Co-op Law
Resources for Worker Cooperatives
Co-op Law
Resources for Worker Cooperatives

Glossary of Co-op-related Terms

This glossary defines and explains common business terms related to cooperatives. While it doesn’t cover every term, these definitions aim to assist you in navigating the cooperative process.

Glossary

Ancillary Loan Agreement– an extra agreement that goes along with the main loan agreement. It includes additional terms and details about the loan, such as collateral, repayment schedules, or interest rates. It provides extra information that is not covered in the main loan agreement. For example, the lender may require that the cooperative receive technical assistance from a specified provider, in order to ensure the financial viability of the cooperative.

Articles of Incorporation– the document filed with the state that forms a corporate entity.

Assets– resources with an economic (typically monetary) value that an individual, or business has ownership of.

Asset sale– refers to the transfer of ownership of tangible or intangible assets from one party (the seller) to another party (the buyer).

Assignment of contracts– a legal process where one party transfers their rights, responsibilities, and benefits under a contract to another party. This transfer usually requires the consent of all parties involved and must comply with the terms and conditions of the original contract.

Assignment of lease– when a tenant transfers their rights and responsibilities under a lease agreement to another party. In simpler terms, it’s like passing on your lease to someone else.

Bill of Sale– a  specific legal document used to record the transfer of ownership of a tangible item from one party to another. It serves as proof of the sale transaction and includes details such as the names and addresses of the buyer and seller, a description of the item being sold, the sale price, the date of the sale, and any terms or conditions of the sale.

Board of Directors– the individuals that serve as the governing body of the organization.

Bylaws– the document that regulates the governance and internal affairs of a corporation.

California Corporations Code– state law governing formation and operation of business entities.

Candidacy Period– a period of work an employee must complete to become eligible for membership in a worker cooperative.

Capital– money used in a business, whether supplied by owners (equity) or borrowed (debt).

Capital Account Cooperative– a cooperative with a system of internal capital accounts that reflect its net worth and determine the redemption value of member shares and written notices of allocation.

Capital Gains– the increase in value of an asset when sold. When a cooperative dissolves, after debts and obligations have been paid and allocated equities have been retired, residual assets shall be shared by shareholders based on patronage.

Capitalization– the amount and source of money needed to start and operate the cooperative.

Class– memberships that are identified in the articles or bylaws as being a different type of membership or that have the same rights with respect to voting, dissolution, redemption, distributions and transfer.

Collateral– asset used to secure a loan.

Collective Account– an internal account containing net income retained in the cooperative and not allocated to members.

Collective Board– a worker cooperative in which there is only one class of members consisting of worker-members, all of whom are members of the board

Community Investor– in a California worker cooperative, a shareholder who is not a worker and whose voting rights are limited to approval rights only over a merger, sale of major assets, reorganization, or dissolution.

Debt Financing– obtaining money for a business by borrowing from a bank or other lender. While some collateral may be required to obtain the loan, the lender does not have any ownership or direct control of the business affairs, except in certain instances of default.

Deed– creates a legal presumption that you have full rights and responsibilities indefinitely. 

Deeds of Trust– A deed for land is a paper that proves who owns a piece of land. It has information about the property and the names of the current and previous owners. It is an important document for showing ownership rights.

Depreciation Recapture– additional tax paid upon profitable sale of an asset that the cooperative in previous years used to offset their taxable income (through claiming a depreciation of value of that asset in past years).

Default on the loan– means that the borrower hasn’t followed the agreed-upon rules for repaying the loan. It can happen when they don’t make payments on time or break other terms of the loan agreement. If a borrower defaults, there can be penalties, higher interest rates, or even the possibility of losing the property tied to the loan.

Dividend– amount paid to business owners based on their investment. Typically, dividends represent a portion of profits paid to members proportionate to the shares held. In a worker cooperative, patronage “dividends” are also distributed on the basis of patronage with the cooperative, usually determined by wages earned or hours worked.

Employee leasing company – a temp agency, where you can get workers who execute specific tasks/jobs for the leasing company’s client businesses. The worker is on employee leasing company’s payroll, but is supervised onsite by the client business.

