C2BE Template LLC Operating Agreement

C2BE Template LLC Operating Agreement:

Michigan LLC operating as a worker cooperative

Paul Chander, Deborah Olson, Michael Friedman, Terry Lewis
Center for Community-Based Enterprise

4605 Cass Ave., Suite 201, Detroit, MI 48201

(313) 429-5053 www.c2be.org

TABLE OF CONTENTS

SECTION 1: CORPORATE AFFAIRS

SECTION 2: MEMBERS AND OWNERSHIP INTERESTS

SECTION 3: OFFICERS

SECTION 4: BOARD OF DIRECTORS

SECTION 5: MEMBERSHIP MEETINGS

SECTION 6: ALLOCATIONS AND DISTRIBUTIONS

SECTION 7: CHECKS AND CONTRACTS

SECTION 8: RECORDS AND INSPECTION

SECTION 9: DISSOLUTION AND LIQUIDATION

SECTION 10: INDEMNIFICATION

SECTION 11: CONFLICT RESOLUTION AND ARBITRATION

SECTION 12: ADOPTION AND AMENDMENT

SECTION 13: OPERATING RULES AND POLICY MANUAL

SECTION 14: GENERAL PROVISIONS

C2BE\Template Docs\FINAL LLC TEMPLATE_v11.docx v.1 Last updated: 3-1-17

C2BE Template LLC Operating Agreement:

Michigan LLC operating as a worker cooperative

[How To Use This Document: This Operating Agreement is a template, or an example, that you can adapt for your particular cooperative business. Before reading through it, it is highly recommended that you first decide on your answers to key questions related to cooperative governance. To that end, please consult the User’s Guide to this Operating Agreement. It identifies, in a much more concise manner, the main issues that you must think about and encourages you to answer them in your own way. Once you have made those decisions, then come back to this template and update it to correspond to your particular choices. We recommend that you consult a legal professional to help you do so. In addition, please note that this Operating Agreement is written specifically for a Limited Liability Company (LLC) that is taxed as a Partnership and “operating on a cooperative basis” (a phrase that has a specific legal meaning).[1] Please see the C2BE Choice of Entity and Taxation Handout if you want to review the other legal entity options and tax statuses that your cooperative business can choose from. This template is designed as an LLC because that is generally the simplest form to use for a start-up company which is unlikely to have substantial taxable net profits in its first few years.]

[A Note on Taxation: There are three major ways that an LLC operating on a cooperative basis can be taxed.

(1) Partnership or Pass-Through Taxation. Under this tax treatment, there is no “entity-level” tax, meaning that the LLC pays no tax as a business. Instead, the business’s net income is “passed through” to LLC owners (called “Members” in this Operating Agreement) and subject to income tax at the individual level. Specifically, the Members each pay taxes on their proportionate share of the business’s net profits on their individual income tax return. Importantly, Members are taxed on the total amount of their proportionate share of net profits, regardless of whether the business retains it as part of its indivisible capital, allocates it to them as an undisbursed distributed share (a “qualified written notice of allocation”), or actually pays that income to them in cash. This means that even if Members need to reinvest some or all of their earnings in the business—for instance, to buy inventory to grow the company—each Member is liable for income tax on their total proportionate share of those earnings. Partnership taxation is the default tax treatment for multi-member LLCs; you will automatically be subject to this type of taxation unless you affirmatively elect to be taxed as a corporation and to be covered by Subchapter T.

(2) LLC Taxed as a Corporation. It is possible to have an LLC taxed as a C corporation by checking a box on an IRS Form 8832. However, making only this election, without going on to make the Subchapter T election described below, will have all company profits taxed at the corporate level, and, if any dividends or distributions are made to member owners, that portion is taxed to the individuals as well. If an LLC wishes to use co-operative taxation (described below) under Internal Revenue Code Subchapter T it would first need to “check the box” for the LLC to be taxed as a corporation.

