being self-employed in a workers co-op - co-operative consortia

@davehollings I'd need to do some serious research on using an LLP or a general unincorporated partnership for a common ownership co-op (meaning no distribution of surplus to members on a solvent winding up) before I could say. The other question is whether and, if so with what tax or other consequences, profits could be distributed according to transactions with the co-op rather than equally year by year. Similarly could a co-ownership workers' co-op distribute surplus on solvent winding up by reference to transactions i.e. proportions of work done over a given period ending on dissolution rather than by capital stake? If profits were divided by transactions year by year would that automatically be the entitlement to surplus on solvent dissolution after returning capital actually invested by members? Again, I'd need to research that. You make a good point in your 2. about the tax issue if that's how it works.

Hey folks, we're not a tech coop, but we are a cooperative consortium offering facilitation, mediation, training in group work, campaigning and more. We're almost 5 years old, and the coop consortium model has been crucial to our growth and survival.

Essentially we wanted to involve lots of funky and interesting facilitator types, but most of them already had their own self-employed facilitation practice. If we asked them to jump ship into a worker coop with very uncertain prospects we'd never have started. The consortium model has allowed us to engage a more exciting and diverse range of people, harness some of their time and energy and make that available to the good folk we work with (including, of course, coops). People can fade into the background for periods of time if other projects demand more of their concentration and energy and re-engage when they're ready. We started as 2, expanded to 7 then 10. We also get approached fairly frequently by people interested in getting involved. Again, most of them would run a mile if asked to formally join a worker coop, but the consortium model is more accessible, more flexible. Happy to answer any questions. BTW I've been previously involved in 2 worker coops and don't find the consortium leading to 'weaker' co-operation or owt like that. Matthew

Hi Matthew - what's the name/website of your consortium? Would like to look you up. Cheers

Hi, we're Rhizome: www.rhizome.coop, @rhizomecoop

Principle Six is a common ownership LLP. What that means is that it’s highly tax ‘inefficient’. Partners are taxed on their share of 100% of surpluses (profit) through PAYE and NI (or corporation tax if they’re businesses), and may choose to leave some of that taxed profit in the business, if they wish, to build up capital. We have decided that if we wind up, we will pass on any residual working capital. There’s no way of actually legislating an indivisible reserve - it’s entirely down to the voluntary action of partners, but we could change our minds tomorrow. An example of people doing co-ops ‘extralegally’? That’s my interpretation of the LLP model, anyway.

@iansnaith re: "The other question is whether and, if so with what tax or other consequences, profits could be distributed according to transactions with the co-op rather than equally year by year."

LLPs are governed by their Member Agreement which can literally be anything the members agree, including distributing profit any way they choose. At present in United Diversity we each get the profit we personally generated exactly as if we were just self-employed freelancers. In some ways we're bonkers because we essentially tangle up our finances in order to then untangle them! :P

@sionwhellens LLP with PAYE?! That sounds very odd to me. It is standard for LLP members to be taxed as self-employed, not as employees.

Also "tax 'inefficient'"?! Part of the point of LLPs is that they are incredibly tax efficient (hence why all accountant firms that were previously just partnerships are now LLPs - indeed LLPs largely exist because after the collapse of Arthur Anderson the other big boys lobbied Jersey to create a partnership structure with limited liability and then said the UK - if you don't create one too we'll all pick up sticks and head to Jersey ).

I do hope @outlandish turns up at some point to share his dilemma with us all! :P

software.coop members are not employees but we're still a worker co-op, not a dratted consortium. This is a product of the fact that we work together on common projects developing common assets with common infrastructure and the organisation isn't just a way to allocate work. It's more to do with how we work, than the words in our legal agreements. It took years from our first enquiry to Co-operatives UK accepting that and it seems from the above that some maybe still don't?

(I say dratted consortium because the term has been used when suggesting that we should be segregated from worker co-ops and usually put in some category that we'd have little in common with.)

And I think common ownership is legally enforceable but really until it lands in court, we're not going to know either way. In practice, it's rarely enforceable in Ltd companies either, as anyone who's been a member of a demutualised ICOM GREEN4 co-op will know. The regulator doesn't care and members of co-ops that have gone that badly wrong rarely want to keep throwing bad money after good and taking its officers and beneficiaries to court.

It'd be great to see LLP Common co-ops finally in the Radical Routes guide that inspired our first members, over a decade ago.

@josefdaviescoates Sorry, I meant to say self-assessment, not PAYE! Yes, LLPs are 'tax efficient' for partners, but not tax efficient for the accumulation of indivisible reserves.

