DEMYSTIFYING EMPLOYEE OWNERSHIP
The Case for Cooperatives in NYC
For a just economic recovery, New York needs to invest in innovative economic development strategies that build self-determination and wealth in working class communities of color. Worker Cooperatives can do this because they:
- Build wealth and narrow the racial wealth gap
- Create higher quality, dignified jobs with higher wages than those in the same sectors with conventional ownership model
- Democratize wealth, particularly for communities who may otherwise lack access to business ownership opportunities
- Have proven to be more resilient in periods of economic downturn
- Can be a strategy to preserve small businesses through conversion to a coop when owner’s retire in what is being called the “silver tsunami"
- Promote community and local economic development by keeping profits in the community instead of going to a distant investor
Economic Democracy is a system where people share ownership over the resources in their communities and participate equally in deciding how they are used [Bronx Cooperative Development Institute (1). Economic Democracy is an alternative to the existing extractive economy that can work to build and retain wealth and power in working class and communities of color.
Examples of Economic Democracy:
- Housing: Community Land Trusts
- Energy: Community Shared Solar
- Financial institutions: Public Banks
- Healthcare: Cooperative Health Care Networks
- Jobs: Employee Ownership + Worker Cooperatives
Employee Ownership is one strategy of economic democracy (when done in a way that embodies social justice values). Employees Ownership encompasses businesses in which the rights and responsibilities of ownership, profit, decision-making and governance are distributed among workers (2).
Worker Cooperatives are businesses that are owned and democratically controlled by their workers .
In 1844, the Rochdale Society of Equitable Pioneers in England outlined seven Cooperative principles which guide cooperatives around the world to this day:
- Voluntary and Open Membership - open to all people who are willing and accepting of the responsibilities.
- Democratic Member Control - controlled by their members who actively participate in decision-making - 1 member, 1 vote
- Member Economic Participation - members contribute equitably to- and democratically control - the capital of their co-operative.
- Autonomy and Independence Cooperatives - are autonomous, self-help organizations.
- Education, Training and Information - provide education and training for their members, elected representatives, managers, and employees
- Cooperation among Cooperatives - cooperatives work together through local, national, regional and international structures.
- Concern for Community - cooperatives work for the sustainable development of their communities through policies approved by their members.
A Brief Cooperative History
The cooperative movement has a long history in the United States as a working-class struggle against the exploitation and extraction of capitalism. In the late 19th century, farmers formed cooperatives as an alternative to debt peonage, with the movement then expanding into urban production industries. Cooperative models are particularly deeply rooted in African American traditions in the United States, as Black workers and activists formed numerous cooperatives in resistance to the racism of both the capitalist economy and other worker movements (4).
For example, in the late 1800’s Black farmers were excluded from the main chapters of the Southern Farmers’ Alliance, so they started the Colored Farmers’ National Alliance and Cooperative Union, which grew to over a million members. These early cooperatives were a form of resistance, self-determination, and democracy, as well as a space for education and leadership development (5).
Worker Coops are often more common in other parts of the world, with one of the most famous models in Mondragon, Spain. Founded in 1956 by a Catholic priest, what started as a technical college in the Baque region to teach the trades and solidarity principles, today’s Mondragon Corporation, a federation of worker cooperatives, has grown into the 7th largest corporation in Spain.
Startups vs. Conversions
There are two primary ways to form a worker cooperative, and each has particular legal, financing and planning requirements and challenges.
- Startup cooperative: worker entrepreneurs band together and start a cooperatively owned business from the ground up. Forming a new worker cooperative requires a thorough process of organizing potential worker-owners, conducting a feasibility study, incorporating and setting up articles of incorporation and by-laws, creating a business plan and securing financing, and finally beginning operations.