(3) Subchapter T Cooperative Taxation. Under Subchapter T tax treatment, the business must be taxed as a corporation. This means that it is subject to a separate, entity-level tax on the business’s net earnings at the corporate tax rate. However, the corporate taxable income can be reduced by the amount of the earnings that the business allocates to Members on the basis of their work performed, or “patronage dividends,” if the business pays out at least 20% of each Member’s total patronage dividend in cash. Then the Members must pay an income tax on the total patronage dividend allocated to them, whether it is paid in cash to them or allocated in their individual capital accounts through a “qualified written notice of allocation.” Net earnings retained by the cooperative as indivisible reserves are taxed to the Company, not to the Members.

Please note that while this Operating Agreement is written to organize an LLC “operating on a cooperative basis”, it does not comply with all of the requirements for Subchapter T, including the “written notice of allocation” system. An LLC must affirmatively “check the box” to be taxed as a corporation and elect to be taxed as a corporation and for Subchapter T tax treatment by filing a form with the IRS. If you seek further guidance on Subchapter T tax status, it is recommended that you consult a legal professional.]

[A Note on Employment Law: The words “employ,” “employment” and “employee” are not used in this Operating Agreement. This is because the template has been written with the assumption that you (the Members of the LLC) will decide to classify yourselves as co-owners, or partners, who are exempt from “employee” status under employment law. This choice was made to maximize flexibility because it eliminates the costs of complying with employee rights laws (minimum wage, overtime, unemployment insurance, workers’ compensation, and payroll taxes for Social Security and Medicare.) However, if you want, you can of course decide to classify yourselves as employees for employment law purposes. Just be aware that if you do, you must comply with all the aforementioned employer obligations. If you do so, then you can update the language in this Operating Agreement with words like “employee,” “employed” etc.]

[NOTE: Throughout this Operating Agreement you will see bracketed “NOTE” sections like this. These Notes provide commentary to either help explain the section in which they appear or to provide additional options for you to consider so that you can best adapt this template for your particular business.]

Section 1. Corporate Affairs

1.1. Name of Company. The name of the entity is [COMPANY NAME] LLC. (hereinafter “COMPANY NAME” or “the Company”)

1.2. Formation of Company. [COMPANY NAME] has been organized as a Michigan limited liability company by filing Articles of Organization with the Corporations Division of the Corporations, Securities & Commercial Licensing Bureau of the Michigan Department of Licensing and Regulatory Affairs, pursuant to the Michigan Limited Liability Company Act.

[NOTE: If the Company would like to file for incorporation in a state other than Michigan, it should update this Section to reflect that state’s relevant statute and filing office instead. It should also understand that this template may not comply with the laws of any other state.]

1.3. Registered Office. The address of the registered office of [COMPANY NAME] is [INSERT REGISTERED ADDRESS HERE].

1.4. Purpose. [COMPANY NAME] is a limited liability company, operating on a cooperative basis, which has been organized to accomplish the following mission and guiding principles:

1.5. Mission and Guiding Principles.

(A) Mission. [COMPANY NAME]’s mission is to [INSERT MISSION OF THE COMPANY HERE.]

[NOTE: If you registered as an L3C, make sure that your mission complies with the following requirements: (1) The limited liability company significantly furthers the accomplishment of one or more charitable or educational purposes described in section 170(c)(2)(B) of the internal revenue code, 26 USC 170, and would not have been formed except to accomplish those charitable or educational purposes. (2) The production of income or appreciation of property is not a significant purpose of the limited liability company. However, in the absence of other factors, the fact that a limited liability company produces significant income or capital appreciation is not conclusive evidence of a significant purpose involving the production of income or the appreciation of property. (3) The purposes of the limited liability company do not include accomplishing one or more political or legislative purposes described in section 170(c)(2)(D) of the internal revenue code, 26 USC 170. Please note that it is not enough to recite the words above. You need to state a mission that fits your company and this description.]

(B) Guiding Principles.

