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Worker-Owned: A Guide to Starting and Running a Workers' Cooperative

Adam Uzialko
Adam Uzialko
Freelance Editor

Modern society is marred by income and wealth inequality and a desire for more autonomy and flexibility in the workplace. While conventional business models allow for a benevolent owner to address these problems if they choose, egalitarianism and democratic principles are not baked into traditional, hierarchical organizations.

The workers' cooperative is an alternative model that empowers worker-owners; those who are closest to the day-to-day operations of the company. Built on the principles of sharing and democratic control, worker-owners enjoy more influence over business decisions as well as more equitable pay. That's not to mention that worker cooperatives also tend to be more productive than more conventional businesses.

What is a workers' cooperative?

Modern cooperatives, also called collectives, have been around since the 19th century when social movements against the excesses of the industrial era waxed and waned. In the late 1920s and the early 1930s as the gains of the roaring '20s were washed away by the disaster of the Great Depression, cooperatives once again burst to the fore. Finally, in 1970, the U.S. experienced one of the largest waves of cooperative formation the country had ever seen with the creation of thousands of new collectives.

But what exactly is a cooperative, and why do they seem to crop up whenever there are pushes for social change? The two defining characteristics of a workers' co-op are worker-owners who invest in the business together and ultimately share in the profits, and a democratic decision-making process in which each worker-owner typically casts votes to determine business operations.

"Common ownership, common mission and common goals is what it comes down to," Dave Swanson, a partner and cooperative attorney at law firm Dorsey, told Business News Daily. "To me, the big thing about a worker co-op is having people who are comfortable with [worker-ownership, and] are not trying to climb on each other and see who gets to the top."

Cooperatives tend to follow seven general principles adopted in 1995 by the International Cooperative Alliance. Those seven principles are:

  1. Voluntary and Open Membership: All people willing to accept membership responsibilities are welcome to use the cooperative's services regardless of gender, socioeconomic class, race, or political or religious affiliations.
  2. Democratic Member Control: Members democratically control cooperatives, actively participating in the setting of policies and decision-making. Those serving in representative capacities are accountable to the membership, which is bestowed equal voting rights (one member, one vote).
  3. Member Economic Participation: All members contribute equitably to, and democratically control, the capital of their cooperative. Common uses of capital include further development of the cooperative, establishment of a reserve account, or benefits to member transactions with the cooperative. Budget surpluses are democratically allocated.
  4. Autonomy and Independence: Cooperatives are autonomous organizations controlled by their members. Any agreement with another entity, be it government, private or nonprofit, must be based on terms where members of the cooperative retain democratic independence.
  5. Education, Training and Information: Cooperatives provide education and training for their members, representatives, managers and employees to help them more effectively contribute to the development of the cooperative. They also educate the public at large about the benefits of cooperation.
  6. Support for Other Cooperatives: Cooperatives generally seek to link their efforts with other cooperatives, thereby spreading the cooperative movement and better serving their communities by pooling resources and services.
  7. Community Focus: Ultimately, cooperatives are dedicated to supporting the sustainable development of their communities through member-approved policies.

"Working for a cooperative, everyone needs to be on the same page; we make all the decisions together," said Lor Holmes, general manager of CERO. "We've developed different areas of expertise or areas we take responsibility for. It's really a great job."

"From my perspective, the difference is your ability to participate," added Rich Soenksen, a worker-owner at the Ubuntu Coffee Cooperative. "Every member has one vote and is treated equally. The difference is having some say in the quality of your day."

Operating as a co-op

Operating as a co-op isn't always a simple process. Although every state has a co-op law, said Swanson, cooperative incorporation varies greatly state by state, and there is no overarching federal policy when it comes to incorporating as a co-op.

Some states are highly restrictive, like Mississippi, which only allows agricultural cooperatives to incorporate. Other states, like Minnesota, boast multiple cooperative laws suitable for businesses in just about any industry. Some states even allow cooperatives to sell equity, Swanson said, though they are seldom used.

While incorporating a co-op is not always available, more conventional entities, like LLCs, can still be structured and operate as a cooperative. That's good news for those in states with narrowly defined co-op laws, because a business doesn't necessarily have to be incorporated as a cooperative to be treated as such under the tax code.

Cooperatives are taxed under what is known as Subchapter T of the tax code, which includes some tax advantages. Primarily, Subchapter T states that cooperatives can deduct payments above and beyond set salaries to constituent members, Swanson said.

"If you're a co-op and operating on a cooperative basis, you can avoid paying tax on your income at the co-op level," Swanson said. "If you earn a profit and allocate the profit to your worker-owners, then you end up with your [members] having more taxable income."

In other words, a cooperative receives the same treatment as "pass-through entities," like LLCs, while members pay their federal taxes when they file their personal taxes.

Other types of entities are eligible for treatment under Subchapter T, but to be considered a cooperative, organizations should generally adhere a three-pronged test established in Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305 (1965):

  • "Subordination of capital" in terms of control over the organization's pursuits as well as ownership of the resulting benefits
  • Democratic control by worker-owners
  • Allocation and investment of cooperative profits amongst the worker-owners

How does running a co-op differ from a conventional business model?

In a cooperative, members all have greater influence in their day-to-day work, but that also means more responsibility. Member-owners must be comfortable with fluid situations and be able to adapt to the needs of the workplace.

"We all have different skills. In the case of our finance person, that's all he does because that's his specialty and none of us have that background. The rest of us divvy up tasks between production and sales and so on," Soenksen said. "It has evolved that some people are better at some things than others. For instance, I do mostly sales and others do more roasting."

Organizing the more horizontal power structure of a worker's cooperative means a greater level of communication. This often requires regular meetings, Soenksen said, both as a general co-op and in working subgroups.

"The downside is … a lot more communication is needed to keep the train on the tracks," he said.

For most, working in a cooperative is more than just taking agency over the workday, however. In keeping with the seven principles, cooperatives tend to be mission- or values-driven and often aim to give back to the communities they serve.

"We're part of a full economy … that [is] really pushing for change," Holmes said. "Our sales pitch is in large part a reflection of our values. We go to people and say, 'Want to do the right thing by the environment? Want to buy local services?' And co-ops are about promoting egalitarianism … that's a good reason for people to work with cooperatives."

Ultimately, cooperatives are focused on a different way of organizing labor, allocating resources and distributing wealth. It flips the typical hierarchy on its side – rather than top down, it's side to side – and helps to more evenly spread profits throughout the organization. That means for each member, the health of the organization is tied to the health of their own position. The ownership stake in a cooperative, in other words, is palpable – worker-owners believe it shows.

"The product and process that comes out of [a cooperative] … is a lot richer and more sophisticated," Soenksen said. "Having everyone's input, streamlining things and the way we approach problems … I just think it's a lot better when we put all of our heads together."

"It's got to be a win-win-win," Holmes added. "For people, planet and profitability."

Image Credit: XiXinXing/Shutterstock
Adam Uzialko
Adam Uzialko
Business News Daily Staff
Adam Uzialko is a writer and editor at business.com and Business News Daily. He has 7 years of professional experience with a focus on small businesses and startups. He has covered topics including digital marketing, SEO, business communications, and public policy. He has also written about emerging technologies and their intersection with business, including artificial intelligence, the Internet of Things, and blockchain.