Equity– the ownership interest in a business, typically calculated by subtracting all liabilities (amounts owed) from all assets (amounts and property owed). Equity is generally made up of investments by worker-owners, other than loans, and the cumulative profits of the business.

Equity Capital– money supplied by the owners of a business, which is used towards financing the various needs of the business.

Final Valuation of Inventory– refers to determining the total worth or value of all the goods and products that a business currently has in its possession and available for sale. There a few different formulas you can use to calculate your  final valuation of inventory.  

Governance– this refers to the way a company is controlled and how decisions are made.

Governing Documents– set of rules and guidelines that an organization or entity follows to operate smoothly. These documents outline things like how decisions are made, who has authority, and what the organization’s goals and procedures are. They can include things like bylaws, articles of incorporation, charters, or partnership agreements, depending on the type of organization. 

Individual Capital Account– an internal capital account reflecting a member’s equity interest and allocated patronage dividends in a worker cooperative.

Indivisible Reserves Account– in the context of a California worker cooperative, an internal account with funds derived from non-patronage-sourced income, that will not be distributed to members, and that must, upon dissolution, be allocated to a cooperative development organization identified in the cooperative’s articles of incorporation or bylaws.

Insurance Policies– formal contracts between an insurance company and an individual or entity. These contracts outline the terms and conditions of the insurance coverage provided by the company. 

Inter-Creditor Agreement– a contractual agreement that each lender commits to, providing financing and outlining the priority of repayment and the assets securing each loan. It’s essentially a rulebook that different lenders agree to when they’re giving money to the same borrower. This rulebook lays out who gets paid first if the borrower can’t pay back everything they owe. Think of it as a game plan to ensure that everyone knows their role and receives a fair share if things go wrong.

Internal Capital Account– an account in a worker cooperative reflecting a portion of its net worth. Worker cooperative corporations formed as capital account cooperatives typically have up to three types of internal capital accounts: (1) individual capital accounts, (2) a collective reserve account, and (3) an indivisible reserves account.

Lease– A lease is a legally binding contract between a landlord (the property owner) and a tenant (the person or entity renting the property). The lease outlines the terms and conditions of the rental agreement, including the duration of the lease, the monthly rent amount, any additional fees or responsibilities, and the rights and obligations of both parties during the lease term.

Lease Assignment– the transfer of a tenant’s rights and obligations under a lease agreement to another party. This transfer typically requires the landlord’s approval and involves the original tenant (assignor) relinquishing their rights to the leased property to a new tenant (assignee). 

Letters– letters typically refer to formal written communications that convey information, instructions, requests, or agreements between parties. 

Liabilities– a financial obligation that arises out of a prior transaction.

Lien– is like a legal “hold” or claim on something you own, such as a house or car, because you owe money or have some other obligation. It’s a way for creditors or others you owe to make sure they can get paid back. 

Limited liability entity– this refers to a type of business that provides extra protection to its owners if it is sued. The owners of a limited liability business, if sued, may lose the business, but in most cases, will not lose their personal assets.

Licensing of Intellectual Property Rights and Trademarks– legal process in which the owner of intellectual property (such as patents, copyrights, trademarks, or trade secrets) grants permission to another party to use, produce, distribute,  that intellectual property in exchange for agreed-upon terms and compensation. This permission is formalized through a licensing agreement, which outlines the rights granted, the scope of use, any limitations or restrictions, financial considerations (such as royalties or fees), duration of the license, and other relevant terms and conditions. 

Margins– in cooperative terminology, net income is often referred to as “margins.”

Member– in a California cooperative corporation, anyone who has the right to vote for the Board of Directors or who has a proprietary interest in the cooperative. “Shareholder” has the same meaning as “member” under the statute.

Multi-stakeholder Cooperative– a cooperative with multiple classes of members.

Net Loss– the excess of expenses over revenues for a fiscal year.

Net Revenue– the total amount of money you make from sales minus your direct expenses.

