Develop corporate structures and incentives that encourage growth
Federal, state, and local governments should encourage and reward fully democratic workplaces, which provide worker and community supports more than any other business model. Most states do not currently recognize worker coops as distinct legal entities. A worker cooperative statute can legitimize worker cooperatives, increase awareness of the model, and simplify their incorporation. Tax incentives will help drive capital to worker cooperatives and encourage business owners who are nearing retirement to sell to their employees in order to preserve their legacy as they leave the business to the next generation.
Create a state worker cooperative statute.
States must extend qualification for preferential procurement, financing, and other business development resources and services to cooperatives incorporated under this statute, and also to businesses that possess a set of qualities characteristic of worker cooperatives, such as control by worker-owners, majority of workers are owners, democratic worker-owner control, and cooperative distribution of profits.
Note: The purpose of creating a state worker coop definition is not to exclude from worker coop support programs worker coops that are structured in other ways. Any incentive or service for worker coops should be careful to clearly define the type of business the program is intended to benefit. Even if a state statute is available for reference, we recommend that worker coop-related incentives and programs leave the door open for worker coops formed in other ways to qualify. This is because coops must grapple with a variety of issues and unique circumstances when determining what entity type will meet their dynamic social and economic needs, and sometimes forming under a state statute (if one exists) does not make sense. Thus, we suggest that advocates for worker coop-specific programs and incentives consider creating multi-pronged definitions of a worker coop in order to allow worker coops of all stripes to qualify.
- California currently has a general Cooperative Corporation statute that cooperatives of all types — whether consumer cooperatives or worker cooperatives — can use when formalizing their entity with the state. A worker cooperative can form under the general Cooperative Corporations statute, and then elect to be governed as a worker cooperative in its Articles of Incorporation. Creating a general cooperatives statute instead of one focused specifically on worker cooperatives could be a more flexible option, and has the potential to create visibility for cooperatives more broadly. However, the specific elements of a state statute depend on many factors and should be determined on a state-by-state basis, in coalition, and considering priorities and larger strategic questions.
- California’s cooperative statute also provides a loose definition for cooperatives (“Such corporations are democratically controlled and are not organized to make a profit for themselves, as such, or for their members, as such, but primarily for their members as patrons”) which enshrines democratic principles within the legal building blocks of the business. Although the California cooperative statute does not go so far as to provide a definition for worker cooperatives specifically, the statute does contain a provision requiring that 51% of workers in a worker cooperative must be worker-owners or be on track for worker ownership.
- Finally, California’s cooperatives statute also places limitations on outside investor ownership and control. These provisions restricting outside-investor rights ensure that worker-owners always maintain a controlling interest in the business.
Create tax incentives for worker coops.
Both state and federal tax laws should be shaped to (1) Drive capital to worker cooperatives, (2) Incentivize the sale of businesses to workers, (3) Incentivize the reinvestment of surplus earnings, and (4) Protect worker owners’ access to critical social programs.
Drive capital to worker cooperatives:
- Create a tax credit for capital invested in worker cooperatives.
- A 20% tax credit would mean that if an individual invests $1,000 in a worker cooperative, they will get $200 off their taxes due. In the same way that the federal solar tax credit has driven rapid solar development, a tax credit could spur widespread financing of worker cooperatives.
- Exempt tax payable on interest earned from financing a worker cooperative.
- This would mean that if an individual invests $1,000 in a worker cooperative and earns $200 in interest (over a period of many years of course), then the $200 would not be taxed as income.
Note: Corporations where workers own at least 51% of the power, eligible worker co-ops ad defined in 1042(c)(2) and ESOPS that function on a one worker one vote basis can participate.
Incentivize the sale of businesses to workers:
- Eliminate capital gains taxes for any business owner who sells to employees in order to transition the business to a cooperative. This incentive should apply to gain from the sale or exchange of qualified stock to either a corporation which is incorporated under a State’s cooperative or worker cooperative statute under which members who are workers own and control the majority of the voting power of the corporation, or an eligible worker-owned cooperative defined in section 1042(c)(2).
Incentivize the reinvestment of surplus earnings:
- Exempt worker cooperatives from paying tax on retained earnings that are not allocated to members (also commonly known as the indivisible reserve).
- Cooperatives should be able to retain up to 50% of net income as tax exempt indivisible reserves. Untaxed retained earnings allow coops to reinvest surplus back into the business — fueling growth without increasing worker-owners tax burden, and has proven successful in Germany, France, Italy, Spain and Quebec. This exemption was allowed prior to 1951, and it has current precedent in IRC § 512 that exempts S-Corp ESOPs from taxation on retained earnings attributable to the ESOP.
Protect worker owners’ access to critical social programs:
- Exclude patronage from asset tests for public assistance programs, and from calculation of healthcare exchange tax credits.