Panel Encourages Courageous Solutions to Economic Issues

By Ken Lund from Las Vegas, Nevada, USA [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

Brandeis school of law featured Dr. Jessica Gordon Nembhard, Professor Ariana R. Levinson, and Sadiqa Reynolds for a lunch time panel discussion about cooperatives. Dr. Gordon Nembhard is an expert on the history of black-owned cooperatives. Her book, Collective Courage, is a groundbreaking study of the history of African American owned cooperatives. Prof. Levinson is an internationally recognized labor and employment law scholar with a background as a labor lawyer. She has recently published articles on worker and union cooperatives. Sadiqa Reynolds is the first female CEO of the Louisville Urban League. She was previously the Chief for Community Building for Mayor Fisher. The discussion, with nods to the history of cooperatives, hinged on the possibilities for building a better economy with cooperatives.

Dr. Gordon Nembhard’s book explores the relationship of the fight for African American civil rights and movements for African American ownership of cooperatives. African American cooperatives can trace their origins to before ‘cooperatives’ were even an organizational concept. They grew out of mutual aid societies that paid funeral or medical expenses out of members’ pooled money. The first step, she said, to starting a cooperative is for a group of people interested to sit down together and form a study group. After a period of self-education, history has proven it is possible to create lasting and meaningful institutions. The movement continues today across the nation in urban and rural places, and advocates such as herself continue to work for recognition by institutions that might incubate, or even encourage, cooperatives as a vehicle for organizing members to solve their mutual problems. Cooperatives, she explains, fail at a lower rate than other business entities because of community buy-in and the financing structure. Cooperatives can build wealth for a community and function at a profit that would not be attractive to a large corporation, but that produce good returns for community investors.

Professor Levinson pointed out that whether the cooperative stays in business for one year or five, the benefits to the community are real and will continue into the future. A worker cooperative, for example, that hires immigrants or previously incarcerated people will educate workers on how to start and manage a business. Workers, even if they are not able to stay with the cooperative until retirement, leave with job skills. Cooperatives, though not as widely recognized as corporations or nonprofits, exist in Kentucky and surrounding states. They exist in the technology, agriculture, food and other industries. A community that supports a cooperative even for a brief period of time will be improved because of the experience of working together. She pointed out that people from all backgrounds are useful for creating modern cooperatives, whether they are knowledgeable of finance or have creative skills.

Sadiqa Reynolds reacted to the conversation by imagining the uses of cooperatives as a remedy for problems in the city. She imagines not only solving food access disparities in West Louisville, but creating a cooperative to train workers for the jobs available in the city. She encouraged folks not to let the people off the hook who are responsible, pointing out a history of redlining and other overtly racist social institutions have resulted in the economic disadvantages cooperatives might be formed to address.

The event, hosted by the Anne Braden Institute for Social Justice Research, the Louisville Food Co-op, the Louisville Independent Business Alliance, the Louisville Urban League, the Muhammad Ali Institute for Peace and Justice, New Roots inc. and Fresh Stop Markets, Sowers of Justice and the UofL Office of the Vice Provost for Diversity and International Affairs, was an important step toward Louisville considering what local ownership would accomplish. At a time when the investment and opportunity disparity between East and West Louisville has been made obvious, where urban grocery stores are becoming steadily more rare, when the rest of the 99 percent is increasingly confident mega-corporations are not here to serve US, it is a good time for Louisville to imagine what an economy that shares our values would really look like.

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March 7, 2017 · 9:03 am

If it Looks Like a Business and Quacks Like a Business

For people interested in local, authentic economies, nonprofits are one of the most attractive features of the local institutional environment. Across the nation, around 1.5 million of them pay 9.2 percent of the wages in the country and account for 5.3 percent of the GDP. (National Center for Charitable Statistics). At least one mission-driven entrepreneur a month comes to my office to talk about a service or good they want to provide differently than how it is provided in a more profit focused way. It can be hard, sometimes, to give these clients an answer because they pass the basic, well-known tests for nonprofit status (like not “profiting”), but may fail to receive exemption because of the commerciality doctrine. This post explains briefly why some of these organizations will not qualify as exempt organizations and give some of their options for achieving tax exemption by organizing as a cooperative.

Courts developed the commerciality doctrine over time in opinions interpreting exempt organization tax law. Underlying it is an assumption of US capitalism that for-profit businesses are the default and nonprofit entities are gap-fillers. Nonprofits, according to the doctrine, should not be allowed to unfairly compete with for profit entities serving the same purpose. (Bruce Hopkins. The Law of Tax Exempt Organizations. Pg 114. 2016). The commerciality doctrine is, in short, that if an organization looks like a for-profit, and acts like a for-profit, then it probably is for-profit.

