The Legal Framework

The 4th goal of the Blueprint for a Cooperative Decade has also showed significant advancement since 2010. This goal states, “ensure supportive legal framework for cooperative growth”.

At the state level, the spread of Limited Cooperative Association (LCA) acts have gained speed. Washington and Illinois just passed versions of it. In Illinois, the law is called “Limited Worker Cooperative Association” (LWCA) and specifically authorizes workers as “patron members”.I haven’t studied the LWCA enough to understand how it compares with LCAs, but it does seem to allow an investor class of membership although much more limited than most LCAs.

In Washington, however, the LCA introduces investor owners into the mix. In Washington, the voting can be weighted based on equity. This seems, to me, a violation of the principle of “one-member, one-vote” and effectively scuttles the basic difference between cooperatives and other corporations. I have been trying to keep an open mind on this model since it might offer some means of raising capital, but any plan that changes governance to appeal to investors should remember the adage, “he who pays the piper, picks the tune.” I am not telling people not to use it, but it seems to me that a social purpose corporation or using preferred stock could achieve the same goals. There is a potential that the LCA can be used for co-ops to access the patient capital of Economic Opportunity Zones and this could be beneficial since selling owners can defer capital gains on the sale of the business and the Zones cancel the tax after 10 years. It will be interesting to see how this develops and if it really helps co-ops.

The major piece of legislation that has moved this goal forward, in the United States at least, is the Main Street Employee Ownership Act. Main Street, for those of you not familiar with it, is the first piece of legislation with regard to employee ownership passed by congress in over 30 years. It provides new mandates to the Small Business Administration to open of guaranteed loans to worker co-ops and support the conversion of existing businesses to employee ownership through either ESOPs or worker co-ops. Further, the law also mandates that Small Business Development Centers (SBDCs) around the country support employee ownership and conversions to worker co-ops. This has potential to be a major catalyst as it comes at a times when business owners are retiring at record rates. The current estimate by Project Equity is that only about 20% of existing businesses will transfer ownership to a new generation.

The hard part, now, is about changing the culture at SBA and helping them engage with this new law. The mandate came without funding as well, despite being part of a 700 billion dollar defense bill. One particular area of difficulty is the requirement for personal guarantees for loans associated through the SBA. This doesn’t have to be the case, especially when their is collateral at hand. Signature loans can create power imbalances within the organization and effect hiring.

This brings up an important area that the ICA is working on and that is in regards to how co-ops in are treated in terms of accounting. Many co-op statutes treat co-ops the same as “for profit” organizations when they are really social purpose organizations. Laws need to change with that regard, but also accounting standards need to reflect that ratios and measurements that show strength in cooperative institutions are not always the same as for-profits (and by for-profit, I mean where the purpose of the organization is to maximize rate-of-return for investors).

The Co-op Decade did bring significant changes to the worker cooperative legal landscape and more needs to be done. The Creating Jobs Through Cooperatives Act of 2013 failed to draw bipartisan support and would have provided support for cooperative development in urban communities (over 50,000 people). I won’t speculate on its demise, but hopefully in the next congress a new attempt can be made after the success of Main Street. At the local level, more city governments have started understanding the co-op model and its ability to build sustainable local economies and this could be an important avenue both as a means of finding immediate support and building future support at the state and local level (as local leaders become State and National leaders).

We have the momentum and need to keep it going!

About John McNamara

John spent 26 years with Union Cab of Madison Cooperative and currently helps develop co-ops in the Pacific Northwest. He holds a Ph.D. in Business Administration and Masters in Management: Co-operatives and Credit Unions from Saint Mary's University.
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