- Conversion to a cooperative: A business owner sells or transitions the business to be owned by the employees. The owner can do this for several reasons: as an exit strategy when they retire as a mission-driven move to give more power to workers and recognize their value as owners, to enable employees to build wealth and because worker coops have proven to be good business models that are more resilient and successful than traditional business. (6)
The Basics of Worker Cooperatives
Worker Cooperatives are distinct from other businesses because they have:
- Worker/member ownership
- Worker/member control
- Worker/member benefit
Each State has different laws and codes governing cooperative incorporation and ability to operate. Less than a dozen states have cooperative incorporation codes, and as such, most cooperatives incorporate as LLC’s, S Corporations or C corporations (7). Cooperatives are taxed under Subchapter T of the tax code, allowing them to deduct payments made to members above the set salaries (profit is typically distributed among worker-owners).
Cooperatives are legally governed by:
- Articles of Incorporation - establish the cooperative as a legal business entity and dictate how it can operate and be taxed.
- Bylaws - member/owners create the blueprint for how the cooperative will operate.
Worker Coops can have different models of membership, which are delineated in their bylaws. Coops may institute structures such as (8):
- Probationary period for new employees before they can join vs. all new employees are immediately voting members.
- All members must vote on new worker-owners vs. new employees being automatically admitted.
- Workers may vote while purchasing required membership share vs. workers must wait until they are paid in full.
Governance + Management
Each member of a worker cooperative has a vote - and all workers typically vote on major decisions of the business (selecting board of directors, sale, mergers, dissolutions, changes to bylaws, etc.). Other governance groups in a coop can include:
- Board of directors
- Management structure
- Special committees and task forces
Governance - dictates the strategic direction, develops resources and maintains financial accountability and develops leadership within the membership.
Management - implements the governing body’s strategy and fulfills the cooperative's administrative tasks.
Cooperatives have many different governing and management structures often depending on the size and type of business. Some coops have elected board of directors and an elected management structure. Others have a more collective structure where all members are also part of the board of directors, and daily operational tasks are performed by committees of the directors. Coops can also operate with a more hierarchical structure, some even hire management from outside the coop.
Most worker co-ops require an initial share purchase to become a co-op member, which can range anywhere from less than fifty dollars to thousands of dollars (9).
Allocation of Profits
Profits in coops are typically divided into two accounts:
- Collective account - belongs to coop as a whole for reinvestment in the business.
- Each Member’s ownership account - which is further divided between cash and shares.
Any losses also are allocated - usually first to the collective account, and if needed, proportionally to the members’ accounts (10).
Cooperatives typically value the shares held in each member’s ownership account based on the actual dollar value at the time of allocation, instead of trying to figure out the “market rate.” This keeps ownership accessible to more workers.
The bylaws dictate what happens to the assets of the coop if it goes out of business. Some coops divide the assets among the current worker-owners, others include previous worker-owners.
References and Resources
(1) Bronx Cooperative Development Initiative, https://bcdi.nyc/economic-democracy
(2) Certified Employee Owned, https://www.certifiedeo.com/
(3) Democracy at Work Institute, https://institute.coop/worker-cooperative-faq
(4) WorkersControl.net https://www.workerscontrol.net/authors/worker-cooperatives-united-states-historical-perspective-and-contemporary-assessment
(5) Collective Courage: A History of African American Cooperative Economic Thought and Practice, Jessica Gordon Nemhard https://www.psupress.org/books/titles/978-0-271-06216-7.html
(6) Project Equity https://institute.coop/sites/default/files/resources/Case-Studies_Business-Conversions-to-Worker-Cooperatives_ProjectEquity.pdf
(7) Democracy At Work Institute (DAWI) https://institute.coop/worker-cooperative-faq
(8) Northcountry Cooperative Development Foundation https://institute.coop/sites/default/files/resources/372%202006_NCDF_worker_coop_toolbox_0.pdf
(9) Northcountry Cooperative Development Foundation https://institute.coop/sites/default/files/resources/372%202006_NCDF_worker_coop_toolbox_0.pdf
(10) Northcountry Cooperative Development Foundation https://institute.coop/sites/default/files/resources/372%202006_NCDF_worker_coop_toolbox_0.pdf