THINK OUTSIDE THE BOSS How to Create a Worker-Owned Business Created by: Fifth edition. Revised November 2014. DISCLAIMER: THIS MANUAL HAS BEEN PREPARED AS A HANDOUT FOR A 2014 WORKSHOP ON STARTING A WORKER-OWNED BUSINESS. THE CONTENTS OF THIS MANUAL SHOULD NOT BE RELIED ON AS LEGAL ADVICE. ALSO, SOME OF THIS INFORMATION COULD BECOME OUTDATED, AND LAWS VARY FROM PLACE-TO-PLACE. FURTHERMORE, ALTHOUGH WE TRIED TO COLLECT ACCURATE INFORMATION AND GIVE THE LAWS OUR BEST INTERPRETATION, SOME INFORMATION IN THIS BOOKLET COULD EVEN TURN OUT TO BE INCORRECT OR SUBJECT TO OTHER INTERPRETATIONS BY COURTS OR REGULATORS! WE SURE HOPE THAT’S NOT THE CASE, BUT, WHAT CAN WE SAY? LAW IS COMPLICATED STUFF! THAT'S WHY WE STRONGLY RECOMMEND THAT YOU CONSULT WITH AN ATTORNEY BEFORE USING THIS INFORMATION TO FORM OR OPERATE A COOPERATIVE. Think Outside the Boss: How to Create A Worker-Owned Business TABLE OF CONTENTS INTRODUCTION: WORKER COOPERATIVE ENTERPRISES ...................................................................... 1 ENTITY FORMATION: HOW DO YOU CREATE A COOPERATIVE BUSINESS ENTITY?.............. 10 ENTITY CONVERSION: HOW TO CONVERT YOUR EXISTING BUSINESS TO A COOPERATIVE ............................................................................................................................................................. 25 NONPROFIT ORGANIZATIONS INCUBATING WORKER COOPERATIVES ..................................... 35 MANAGING YOUR COOPERATIVE BUSINESS ............................................................................................... 52 COOPERATIVES AND EMPLOYMENT LAW .................................................................................................... 58 FOR MORE INFORMATION: SEE APPENDIX A: NEW EMPLOYER CHECKLIST ............................. 79 GETTING THE GREEN: FINANCING A WORKER CO-OPERATIVE ..................................................... 80 PART I: BANK LOANS AND ALTERNATIVE FINANCING ...................................................................................... 80 GETTING THE GREEN PART II: SECURITIES LAW ................................................................................................ 86 HOW DOES MONEY FLOW THROUGH A COOPERATIVE? ..................................................................... 93 GLOSSARY OF USEFUL TERMS ........................................................................................................................... 102 APPENDIX A: NEW EMPLOYER CHECKLIST ................................................................................................ 104 APPENDIX B: SAMPLE BYLAWS OF GREEN COMMONWEALTH COOPERATIVE, INC............. 107 ARTICLE 1 - MEMBERSHIP ..................................................................................................................................... 110 ARTICLE 2 – TERMINATION OF MEMBERSHIP .................................................................................................. 111 ARTICLE 3 – MEMBER MEETINGS ....................................................................................................................... 113 ARTICLE 4 – DIRECTOR MEETINGS .................................................................................................................... 119 ARTICLE 5 – DECISION-MAKING PROCESS ....................................................................................................... 124 ARTICLE 6 – OFFICERS .......................................................................................................................................... 124 ARTICLE 7 – FINANCIAL PROVISIONS ................................................................................................................ 126 ARTICLE 8 – CORPORATE RECORDS AND REPORTS ........................................................................................ 131 ARTICLE 9 – INDEMNIFICATION ......................................................................................................................... 133 ARTICLE 10 – BYLAWS CHANGES ........................................................................................................................ 133 CERTIFICATE OF SECRETARY .................................................................................................................................. 134 APPENDIX C: SAMPLE ARTICLES OF INCORPORATION ........................................................................ 135 APPENDIX D: SAMPLE DISCLOSURE DOCUMENT .................................................................................... 139 APPENDIX E: 28 QUESTIONS TO CONSIDER BEFORE MEETING A LAWYER ............................. 140 APPENDIX F: REFERRAL LIST ............................................................................................................................. 142 APPENDIX G: COOPERATIVE BUSINESS PLANNING RESOURCES FROM PROJECT EQUITY ............................................................................................................................................................................................ 144 APPENDIX H: OTHER RESOURCES ................................................................................................................... 154 Think Outside the Boss: How to Create A Worker-Owned Business INTRODUCTION: WORKER COOPERATIVE ENTERPRISES Credit for this image goes to: http://ejfood.blogspot.com. What Are Worker Cooperatives? Worker cooperatives are business entities that are (1) owned by their workers, (2) governed by their workers, and (3) operated for the benefit of their workers. Because worker cooperatives are owned and controlled by and for the people who work there, they operate differently from traditional businesses in some key ways. (1) Joint Ownership: In traditional for-profit businesses, the owners are sole proprietors or shareholders whose main interest is in generating a profit. Worker cooperatives are interested in making money too, but they are also invested in making sure that the business meets the needs of its members, such as paying fair wages, providing a sustainable livelihood, investing in the local community, and promoting a healthy environment. (2) Democratic Control: In typical business enterprises, elections are held and major decisions are made by investors who cast votes based on the number of shares they own. In worker cooperatives, directors are elected and major decisions are made by the workers, on a one- member, one-vote basis. Therefore, control is vested with each member, not each share of stock. No member has a larger or more influential vote because she invested more money in the business. For informational purposes only, not to be relied on as legal advice. 1 Think Outside the Boss: How to Create A Worker-Owned Business Cooperative Distribution of Earnings: In investor-owned businesses profits are distributed based on how many shares each person owns. Worker cooperatives instead distribute surplus earnings based on a patronage system. This means profit is distributed equitably based on factors such as hours worked or value of work provided. Profit distribution is thus based on labor input, not on capital contribution. Workers generally do not receive a greater profit share by contributing more money directly to the business or by purchasing shares. Benefits of Worker Cooperatives: When efficiently organized and managed, worker cooperatives convey the following benefits to the people who work there: • Employment and the ability to generate income. A worker cooperative gives groups of people an opportunity to become economically independent in a mutually beneficial way. • Control over the way their work is organized, performed, and managed. Worker cooperatives provide an opportunity to balance workers’ needs and concerns with the need for profits and efficiency. Worker cooperatives also emphasize the training and development of the worker-members. • Employment security, provided that the business is financially viable. Worker cooperatives are managed to generate income and provide stable employment for their members. When faced with a tradeoff between pursuing profits and maintaining employment, worker coops often choose the latter. • A financial and ownership stake in the enterprise in which they work. Worker–members contribute directly to building the enterprise and sharing in its success. • An opportunity to practice democracy in the workplace. Worker-members participate directly in decisions that affect them in their workplace as well as those that determine the growth and success of the business. Cooperative businesses manifest in a variety of ways. The term “cooperative” can refer either to a 2 For informational purposes only, not to be relied on as legal advice. Think Outside the Boss: How to Create A Worker-Owned Business specific type of business entity recognized under the law or to the internal governance structure of an organization. (1) Cooperatives, as a legal entity: “Cooperative” may refer to a specific type of corporation, recognized under the law. The legal requirements for forming a cooperative corporation vary from state to state. In California, cooperatives generally form as a corporation under the California Consumer Cooperative Corporation statute. The rules governing this type of corporation are found in the California Corporations Code provisions beginning with section 12200. In California, you cannot legally have the word “cooperative” in your name, unless you have formed under this statute. (2) Cooperatives, as a legal structure: