A Simple Approach to Organizing
a Learning Co-Opby Laddie Lushin, Esq
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Abstract
This article, with the attached model organizing document, presents a convenient and low-cost approach to the formation of a cooperative learning society. The option presented is that of an unincorporated co-op. It is intended primarily for small groups that do not deal with the general public and have minimal property needs. It is, however, potentially of wider applicability. This option offers both advantages and disadvantages which should be carefully evaluated. Complications arising from special circumstances and some other possible approaches to legal structure are briefly discussed. What is a cooperative learning society?
In its most general conception, a cooperative learning society may be said to be a group focused on autonomous learning, dedicated to alternative social values, and run by and for participating individuals or families. Cooperative learning societies are at a very preliminary stage of development, and their activities would be expected to vary widely. The simplest might merely facilitate the sharing of information and other resources and the provision of mutual support. Another useful function might be group buying of books, software, scientific instruments, and other learning tools. The most elaborate might operate an alternative school, perhaps even a cooperative community founded on principles of alternative learning. At this stage of development, the activities of learning societies are limited only by the imaginations of its participants.
An organization that is merely a mutual support group should require no organizing document, and generally may safely ignore tax laws and government regulation of all kinds. Only if the group engages in financial transactions of more than a nominal character does it need to consider a more formal organizational structure and to pay more attention to legal details. The possibility of charitable status
An important possibility that should not be overlooked in the first instance is that of a charitable and educational organization. If the purpose and function of the organization is exclusively educational in nature, it could qualify under IRC sec. 501(c)(3). It would thus avoid federal income taxes on net earnings that were related to its exempt purpose. And, in most jurisdictions, state income taxes and possibly other taxes as well may be avoided. The most significant advantage of charitable status is that it facilitates receipt of grants and contributions to support its activities. This fundraising advantage may make charitable status particularly advantageous to a group wishing to establish an alternative school.
These and other advantages of charitable status, however, come at a high price. It is never easy or inexpensive to secure such status, and it gets increasingly more difficult as one moves farther away from conventional ways of doing things. And once the status is secured, actually getting grants and contributions presents a whole new challenge in what has become a very competitive fundraising environment. Charitable status also brings with it many limitations and restrictions upon operations, and may require detailed and intrusive reporting obligations. If you wish to pursue this option, you will probably need specialized legal assistance. Although a charitable organization need not be incorporated, it needs to be carefully planned and it requires very specific language in its organizing document. The model presented in this article in no way meets these needs. Advantages of a co-op structure
A group that needs or desires a formal organizational structure other than as a charitable organization ought to seriously consider a cooperative. In the broadest sense, a co-op is democratic association for self-help. More specifically, it has been described as a voluntary association of persons organized to furnish themselves an economic or other service under a plan that provides for democratic ownership and control by its user-members and that distributes its benefits or gains to its members in proportion to their use of its services. A co-op is diametrically opposed to the investor-controlled, profit-seeking organizational model that predominates in our society. It would seem to be a natural fit for a learning society.
Surprisingly, this alternative form of organization has unique legal advantages available to it. Co-ops enjoy limited exemptions and special rules regarding securities, antitrust, unclaimed property, taxation and other laws. One of the most significant advantages is that, through the use of patronage dividends, a co-op may eliminate taxable income that is directly related to its purpose by allocating it to its member-patrons, even if only a small part of the allocation is currently distributed in cash. Such allocations are not taxable to recipients who use co-op services for "personal, living, or family items"--which should include all member-patrons of a learning co-op. The net income of the co-op can thereby be made taxable neither to the co-op nor to its members. Indeed, a patronage dividend-paying co-op that avoids any extraneous income may thereby completely avoid corporate income taxes. Using these legal and tax advantages requires some amount of legal or other professional assistance.‘ Advantages of an unincorporated co-op
If a cooperative structure is desirable, one is usually directed to the state's cooperative incorporation statutes. The co-op statutes of the various states are all unique, and many states have more than one such statute that might possibly apply to a learning co-op. The articles of incorporation of a learning co-op in one state is of little or no use to a co-op in another state. You really need a lawyer who is knowledgeable in cooperative law to help you sort out the various options, choose a structure that is appropriate for your organization, and avoid a maze of legal pitfalls.
But a learning co-op that is operated on a small scale and will have minimal dealings with outside parties does not necessarily need to be incorporated. There are unique advantages to not being incorporated:
- An unincorporated co-op lends itself much more easily to the use of a model organizing document since it is based upon common law rules, and is only minimally or not at all affected by state statutory requirements. This may save considerable time and legal fees.
