Lesson 2 of 3

How Worker-Owned Cooperatives Work

Amy August 27, 2021

Here’s a good clip from https://www.businessnewsdaily.com/10117-worker-cooperative-coop-owner.html:

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.”