Some entities whose revenues come entirely from fee for service payments can qualify for nonprofit status, even 501(c)(3) public charity status. (IRS Internal Revenue Manual). Museums and zoos would easily qualify. They’re providing an educational, service to the public. This is allowed even though art galleries and circuses arguable provide a similar purpose on a for-profit basis.

On the other end of the spectrum, are entities that are too similar to their for-profit coutnerparts, and therefore do not qualify. For example, Congress decided in 1986 to deny exempt status to insurance companies that behaved similarly to for-profit companies and engaged in competition. (Hopkins, 114-15). Recently, there has been lobbying by the banking industry to disqualify credit unions from exempt status. (Time, 2013). Exemption for hospitals is an older, but still evolving questions. (Baker Tilly, 2016).

The doctrine allows the IRS or courts disqualify an entity from exemption when the entity is operated in a way similar to how a for-profit entity is operated. (Hopkins, 127). A leading case involved vegetarian restaurants and health food stores operated by the Seventh-Day Adventist Church. (Living Faith v. C.I.R., 950 F.2d 365, 7th Cir. 1991). In that case, the court looked at the following factors:

  • Manner of operations. If the entity’s primary activities constitute a business, it weighs heavily against granting exemption. The court analyzed the entity’s balance sheets and looked at stipends paid to “volunteers”
  • Competition with commercial firms,
  • Prices set at market rate
  • Advertising and use of commercial catch phrases to attract customers.
  • Lack of plans to solicit donations from the public, no record of receiving donations.
  • High gross profits,
  • Hours of operation competitive with for-profit counterparts

In a later case, the court found major actors to be taken into account are:

  • Competition with for-profit entities,
  • Extent and degree of low-cost services provided,
  • Pricing policies,
  • Reasonableness of financial reserves. (factors quoted from Hopkins, 124).

Using Cooperatives Instead

The sound of tax-exempt is music to the ears of almost anyone. People attracted to a nonprofit model are also excited to meet needs in their community they see going unmet. Though not nearly as common in Kentucky as nonprofit organizations, cooperatives offer are tax exempt at the entity level for business done with members (all business in the case of an agricultural cooperative) and also historically stand for a commitment to improving the community.

Cooperatives are tax-exempt at the entity level. Various theories have been advanced to explain why the rule is different for cooperatives and corporations, but a personal favorite is that since cooperatives are formed by members to meet their needs any operating profit belongs to the members. The cooperative does not pay taxes on money distributed or promised to be distributed to members. Members are taxed when when the money is disbursed, but the entity itself is not.

For example, consider a group of design and marketing experts who want to provide services to nonprofit businesses. Chances are, the services  are going to look and function a lot like their for-profit counterparts. The commerciality doctrine is going to create some level of uncertainty for the founders considering whether to be nonprofit, and they are going to have to consider how much to compromise their business ideas to increase their chances of qualifying for nonprofit status. Instead of trying to squeeze their business into a nonprofit mold, they should instead consider forming as a cooperative. Business with members would be the labor put into the cooperative. Wages, as with a nonprofit, would be taxed, but then profit distributed to members would only be taxed once, at the time the individual receives the money.

While the public cannot write off deductions to a cooperative on their taxes, cooperatives can still use crowd funding if they put in the work. Money from the cooperative, unlike in a nonprofit, can flow back to owners and investors. Most importantly though, a cooperative is expected to be operated for commercial purposes. Owners will know they are not violating federal tax law when they expand into new opportunities. For close cases, organizing as a cooperative will allow founders to build the business according to their goals and not accept limitations likely to conflict with their business plan.

To further illustrate, here is a list of organizations denied exempt status to organizations because of the commerciality doctrine that would work well as cooperative businesses:

  • An entity that sales health insurance for insurance companies. As a cooperative, insurance companies would be the member/ owners.
  • An entity that to provide rest and relaxation to caregivers of chronically and terminally ill individuals. Structured as a cooperative, member/ owners would be caregivers.
  • An entity that facilitates home health services for a fee. Member/ owners would be users of health services.
  • A paratransit or transit service provider to healthcare organizations to assist their elderly and disabled clients for a market rate fee. As a cooperative, the health care organizations, or the elderly and disabled people using the service, or both could serve be member/ owners.
  • An internet service provider providing access through wireless internet (because it benefited for-profit companies that facilitate internet access by enhancing their ability to attract customers). The cooperative would be owned and managed by the for-profit internet access companies.
  • Administrative service provider for nonprofit entities. The nonprofits would own the cooperative.
  • An entity that provides travel services for synagogues nationwide. (entities denied exempt status from Hopkins, 125).