Hi all, apologies for the delay in joining this fascinating discussion.

For a relatively young co-op-style organisation, Outlandish has been through a few incarnations and we've definitely still not gotten it right.

Like @josefdaviescoates we started as an LLP with two tech freelancers that decided to do some work together (and take turns cooking lunch). We added two more people to the model and it went great, but the fifth member was a bit more problematic - we didn't see eye-to-eye and productivity (and fun of going to work) went down hill. The fifth partner agreed to leave, but it was all a bit of a pain and involved notifying Companies House, etc.

We then started employing a couple of freelancers, then made them employees and gave them the same profit share as the partners (we divide the surplus profits among everyone according to the number of hours they worked in the year). We agreed that as soon as we could work out what the right model for formal joint ownership of the company was we'd adopt it, and offered all employees who'd been with the company for a year the opportunity to become partners. All declined citing added complexity of accounting, issues with mortgages, etc.

Having some employees and some partners created a disparity in that all the profits of the company were shared equally, but the losses only borne by the partners. That meant that if we had no work to do then no one paid the partners and the partners paid the employees salaries, which wasn't sustainable.

There also became notable differences in the way people approached work - people who were employed largely treated work as a job while the partners (who were essentially more invested) saw it as something they were responsible for (as a partner, I would say that).

As of April all the employees will have the opportunity to become a partner in the LLP, become a freelancer for the LLP (and/or others) or get a job elsewhere. In the medium term we're aiming to adopt a different structure due to the tax issues outlined by @sionwhellens - we're mostly higher rate taxpayers so we end up paying 40% tax on the money we retain in the company which makes the annual tax cycle a bit of a nightmare.

The new incarnation that is being put forward is very much like the model @josefdaviescoates is putting forward for United Diversity - pooling a proportion of revenue to own/spend/use communally. I think there are some problems with that which I'd love to discuss further - along with the broader discussions about consortia/networks vs companies/cooperatives, and how to save the world.

Time to meet for a beer? Sounds like there's quite a lot of interest. Happy to host and provide drinks and soundsystem.

About Cooperantics - we are an LLP. We provide consultancy, training & facilitation to develop co-ops particularly around governance, co-operative skills, meeting effectiveness, strategic reviews, resolving conflict etc .The reason being an LLP makes sense for us is that there is not always steady/regular enough income from our trade as a co-operative development practice to employ people. The 2 members supplement our incomes with other work that is outside of the remit/mission of Cooperantics. We are still workers but we bend and flex with the work rather than creating a burden on our co-op to pay us when there isn't sufficient fee earning work about. We don't accumulate common reserves but what we do create in common is intellectual property. Some of this is information, guidance etc that we give away for free on our website www.cooperantics.coop.
Being a co-op we are able to provide and access mutual support which is essential for good advice & support for our clients. This also extends to beyond our Cooperantics work (usually stuff that is non co-op). It also meant that in one instance, we were able to provide cover when a member was too ill to deliver some training.

I would concur with @davehollings @sionwhellens and @iansnaith on the issues of common ownership. I looked into this a while ago because I was finding out how our legal form worked. The only solution I could find was having an incorporated body as a member which would hold the commonly owned funds. But that would be more complicated than re-registering with a different form. While @josefdaviescoates is correct that the partnership agreement governs the partnership, if there are any arguments there is little legislation to refer to and the courts are the arbiter. My understanding is that the partners have a right to the reserves as they paid the tax on them, so it was their income & legally their property. This is what makes it a partnership rather than a corporation. I find it hard to believe a court would see it differently. But until we arrive at that judgment none of us knows. In my view the LLP model does not suit accumulating common reserves as well as a Co-operative Society. However, it is easy for self employed people to co-operate on this basis as HMRC does not start with an assumption that partners are employees as it sometimes does with Members of a co-operative....it starts with the assumption they are self employed until you tell them differently.

Just for clarity on the tax/profits/co-op reserves issue, have I understood this correctly?:
- any profit made by the LLP is taxed as though it has been shared by the partners, regardless of whether it has been distributed to them or not
- the Partnership Agreement can describe the proportions in which profits are shared and presumably the tax is apportioned accordingly (via self-assessment)
- it might be possible to do something clever by creating a corporate partner which is a trust or something which gets to keep all the profit (indivisible reserves, the common ownership bit) rather than the partners getting the profit and therefore personally paying the tax (though it begs the question why you'd bother with an LLP in the first place)

Effectively, does HMRC assume distribution of all profits, on which partners then pay tax and can subsequently decide to put back their taxed share of the profit into the partnership?

