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For Profit vs. Non-Profit (page link)

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Worker Co-ops

From: Melissa Hoover, USFWC <usfwc@techforpeople.net> Date: Aug 22, 2006 11:21 AM

You will probably have to do what worker co-ops across the country have done with these statutes - incorporate under them even though they are not written expressly for worker-ownership. You will need an incorporation lawyer to do this correctly - the devil is in the details - but basically this means you define the workers as members and follow the statute's provisions for distributing surplus as patronage. Then you write the democratic self-management and governance part into your bylaws to guide the functioning of your business. At least, this is how it's done in California.

I would advise you to contact local counsel to proceed with the incorporation. Particularly if you will be the first and will be providing a model for future incorporations, I wouldn't go the DIY route on this one. Because incorporation lawyers are quite expensive, I have couple ideas:

1. Do all the research yourself. Find the statutes and read them carefully. Find any other, similar entities to the model you're proposing. Contact your local consumer co-op (is that Wheatsville?) and ask to get a copy of their bylaws or talk to someone who has experience there with incorporation. The previous experiences of other businesses can be incredibly valuable, especially for anticipating roadblocks and problems. I can help you find bylaws and models form other worker cooperatives, but you will need to focus on Texas entities because each state's laws are unique.

2. Contact local law schools and ask about working with students in their law clinic, especially if they have a business or community economic development law clinic. This incorporation could be a great project for a law clinic student, and if you have the research and questions prepared clearly, they'll be more likely to take you on. The UT Austin law clinic is at: http://www.utexas.edu/law/academics/clinics/ and they may be able to refer you to others if they can't help.

As for seed capital, I have a bunch of resources, all of which are also listed on the www.usworker.coop site. Have you written a business plan? That's the first step to getting funding...

Have you thought about working with the local organizations who will be your partners - to do some grant-based fundraising? (If they have 501c3 status, that's even better.) There are foundations out there who are interested in supporting social enterprise collaborations between nonprofits and small businesses. In fact, I think this is a growing funding trend.

What is a Worker Co-op?

A worker cooperative is a business owned by the workers. Workers are accepted as cooperative members according to criteria set by the cooperative, by working in the business, and through the purchase of a membership share. Each member of the worker cooperative becomes an owner with rights and obligations, including participating in workplace decisions, contributing labor and skills, and receiveing an equitable share of profits. Some worker cooperatives hire employees who are not members.

Worker cooperatives apply the general cooperative principles distinctively trough a set of worker cooperative principles which specigy theat worker-members:

1. take the full risks and benefits of working in, owning, and operating their cooperative business; 2. equitably contribute to and benefit from the capital of their cooperative; 3. decide how the net income, or net losses, are allocated; 4. govern and control the enterprise on the basis of one member-one vote, by consensus decision making, or other democratic structure; 5. work together (as opposed to being independent contractors) in a commonly owned business.

Worker cooperatives are unique both as cooperatives and businesses. They provide the worker-members with employment and income along with the ownership and control of the enterprise. Through their ownership and control, the worker-members receive a fair share of the profits and enjoy workeplace democracy. Worker-owned cooperatives are found in many countries and all business areas, including manufactureing, services, ship-building, food products, restaurants, computer software, engineering, reforestation, construction, and many other industries.

Distinguishing the Worker Co-op

1. A Worker Collective is generally a worker cooperative that utilizes consensus decision making. Similarity of members in every sense (pay, authority, etc.) is the hallmark of the collective. Decisions are approved by unanimous support (some collectives do allow votes of a two-thirds or other supermajority under certain conditions).

Texas State Law

when you've got the time check out the cooperative association act:

http://www.sos.state.tx.us/corp/index.shtml

cooperative corporation statute.

http://www.hal-pc.org/nonprofit.html.

$25 for non-profit $300 for for-profit

I think the non-profit in Texas is what we should go with - using that as an inroad to 501(c)3 foundation status. If you read the 202 boc.doc Article 3 you will see that it mentions a board of directors, but also mentions the following section of the texas business organization code:

§ 22.202. MANAGEMENT BY MEMBERS. (a) The certificate of formation of a corporation may vest the management of the affairs of the corporation in the members of the corporation. If the corporation has a board of directors, the corporation may limit the authority of the board to the extent provided by the certificate of formation or bylaws. (b) A corporation is considered to have vested the management of the corporation's affairs in the board of directors of the corporation in the absence of a provision to the contrary in the certificate of formation, unless the corporation is a church organized and operating under a congregational system that: (1) was incorporated before January 1, 1994; and (2) has the management of its affairs vested in the corporation's members.

Acts 2003, 78th Leg., ch. 182, § 1, eff. Jan. 1, 2006

Information from Mona

8.18.2006

Mona's boss's advice is to file for tax exempt status as a private foundation, and not a for profit business. The paperwork isn't that extensive in Texas and you shouldn't have too much of a problem filing with the federal government either. Being a non-profit doesn't mean, however, that you can't have earned income, like if you want to reserve some of your profit at the end of the year for instead of funneling it out to other organizations, you can do that. As long as you keep that money for activities related to operations it's still tax exempt. You can also begin operations as a 501c3 before you receive your determination letter, as long as you're above board that your 501c3 status is pending.