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Filed under Cooperative economy, Nonprofits

Limited Cooperative Associations in KY

People often ask me if there is a Kentucky Cooperative Statute. People are shocked when I tell them there are 2 distinct cooperative statutes in the state. The newest KY Cooperative statute, the Uniform Limited Cooperative Act, authorizes creation of Limited Cooperative Associations (LCAs). LCAs are a hybrid entity type taking parts of the old, traditional cooperative statutes and modern, Limited Liability company statutes. LCAs respond to limitations preventing use of modern financing techniques common to capital intensive businesses, whether tech, agricultural, or industrial. Kentucky enacted the statute in 2012. It is codified as KRS 272A (but at the time of publishing is not posted on the internet).

Concretely, the statutes allow investors, who historically had no say in matters of cooperative business management, to take a limited role in management. This and other alterations to the traditional cooperative statute, KRS 272, have some worried the cooperative statute will dilute traditional cooperative protections intended to keep the organization independant. (Pitman, 2008). However, considering the up front investment requirements for starting a business, it is obvious why a group would be interested in attracting investors. The statute is also a natural choice for multi-stakeholder cooperatives where more than one group will be considered a patron, or in situations where a nonprofit wishes to incubate development of cooperative and exercise some control over its management.

The statute is significantly more detailed than the traditional cooperative statue. Provisions require in detail records required to be maintained by the cooperative. (KRS 272A.1-120). Clear provisions for organization are specified, along with requirements for bylaws. (KRS 272A.3-020-030). Procedures for amending organic rules (collective term for bylaws and articles of association) are also clearly delineated. (KRS 272A.4). These, though, are issues cooperatives used to fill in with reference to corporate statutes and not likely to be unfamiliar. One potentially important change is a LCA can have as few as 3 directors if there are more than 3 members, and fewer if there are fewer than 3 members.

More substantively, the ULCA statute creates protections for patrons (the primary users of the service provided by the cooperative) and procedures for dealing with classes of members who have naturally conflicting interests. The statute requires amendments to bylaws or articles of association that disparately affect one class of member to be approved in the discrete group by a majority or supermajority depending on the specific issue. (KRS 272A.040(1)). Additionally, a majority of patrons, where there are investor members, must vote to approve amendments to articles of association or bylaws.

Patrons are further protected by provisions restricting who may be on the board of directors. The statute requires members to occupy approximately ⅓ of the board with specific provisions for boards smaller than 9 people. (KRS 272 A.8-030). Furthermore, patrons must elect a majority of the board, and specific provisions require a significant patron representation on the elected board. (KRS 272.A.8-040).

Patron rights to a share of the profits are also mandated. Where there are investor members, those members may not receive an allocation of profits greater than 50% of the cooperatives total profits. (KRS 272A.10-040(3). When thinking about profits and losses, it is important to consult with an accountant.  LCAs, unlike traditional cooperatives, are taxed under Subchapter K as partnerships, not under Subchapter T which is traditionally applied to cooperatives. Naturally, this post should not be considered legal advice. Please talk face to face with a lawyer before starting your LCA.

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Filed under Kentucky Limited Cooperative Associations

Share Fest 2016

2016-04-10

Share Fest 2016 was an amazing celebration of organizations devoted to sharing resources. Co-housing Louisville was there seeking 6-8 people to buy a house together. The Louisville Area Intentional Communities Incubator was there in furtherance of its mission to find a way to bridge the gap between the dreams of intentional communities (or communities designed to pool resources and provide a tight, durable social network). LVL 1, a collective ‘hackerspace’ where people share tools and know-how to “create/ destroy/ hack” was teaching people to solder bright LED lights onto a fleur de lis sign. The Louisville Free Public Library had a Makey Makey plugged into 5 bananas letting people play CDEFG on banana keys. And of course, the Louisville Time Bank, the event’s host, was there inviting people into their vibrant and friendly community of individuals focused on building a supportive alternative economy.

Setting up a table to talk about cooperatives with Elizabeth Jones gave us the perfect opportunity to learn how creative and entrepreneurial the city really is. A young man who started Stronghold Chess Club, with a mission to put “Chess on every porch, in every park, and in every heart, explored what a chess cooperative would look like with us. A West End group in the process of forming a food cooperative talked to us about the union cooperative model, a model combining the strengths of local level cooperative management with larger scale labor union negotiating power. Someone else told me about plans to turn a house she owns into a hang out place for retired people.

The event left me with the clear impression Louisville is on the verge of something big. Large scale solutions are great, but they leave too many people and too many needs out of the equation. Right-sized entities like those represented at Share Fest are the best hope for filling the gaps and helping people understand fairness in our economy.

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Filed under Cooperative economy