- It is considerably less expensive because no documents are required to be filed with the state to set up the organization, report on current activities, maintain its existence, or make fundamental changes--thus avoiding a wide range of filing and franchise fees and, of course, legal fees.
- There is virtually unlimited freedom in designing internal structure and procedures because the organization is not constrained by rules set out in a governing statute, and the courts will generally not interfere in the internal affairs of the association.
- Although there is a large body of case law establishing tax advantages for an unincorporated co-op that distributes patronage dividends, the co-op is not subject to the onerous statutory requirements that are applicable to cooperative corporations, nor is it required to file tax information returns on such distributions.
Disadvantages of not being incorporated
There are, of course, disadvantages to not being incorporated. The major disadvantages, in the context of a learning co-op, are the following:
- There is very little in the way of limitations on the personal liability of members to outside parties. This factor is very important, but it tends to diminish in significance if the co-op does not deal with the general public and has minimal property needs.
- There is no immunity of co-op property from levy for the personal debts of members. In a small learning co-op, this problem would seldom be expected to have any real import.
- Under common law, a conveyance of real property may not be held in the name of an unincorporated association. But, if it becomes desirable for a learning co-op to own real property, this may be rather easily accomplished by the use of a trustee to hold title for the use and benefit of the co-op.
- Under common law, an unincorporated association is said to lack capacity to enter into contracts in its own name. This limitation, however, is more theoretical than real. To preserve its legal rights in a contract, the co-op may simply use an officer or other member as a contracting agent to act on its behalf under a written authorization -- not substantively different from what a corporation would do. Furthermore, a party who deals with the co-op and receives a contractual benefit (which is always and necessarily the case) is estopped from denying the right of the co-op to enter into a contract.
- Under common law, an unincorporated association cannot have perpetual existence. It does, however, continue for its specified duration despite the admission and withdrawal of members. The association is also said to have the right to preserve its existence as long as its function survives.
- Historically, there has been a problem with the capacity of an unincorporated association to be a party to litigation in its own name. But a majority of states now allow such an organization to sue or be sued in its own name or, less frequently, in the name of specified officers of the association.
- In some states, an unincorporated association is prohibited from using the word "Co-op" or "Cooperative" in its name.
The most significant among these disadvantages is the absence of limitations upon the personal liability of members as is available under the corporate form of organization. There are two principal areas of concern. The first is the problem of members being held liable for the actions of one or more other members that causes loss or injury to another, i.e., liability for torts. In general, however, to be held liable for the tortious acts of another the action must be within the purposes of the organization, or the member must have participated in the action or assented to or ratified it. The significance of this potential problem tends to diminish as the co-op's dealings with the general public are minimized or avoided. Also, this problem may be addressed more directly by obtaining adequate insurance coverage.
The second major source of potential liability of members is for debts incurred by the co-op which cannot be paid from co-op funds. Again, for members to be held liable for such contract obligations, the debt must be necessary to carry out the purposes of the organization, or the member must have participated in or agreed to the action. If liability is thus established, the creditor can collect the debt from any or more members who must then collect from other members their ratable shares, if they can. The significance of this potential problem tends to diminish the smaller is the co-op's needs for property, equipment, and other outside resources. If this type of potential liability exists, the best way to avoid it is by prudent decision making.
A related problem is the lack of immunity of co-op property from levy for the personal debts of members. But here there are many obstacles for creditors to overcome. First, they would have to find the co-op and its property and make the connection that this property may be available to them. Secondly, the property would have to be sufficiently valuable and easily convertible to cash to attract and maintain their interest in it. And thirdly, they could take no more than the debtor's interest in the property. It would have to be an unusual learning co-op in which this would be more than a theoretical problem.
If only because of the liability issue, there is certainly a point at which the scope and complexity of co-op activities would dictate the advisability of being incorporated. Certainly this is true of a co-op operating an alternative school. A possibility that should not be overlooked, even for a co-op that plans or hopes to have extensive operations, is to start out as an unincorporated co-op with the expectation of becoming incorporated when the circumstances warrant it. The model organizing document
Recognizing that no one approach--much less any single document--could ever accommodate all organizational circumstances or all peculiarities of state laws, the appended articles of association are offered as a potentially helpful starting point. The model assumes that a cooperative structure is desirable and that unincorporated status is appropriate.
The document obviously requires some tailoring to the circumstances of the co-op. The most obvious of such changes are blanks that require the addition of specific information and provisions that are unlikely to be of general applicability.