(1) Operation as a Worker Cooperative. [COMPANY NAME] shall operate as a worker-owned cooperative. This means that [COMPANY NAME] is a business that is owned and controlled by those who work for it and is operated for their benefit. Worker-owners shall have the right to vote on the Company’s decisions on a democratic basis, based on “one person; one vote,” on matters defined by the Company. In addition, worker-owners shall control the allocation of the Company’s surplus, a portion of which shall be proportionately and equitably distributed back to worker-owners, based upon their patronage (i.e., their labor) to the Company, as defined by Company policy.

(2) ICA Principles. [COMPANY NAME] shall be run according to the cooperative identity statement set down by the International Cooperative Alliance (ICA).[2] As such, [COMPANY NAME] shall be based on the values of: self-help, self-responsibility, democracy, equality, equity and solidarity. Members of [COMPANY NAME] shall also adhere to the ethical values of: honesty, openness, social responsibility and caring for others. Lastly, [COMPANY NAME] shall be guided by the seven ICA principles:

(a) Voluntary and Open Membership. Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

(b) Democratic Member Control. Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives members have equal voting rights (one member, one vote), and cooperatives at other levels are also organized in a democratic manner.

[NOTE: “Primary cooperatives” are cooperatives in which the Members are persons, whether individuals or entities, organized for their own purposes. In contrast, secondary cooperatives are cooperatives in which the Members must also be cooperatives, organized for the same purposes as the secondary cooperative.]

(c) Member Economic Participation. Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative, referred to as the “indivisible” portion. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: (1) developing their cooperative, possibly by setting up reserves, part of which at least would be indivisible; (2) benefiting members in proportion to their transactions with the cooperative; and (3) supporting other activities approved by the membership.

[NOTE: The indivisible portion of a co-op’s capital is the part that is NEVER allocated to the individual members. It is the co-op’s ultimate reserved capital.]

(d) Autonomy and Independence. Cooperatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy.

(e) Education, Training and Information. Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of cooperation.

(f) Cooperation among Cooperatives. Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures.

(g) Concern for Community. Cooperatives work for the sustainable development of their communities through policies approved by their members.

[NOTE 1: You can add any other guiding principles you like. For example: Anti-Oppressive Facilitation, Community Agreements, Commitment to the Detroit Cooperative Ecosystem/Solidarity Economy, etc.]

[NOTE 2: You can also add a separate Vision Document. For example: “[COMPANY NAME] shall be further guided and inspired by its Vision Document provided in Attachment A.”]

1.6. Articles of Organization

(A) Articles of Organization. The Articles of Organization are hereby made a part of this Operating Agreement. In the event of any inconsistency between the Articles of Organization and this Operating Agreement, the provisions of the Articles of Organization shall be controlling. All references in this Operating Agreement to the “Articles” or “Articles of Organization” shall be construed to mean the Articles of Organization of the Company as amended from time to time.

Section 2. Members and Ownership Interests.

2.1. Classes of Membership and Ownership Interests. The Company has two classes of Membership: (1) Worker-Members as defined in Section 2.2; and (2) Supporter-Members as defined in Section 2.3. The Company has two types of ownership interests: (1) it shall have Worker-Membership Ownership Interests as defined in Section 2.2. and (2) it may create one or more classes of Supporter-Member Ownership Interests as defined in Section 2.3.

[NOTE: If you do not want to have Supporters and Supporter-owned interests in your Company, you can simply delete all references to them in this Section and throughout the rest of the Operating Agreement and have only one class of membership. However, if you do this, it will mean that you cannot raise equity capital from individuals other than your worker-members.]

2.2. Worker-Members and Their Ownership Interests.

(A) Worker-Member Eligibility. Worker-Members (hereinafter “Members”) shall be limited to natural persons who:

(1) Are a resident of [LOCATION. For example: “Detroit, Michigan” or “Michigan”].

(2) Work for a specific length of time, as set forth in the Policy Manual, for the Company. This period shall be known as the “Trial Period.” Persons who work for the Company during the Trial Period shall be designated as “Provisional Members.”)