacturing, furnishing, exchanging, or distributing commodities, goods, or services for the primary and mutual benefit of the patrons of the cooperative association.
Membership: Membership is open to any individual, business or corporation, nonprofit organization that has met eligibility requirements set forth by the bylaws.
Annual License Fee: Producer cooperatives are responsible for paying an annual license fee.
Credit Unions: Financial Cooperatives
Credit unions are nonprofit cooperative organizations that exist to serve their members. Similar to banks, credit unions accept deposits, make loans, and provide an array of other financial services. In general, credit unions in the District form as general cooperative associations under Chapter 9 of the D.C. Code Title 29, Business Organizations.
Housing Cooperatives
Purchasing Co-ops
Energy Cooperatives
Governance & Management
LLC's
LLCs in DC have no requirement to have a board of directors, annual meetings, etc. LLCs should draft an operating agreement, a binding contract outlining the company’s internal procedures, governance, and accounting system. The operating agreement may establish one or more designated series of members, managers, or interests of a limited liability company, in which the members, managers, or interest holders have separate rights, powers, or duties with respect to specified property or obligations of the limited liability company. See Section 29-802.26. LLCs must be careful when writing their initial governance documents to avoid the possibility of demutualization or conversion to a non-cooperative entity. LLC governance documents run the risk of amendment to eliminate principles such as one-worker, one vote and profit sharing based on patronage. The LLC’s articles of organization and operating agreement should restrict amendments to prevent a change in structure.
Employment Law
Employee Status
LLCs and LCAs can carefully structure their internal governing documents to avoid employee status of their workers. The DC Department of Employment Services tests whether a worker is an employee through the “right to control” and “relative nature of the work” tests in D.C. worker compensation and unemployment insurance cases. The following factors are considered:
“(1) the selection and engagement of the individual hired,
(2) the payment of wages,
(3) the power of the one who hires over the other whom he has hired, and
(4) whether the service performed by the person hired is a part of the regular business of the one who hired.”
Spackman v. District of Columbia Dep’t of Emp’t Servs., 590 A.2d 515, 516 (D.C. 1991). While no single factor is controlling, the decisive test is whether the employer has the right to control and direct the servant in the performance of his work and the manner in which the work is to be done.”
Workers Comp
In terms of worker’s compensation, the DC Department of Employment Services tests whether a worker is an employee by analyzing the nature of the worker’s work or business and the relationship of the worker’s work to the purported employer’s business.
The nature of the worker’s work uses the following factors:
1) the degree of skill involved;
2) the degree to which it is a separate calling or business; and
3) the extent to which the work can be expected to carry its own accident burden.
The second prong asks:
1) the extent to which worker’s work is a regular part of the employer’s regular work;
2) whether worker’s work is continuous or intermittent; and
3) whether the duration is sufficient to amount to the hiring of continuing services, as distinguished from contracting for the completion of a particular job. The more closely related the work is to that of the purported employer, the more likely that the worker is an employee versus an independent contractor.
Financing Cooperative Enterprises (Securities Law)
Under DC-specific securities laws, member interests in a nonprofit membership cooperative, if not traded to the public, are exempt from securities filing requirements. See Section 31-5604.01. Members may invest up to $1,000/person without triggering cumbersome securities regulation.
Under the statute for general cooperative associations, the maximum rate at which any return is paid on share or membership capital is limited to not more than 8% per annum. If a member desires to withdraw from the association, the directors may purchase the holdings by paying the member the par value (as set by the charter) of any or all the holdings offered. The directors shall then reissue or cancel the holdings. A vote of the majority of the members voting may order the directors to exercise this power to purchase. If the directors do not purchase the holdings, then the member may dispose of the unpurchased interest elsewhere, subject to the approval of the transferee by a majority vote of the directors
Additionally, associations are treated as nonprofit corporations for purposes of taxation or securities regulation in the District.
In DC, many worker cooperatives are small and do not yet raise capital via securities. Worker cooperatives often receive financing from other means.
Cooperative Support Organizations
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