One thing you should know, however, is that you won't be eligible for many grants at all, so you shouldn't really take that into consideration when deciding what you want to do. I saw from one of the e-mails that you were looking at grant opportunities from Public Welfare, which is a fund the firm I worked for this summer actually wrote a proposal for earlier in the year. You all won't be eligible for things like that because you don't actually perform any services, you just put money into different organizations. Most foundations look to fund direct services or technical assistance to other non-profit groups. While there is a limited amount of money for pass-through funding, which from what I understand is what you want to do, it's rare that a foundation would give another organization money to give to a second organization when it could just fund that second organization itself.

8.19.2006

a private foundation isn't a for-profit business with a non-profit branch, though that's definitely something you could do if you wanted to. the ford and gates foundations have for-profit components, like you said, but they could exist independently as non-profit foundations. both options are available to you all. the difference between a foundation and a non-profit can sometimes be fuzzy, but the biggest distinction is that a conventional non-profit will provide some type of service, like providing meals to the homeless or free AIDS testing or what have you. a foundation just doles out money to organizations that provide services. i hope that answers your questions. im still trying to figure out if there's any way you guys could get public charity status--that would be ideal, because it provides the most tax exemptions to you, and, at least from my perspective, it's the least complex.

Incorporation

Corporation from Texas Secretary of State Guide to Starting a Small Business

A corporation (Subchapter C or S) is created when two or more individuals, partnerships, or other entities join together to form a separate entity for the purpose of operating a business in the state. A corporation has its own legal identity, separate from its owners. The corporation offers protection to the business owners’ personal assets from debts and liabilities relating to the operation of the corporation. Taxation of the corporation varies depending on the type of corporation formed. A corporation must be registered with the Secretary of State.

A Subchapter C Corporation is taxed at a higher rate than an individual. The owners are not taxed personally for profits; however, the owners do pay personal taxes on any salaries and/or dividends, and the corporation is also taxed on the profits.

Owners of Subchapter S Corporations may deduct business losses on personal income tax returns, similar to a partnership. The Subchapter S Corporation also offers alternative methods for distributing the business income to the owners.

S Corporation

from Wikipedia S Corporation Article

Unlike a regular C corporation, an S Corporation generally pays no corporate income taxes on its profits. Instead, the shareholders in the S corporation pay income taxes on their proportionate shares, called distributive shares, of the S corporation's profits. Shareholders pay the tax regardless of whether the S corporation pays out money or not. The FICA tax need only be paid on employee income and not on profit distributions. Additionally, employees must be paid a reasonable wage for their position within the company to avoid any potential tax implications.

S corporations that have previously been C corporations may also in certain circumstances pay income taxes on profits that were earned when the corporation operated as a C corporation.

Example: Widgets Inc, an S-Corp makes 10,000,000 in net income and is owned 51% by Bob and 49% by John. On Bob's personal tax return, he will report 5,100,000 in income and pay taxes on this income. John will report 4,900,000 of income on his personal 1040 return and pay taxes on this income. If for some reason, Bob (as the majority owner) decides not to distribute the money, both Bob and John will still owe taxes on their distributive shares, even though neither received any cash distribution. (Typically, S corporations use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares.) They will also be required to pay their FICA tax, currently 15.3 percent, on any salary paid, following the rules of the FICA Tax. Keeping it simple, we'll assume they both pay themselves 94,200. Their FICA Tax liability will be 14,412 each. The distribution of the additional profits from the S-Corp will be done FICA Tax-Free. Their total tax savings will be approximately 603,000, or 6.15% of their income minus their salaries.

C Corporation

from Wikipedia C Corporation Article

A C corporation is a form of corporation in the United States that meets the IRS requirements to be taxed under Subchapter C of the Internal Revenue Code. It is also known as "C corporation" or "C-Corp". Most major companies are incorporated under a C corporation. After the corporation is created it becomes its own entity and has an indefinite lifespan as long as the yearly filing fee is paid.


Lemonade Stand Examples

non-profit vs. for-profit

"Nonprofit structure hampers nonprofits' ability to compete with for-profits in the commercial realm. Most often people point to the disadvantage that a lack of personal equity in a nonprofit engenders. Your for-profit lemonade stand can snag a million-dollar contract if you can find another $100 in the next month to buy the juicing machines it will take to meet the contract. You're tapped out, but it's a cinch to raise the money—you can offer practically a guarantee that someone's $100 investment will return to him as $200 in a month. Your nonprofit lemonade stand has the same opportunity, but you're not allowed to capitalize—you can't artificially and immediately increase your assets through investment. You'll have to grow the business by $100 through your programs and your fundraising, and by the time you do (six months? a year?) the opportunity has passed." from The Nonprofit Motive