No-Action Letter– an official response from a regulatory agency, such as the Securities and Exchange Commission (SEC), in which the agency indicates that it will not take legal action against a party for a specific proposed course of action. These letters are typically requested by individuals or entities seeking clarification or assurance that a particular action they plan to take will not violate securities laws or regulations.

Officers– executive agents of the business, responsible for certain duties, such as signing documents, keeping meeting minutes, providing notices, signing checks, and so on.

Operating Agreement– the document that regulates the internal affairs and governance of an LLC.

Patronage– the volume or value (or both) of a patron’s purchases from, and use of services furnished by, the cooperative, and products and services provided by the patron to the corporation for marketing. In other words,  “patronage”, which most worker cooperatives measure based on the number of hours each member works. The more “patronage” you have (for example, the more hours you work), the greater the profit-share to which you are entitled.

Security interest– a legal right granted to a lender or creditor that allows them to take possession of specific assets or property (known as collateral) if the borrower defaults on a loan or fails to fulfill their financial obligations. 

Securities Offering Documents– documents are created by companies or entities that intend to offer securities (such as stocks, bonds, or investment contracts) to investors, either publicly or privately.

Preferred Shares– an investment class of shares that typically have priority over member shares with respect to dividends and liquidation distributions and are nonvoting.

Profits– in the context of California cooperative corporations, this is defined as the excess of revenues over expenses for a fiscal year attributable to non-Member labor.

Promissory note–  generally short documents that simply describe the terms of promised payments. Cooperative will likely execute promissory notes representing the cooperative’s debt to the prior owners and/or lenders. A very basic sample is linked here and some institutional lenders will often use their own form. If individual workers are receiving loans to finance their buy-in, workers will also need to execute promissory notes individually.

Redemption Agreements– It’s an agreement between parties that says if something specific happens, like if one party messes up or breaks a rule, the other party can step in and buy back or “redeem” their ownership stake or shares. It’s a bit like having an insurance policy to protect everyone involved.

Registration Documents– documents are part of the formal process of registering securities with regulatory authorities, such as the Securities and Exchange Commission (SEC) before they can be offered and sold to the public.

Representative Board– a Board of Directors elected by the members, distinguished from a Collective Board which is composed of all the members.

Registration Documents- 

Resolutions– formal decisions or declarations adopted by a group or organization, such as a board of directors, shareholders, or governing body. These decisions are often documented in writing and are legally binding within the scope of the organization’s authority. Resolutions can cover a wide range of matters, including approving contracts, appointing officers, authorizing actions, or making policy decisions.

Revenue– income that a business receives from normal business activities.

Revolving Capital Accounts– written notices of allocation that are paid to members on a first-in, first-out basis, rather than upon termination of membership or fixed maturity dates. Dates of redemption are generally flexible and controlled by the board or other designated decision-making body.

Revolving Funds– funds made available for cooperative and business investment purposes by some public agencies or nonprofit organization. These may be borrowed and then repaid on specified terms so that others may borrow the money at a later time.

 Shareholder– in a California cooperative corporation, anyone who has the right to vote for the Board of Directors or who has a proprietary interest in the cooperative. “Shareholder” has the same meaning as “member” under the statute.

Share Certificates–  official documents that prove you own shares in a company. It’s like getting a receipt when you buy something at a store. The certificate has details about how many shares you own, the company’s name, and sometimes other info like the share’s value or class.

Steering Committee– an advisory body, usually comprised of relevant stakeholders and experts, formed to manage the development or conversion of a cooperative before its formation. A steering committee usually dissolves once a cooperative is formed and democratically managed directly by its members.

Subchapter T– a federal tax provision that allows cooperatives to avoid double taxation on net income that is allocated to members on the basis of patronage.

Surplus– in the context of California cooperative corporations, this is the net income that is attributable to member labor.

Tax Clearance Letters– also known as a tax compliance certificate or tax clearance certificate, is an official document issued by the Internal Revenue Service (IRS) that certifies an individual, business, or organization has fulfilled its tax obligations up to a certain date.

Written Notice of Allocation– a certificate issued to a member specifying the amount, if any of the patronage dividend allocated to the member and retained by the cooperative.

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