While many conventional businesses operate and transact without much help from lawyers, cooperative conversions are perhaps uniquely in need of legal expertise and support.
Lawyers can help you navigate the conversion process and protect everyone involved
The reasons for working with lawyers during a cooperative conversion include:
- Cooperatives have unique governance, financial, and tax requirements that are often misunderstood by most people and institutions crucial to the business.
- Selling a business involves complex steps, tax considerations, securities laws, and technical details that require expertise.
- Business owners and employees have significant stakes in the conversion and should seek independent advice.
During conversion, employees may be vulnerable during the process of conversion as they take risks with their jobs and personal assets. Employee Stock Ownership Plans (ESOP), a trust that manages the employees’ ownership interest and is legally required to act in the employee’s best interests, reducing some of the risks.
However, converting to a worker cooperative offers fewer worker protections.
There’s a sad shortage of lawyers who know anything about cooperative conversions, resulting in a gap in legal services. In order for lawyers to advise on cooperative conversions the need to have, at the very least, basic knowledgeSubchapter T and Section 1042 of the tax code, of the processes and tax consequences of selling a business, of employment laws, of cooperative entity choices and structure, and of basic securities law.
The U.S. Federation of Worker Cooperatives and the National Cooperative Business Association maintain lists of professionals, including lawyers, accountants, and business strategists, who can assist cooperatives.
What lawyers can do during a cooperative conversion
Lawyers generally assist with a wide variety of questions and tasks in the process of cooperative conversion, including:
- Choosing the right business structure and planning the roadmap to the conversion process.
- Drafting necessary documents and filing paperwork with government agencies. Found here in Cooperative Bylaws and Other Governance Documents.
- Ensuring compliance with securities laws and Subchapter T of the Internal Revenue Code.
- Providing advice on employment law and workers’ rights.
- Reviewing financial statements and records of the business for potential liabilities.
- Advising on cooperative Bylaws, financial matters, voting rights, and decision making.
- Explaining tax consequences and reviewing conversion transactions.
- Verifying tax compliance and filings.
- Lawyers may not excel in numbers and spotting financial issues. Financial or tax advisors can crunch numbers, analyze scenarios, and identify potential debt problems or tax payment concerns. It’s crucial to ensure a comprehensive and well-informed process.
Who needs a lawyer during a cooperative conversion?
While having just one lawyer involved in the conversion process may seem convenient and cost-saving, it’s not effective in considering and protecting everyone’s interests simultaneously.
Ethical rules for lawyers strongly recommend that each party have independent counsel to ensure they are fully informed of their rights, responsibilities, and risks.
Business partners often seek separate counsel when forming a business, but after formation, typically only one lawyer represents the business entity. Therefore, after the conversion, most lawyers will likely drop out, and the cooperative will work with one lawyer for ongoing legal needs.
Even with multiple lawyers involved, the process can be collaborative rather than adversarial. Parties can openly discuss the conversion and reach a general agreement on the plan and terms. One lawyer often takes the lead in drafting legal documents, which others review.
In The Ideal Scenario: Everyone Would Get Independent Advice
In an ideal scenario, every worker, selling owner, and entity involved in the conversion would seek independent advice on financial and legal considerations.
Second Best Option: Involve at Least Two Lawyers
Considering cost constraints, the second best option is for one lawyer to represent the selling owner(s) or the business itself, while a second lawyer advises the workers as a group. The workers’ lawyer may require waivers acknowledging potential conflicts of interest, especially if one worker faces greater risks. If an individual is investing significantly more capital than others, separate counsel may be necessary. Lawyers should be ready to advise a single employee on the legal aspects of worker cooperative conversion while keeping costs reasonable. They can use a checklist of documents and topics to streamline the process and make it efficient.
For Simple Conversions: When One Lawyer Might Suffice
In some cases, simple conversions can be handled by one lawyer representing the converting entity, but it’s still advisable to have someone looking out for the workers’ interests and conducting due diligence to uncover any hidden risks or liabilities. This could work if affordable lawyers are scarce, the conversion has minimal financial risk for workers, the business has no debts or liabilities, and the employment status of new worker-owners remains unchanged.
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