non-profit/for-profit hybrid

"Imagine a third lemonade stand. Under current law and code, this lemonade stand can't exist. But let's pretend: This lemonade stand is a for-profit, wholly owned and controlled by you, selling lemonade at a large margin and supporting your stripper and candy habits. But you're a socially conscious person, and recognize the need in your community for education about lemonade's heritage. So you start a program where once a week you bring in at-risk minority youth, offer them free lemonade, and invite guest lecturers to speak on lemonade's pertinence to at-risk minority youth. You apply to the IRS to have this one program within your business—this one line item in your budget—granted a tax exemption under section 501(c)3. So while the lemonade stand as a whole continues to operate like a for-profit, the education program you're running can operate as a nonprofit (this is the part that doesn't exist yet). You can convince your lemon suppliers to donate goods, knowing they'll be tax-deductible. You can write grants to support the program. You can mail cards for the program at nonprofit rates. You can convince patrons in the area to support the program with donations. Because there's the danger of you personally profiting from this program, you hire an accountant to conduct an extra audit at the end of each year, proving that none of the donated monies, and none of the monies generated by the program, ended up in your pocket—they'll need to go right back into supporting the program. But the key is that for this one program within your for-profit organization, you maintain a classification as a tax-deductible charitable purpose—the golden ring of charitable deductibility." from The Nonprofit Motive

For-Profit Hybrid Idea (Thrift Shop Only)

The thrift shop could be a for-profit business the who in "who's the profit for" being the organizations or groups that we choose to support as well as future anarchist businesses folks in our networks needed seed money for. Here's a draft of how it might work.

The thrift shop incorporates as a straight-up for-profit or as a worker-owned cooperative revised to work with a volunteer counsel and volunteer network.

After incorporation as a for-profit the thrift shop then goes about setting up a non-profit however it is legally possible. This non-profit ends up redistributing all of the profits after expenses, thrift shop merchandise, and whatever else folks decide needs to be redistributed.

  • We need to determine what the break-down of after expenses net profit redistribution looks like.
    • We should save some money for emergencies
    • We should save some money for future business start-ups.

Cons (vs. simply incorporating as a non-profit)

  • we pay state and federal taxes (some of which goes to useful gov projects and a lot of which goes to stuff we probably don't agree with)
  • we appear to be a fairly standard capitalist corporation (even as a worker-owned coop) - in that we could just be making money for the sake of making money
  • at some point bylaws could be rewritten to make redistribution smaller or non-existent (not a problem with a non-profit trying to remain a non-profit)

Pros (some of these aren't outside of the non-profit arena)

  • we can push the co-op model to the radical side both in law and practice
  • anarchist infrastructure (the sum total of alternative model businesses, etc.) gets big while autonomous anarchist federated collectives (the businesses themselves) stay small (size seems to be a huge factor in maintaining a democratic system)
  • we don't have to tread lightly on issues of political support if we so desired


For-Profit Hybrid Idea (General)

The thrift shop could be part of a for-profit organization/federation with the who in "who's the profit for" being the organizations or groups that particular business chose to support (there would be federation guidelines that businesses that wanted to be a part of the federation would have to follow. Here's a draft of how it might work base on the thrift shop.

The thrift shop incorporates as a for-profit, possibly as a worker-owned cooperative revised to work with a volunteer counsel and volunteer network.

After incorporation as a for-profit the thrift shop then goes about setting up a non-profit however it is legally possible. This non-profit ends up redistributing capitalist points, thrift shop merchandise, and whatever else folks decide needs to be redistributed.

  • We need to determine what the break-down of after expenses net profit redistribution looks like.
    • We should save some capitalist points for emergencies
    • We should save some capitalist points for future business start-ups.

When we or other folks propose a new business (examples: a grocery store, a bicycle shop, a bank, or any business that can operate on a socially responsible model) we jump to the next level of incorporation as a federation. The federation has a name unto itself (Shining Path Federation for the Resistance of Oppression and Greed) and the thrift shop, the non-profit wing, the bicycle shop, the bank, and/or whatever else comes into existence are all autonomous subsidiaries within the federation. The federation acts as a system checking on each organization to see if members are being treated with respect according to a set of guidelines and priciples to certify each organization yearly and give organizations that fail to meet such standards probationary periods to get themselves together or GTFO.

Cons (vs. simply incorporating as a non-profit)

  • we pay state and federal taxes (some of which goes to useful gov projects and a lot of which goes to stuff we probably don't agree with)
  • we appear to be a fairly standard capitalist corporation (even as a worker-owned coop) - in that we could just be making money for the sake of making money
  • at some point bylaws could be rewritten to make redistribution smaller or non-existent (not a problem with a non-profit trying to remain a non-profit)

Pros (some of these aren't outside of the non-profit arena)

  • we can push the co-op model to the radical side both in law and practice
  • anarchist infrastructure (the sum total of alternative model businesses, etc.) gets big while autonomous anarchist federated collectives (the businesses themselves) stay small (size seems to be a huge factor in maintaining a democratic system)
  • we don't have to tread lightly on issues of political support if we so desired


Radicalcoopthriftstore

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