Name: In addition to adding the name of the co-op, you might also need to change the word "Co-op" if the laws of your state limit the use of this name to types of organizations that do not include your co-op. In that case you might consider "Society," "Association," "Collective," etc There are other articles may be changed to better accommodate the particular circumstances of your co-op without jeopardizing the status and effect intended by the document as a whole. This is particularly true of Arts. V, VII, VIII and XI(iii). In general, however, it is inadvisable to tinker with the legal language that appears throughout the document except on the advice of a lawyer who is knowledgeable in this area of the law.Art. I: The purpose clause has deliberately been made very general. The first sentence of this article may therefore be altered or made more specific.
Art. III: A duration of ten years was arbitrarily chosen as a good reasonable number. Another number may be substituted as circumstances may dictate. If the co-op is still in existence at the end of the designated period, the articles of association may then be re-executed. The fiscal year end should generally be a month in which activities are expected to be minimal.
Art. XIII: In most cases the state whose laws are to govern will be obvious. If, however, the co-op has no fixed office or place of business and its members have different states of residence (as might be the case near a border between states), this may present an opportunity to choose a state with more favorable rules. This would probably require legal assistance.
It may be desirable for the co-op to compensate members for their labor services. Typically, this situation may arise where the activities of the learning co-op require labor services other than those contracted from outside parties, and this burden cannot be divided equally among members. An advantageous way of doing this is for the contributed labor of members to be compensated through patronage dividends, i.e., income is apportioned to contributed labor on the basis of hours of work. If the co-op is appropriately structured and properly operated, it may thus legally avoid employment taxes and related returns. This, however, is a more complicated situation and requires additions and changes to the language in the model document. Also, the model makes no attempt to address the problem of state laws regulating the operation of a school.
Except perhaps in the very simplest circumstances, it is always recommended that the articles of association be reviewed by a knowledgeable lawyer. It is also beyond the scope of this manuscript to provide guidance on operating under these articles of association, especially with regard to issuing and redeeming capital certificates (Art. IX), calculating and distributing patronage dividends (Art. X), and dissolving the co-op (Art. XI). Many other organizational and operational problems may arise that require professional assistance.
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Laddie Lushin is an attorney in private practice. He is also a CPA, although not currently licensed as such. Since 1979, his legal practice has been limited to cooperatives and nonprofit organizations with a concentration in corporate, tax and securities law matters. Much of his legal practice involves the design and implementation of unique organizational structures, finding creative solutions to legal problems, and resolving compliance and operational problems. He endeavors to accommodate small organizations with limited financial resources. He may be reached at
4120 Braintree Hill Road,
Braintree, VT
05060-8854 (tele. 802.728.9728).
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ARTICLES OF ASSOCIATIONOF
_________ LEARNING CO-OP
BE IT KNOWN that on this day the undersigned do hereby associate themselves for the purpose of forming an unincorporated cooperative association to be known as "________ Learning Co-op" and subscribe to the following Articles:
I. Purpose. The purpose of the Co-op is to operate a learning center dedicated to equitable and sustainable social values for the common-interest community of its members. The Co-op shall pursue such purpose for the objective of enhancingthe mutual benefit of its members. The Co-op is organized and shall be operated exclusively on a cooperative and nonprofit basis. The Co-op shall not unreasonably or unfairly discriminate against any person.
II. Powers. The Co-op shall have the power to do everything necessary or desirable for carrying out its purpose and to do other things which are incidental to or connected with such purpose. The Co-op shall, to the maximum extent permitted by law, have the power: (a) to acquire, own, hold, mortgage, and dispose of real and personal property either in its own name or through a trustee acting for its use and benefit; (b) to enter into contracts either in its own name or through an agent acting in its behalf; and (c) to protect the lawful rights and interests of itself and its members either in its own name or through an agent acting in its behalf.
III. Duration and fiscal year. The duration of the Co-op shall be ten years. The fiscal year of the Co-op shall end on the last day of _________ in each year.
IV. Admission and financial obligations. Admission as a member shall be voluntary and open to any individual who is in accord with the purpose of the Co-op and desires to further its activities, will meaningfully participate in the activities of the Co-op, and is approved for admission by members. Such approval shall be contingent upon the applicant paying such current prorated dues and purchasing such capital certificate which shall at the time be required of members generally. Admission shall be evidenced by such person signing these Articles and indicating the date of such signing, to the effect that these Articles shall remain in effect as to then existing members. By applying for and accepting admission as a member, such person shall thereby agree to abide by these Articles and to share equally in the benefits and risks of the Co-op. Neither membership nor any right or interest in the Co-op may be transferred or assigned.
V. Dispute resolution. In any dispute between the Co-op and any of its members or former members which cannot be resolved through informal negotiation, it shall be the policy of the Co-op to use mediation whereby an impartial mediator may facilitate negotiations between the parties and assist them in developing a mutually acceptable settlement. No such party with a grievance against the other shall have recourse to litigation unless and until the matter is submitted to mediation and attempted to be resolved in good faith.
VI. Termination. Membership may be terminated voluntarily at any time upon notice to the Co-op or involuntarily for cause after the accused person is provided an opportunity to respond to the charges in person or in writing. Upon termination of membership for any reason, all rights and interests in the Co-op shall cease except as to entitlements to redemption of capital certificates and payment of patronage dividends in accordance with these Articles. Termination of membership for any reason shall not terminate any outstanding liabilities of such person, either actual or potential, existing at the time of termination.
VII. Governance. The organizational affairs of the Co-op shall be collectively self-managed by its members. Members may, however, delegate limited powers to a Steering Committee, and may appoint officers and define their powers and duties. The Co-op shall take action only through some authorized person, and no member may act for the Co-op without specific authorization.
VIII. Decision making. Meetings may be convened only upon notice of the time, place, and purpose of the meeting to all persons entitled to participate. The presence in person of a majority of all participants shall be necessary and sufficient for the transaction of business. Each person shall have one and only one voice or vote in any matter under consideration. Decisions shall be made through consensus whereby differing points of view may be reconciled based upon the purpose and policies of the Co-op. If, in the opinion of a majority of persons present, diligent efforts have failed to produce consensus on an issue that requires immediate action, a decision may be made by vote of a two-thirds majority of persons present. All meetings shall be conducted in conformity with common parliamentary principles.
IX. Capital certificates. To evidence capital funds provided by members, the Co-op shall issue capital certificates upon full payment of their purchase price which may include money, property, labor, or services. The purchase price of capital certificates shall be set by reference to the current and prospective capital needs of the Co-op. Capital certificates shall be subject to assessment for additional capital needs of the Co-op. The Co-op shall, as far as may be practicable, segregate proceeds of capital certificates and use them only for acquiring capital assets or for paying liabilities incurred for such purpose. Upon termination of membership, the capital certificate of such person shall be redeemed as soon as replacement capital has been secured by the Co-op from other members or, as determined at a meeting of members, when funds otherwise become available. Capital certificates shall be redeemed at their carrying value on the books of the Co-op or their net book value, whichever is lesser. Redemption proceeds shall be subject at all times to being offset by amounts otherwise due and payable to the Co-op.
X. Patronage dividends. The realized net margins of the Co-op, to the extent attributable to the patronage of members, shall be allocated and distributed among members in proportion to the quantity or value of their patronage and in such a manner as to constitute patronage dividends within the meaning of federal income tax law. A portion of patronage dividends may be retained for the reasonable capital needs of the Co-op. Such retained amounts shall be redeemed when determined by members to be no longer needed for capital purposes of the Co-op. Retained patronage dividends shall be subject at all times to being offset by amounts otherwise due and payable to the Co-op.
XI. Dissolution. The Co-op may be dissolved by action at a meeting of members. It shall be dissolved by abandonment or non-use that is not merely temporary, or by the death, resignation or removal of one or more members leaving less than three remaining members. On dissolution of the Co-op, its assets shall be distributed in the following manner and order: (i) by paying or making provision for payment of all liabilities and expenses of liquidation; (ii) by redeeming any outstanding retained patronage dividends which, if they cannot be paid in full, shall be paid in the order of the oldest outstanding amounts and on a pro rata basis among such amounts; (iii) by redeeming any outstanding capital certificates and related assessments which, if they cannot be paid in full, shall be paid on a pro rata basis among all outstanding amounts; and (iv) by distributing any remaining assets among current and former members in proportion to their patronage dividends during the current and five immediately preceding fiscal years.
XII. Severability. In the event that any provision of these Articles is determined to be invalid or unenforceable under any statute or rule of law, then such provision shall be deemed inoperative to such extent and modified to conform with suchstatute or rule of law without affecting the validity or enforceability of any other provision of these Articles.
XIII. Governing law. The Co-op shall be governed by the laws of the State of ____________.
XIV. Amendment. These Articles may be amended or revoked only by action of members at a duly called and convened meeting. IN WITNESS WHEREOF, the undersigned have set their hands in________________, this _____ day of _____________, 20___.
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© Copyright 2000. Laddie Lushin - All Rights Reserved.
Lushin@quest-net.com