Yes and yes (although most co-ops would have equal shares of profits I think).

The third point could work so long as the trust was charitable (and hence would not incur a tax liability on the partners). Might be a way of having some common ownership element, although this money could never come back into the LLP.

Reasons for forming a LLP - less paperwork, single tier structure (no members and directors), if members would prefer to be self-employed anyway.

HMRC just assumes a LLP is a partnership and taxes it just like any other partnership.

As we are a workers co-operative solidarity fund and this is clearly an area of concern and confusion to many, have we just identified our first piece of work to help worker co-ops in the UK perform better?

So, LLP v. Co-op Consortium (a co-op society of self-employed people/other bodies) v. conventional employing workers co-op with zero-hours contracts

LLP - cheap & easy to set up, almost infinitely flexible, possibly more vulnerable to rogue members, easy to leave dormant or just ticking over
Consortium - easier to retain common assets, constitution is harder to change (bonus for many co-ops), expensive to set up, annual filings & tax whether dormant or not.
Employment co-op - as above? or different in some way?

Presumably it's possible for both LLP and Society to have employees, who might or might not be members?

Well having just got back from trying to untangle a worker coop where three members want the fourth to leave (personality clashes) and he is invoking his employee rights to theaten them and maybe destroy a ten year old business, this discussion is pertinent!
The status of employee in a worker coop is not suitable, I say, even in a big coop like Suma it wastes loadsof time and costs us too much money to make it fit. The clash between employee rights and member rights is very difficult to manage when things go wrong and emotions run high.
I have always promoted LLP for small worker coops. None of the LLP worker coops I helped start have come back to me to complain. Several of the company and society ones have, for the reasons above.
Common ownership is only enforceable by injunction by ex memebrs who believe they are losing out. Its a toothless tiger. So put it in the partners agreement and keep the cooperative spirit healthy so no one wants to carpet bag the accumulated capital. At suma a pay off would only be about seven years wages and then its back to minimum wage round here in west yorks. Not worth it.
You cant trap a coop in dead words in a document. You can only feed a coop with living words in conversation. Once the talking stops, the coop dies, innit?

IPS "Worker Co-op" rules generally suggest (well ours do and I think they were based on Model rules in this respect) that you have to be employed to become a member, so for an IPS to exist it must have employees. Theoretically there is nothing to prevent those employees all being on zero hour contracts, but that in itself creates all sorts of issues - I think discussed on another thread on Loomio. I guess it depends how a Co-op defines "employed" - which can also involve working a minimum number of hours to qualify as a member or could include volunteers?

I guess its a sense of scale. LLP may well be a good model for people to get things started but converting to an IPS may have other advantages later on.

The Member/Employee Dichotomy becomes as much an existential crisis than anything else, but it can create problems like Bob (@boobarr) suggests. However those issues are likely to exist whatever the structure as they do for any organisation which involves people.

There appear to be a lot of obstacles (let's call them "rules") to people grasping the "DIY" ethos which motivates many to get involved with or start a co-op. It should be more along the lines of the old "Sniffin Glue" fanzine ethos - "Here's a Chord, here's another, Now form a band" - "here's a worker, here's two others, now form a co-op". Apologies for the outdated cultural reference to anyone under the age of about 40..... I guess the point I'm trying to clumsily make here is the simpler the better.

For me this whole discussion only serves to highlight the fact that the UK is all the poorer for not having any legal definition of a cooperative. Some have said that this makes for a more creative landscape in terms of incorporating cooperatives, but to me it all feels like a classic bodge.

On the use of a trust for common ownership, it would have to be an incorporated trust to be a partner in the LLP. An unincorporated trust is not a legal person and can't be partner.

@cathmuller Yes, both LLP and Society can have employees who might or might not be members - whether they are worker or consortium co-ops.

@richardcrook You can adapt IPS (now Co-operative Society) rules to define membership how you like as long as there is there is a clear relationship between members and trading activity. You have a point too about how we define workers. I think the issue is do we include non-paid workers & people technically self employed as workers or only those with employment contracts (employees). I prefer the former, and have had clients for whom that is the reality. BTW love the Sniffin Glue reference. It was DIY punk rock that led me to co-ops (let's not just take over music, lets take over housing and employment too).

@boobarr Regarding the employee suing the coo-p issue, LLP is not a watertight protection against the scenario you describe. With an LLP it doesn't matter what the documents say, if the real life relationship is that of an employee the courts will recognise that regardless of whether or not there is a contact in place. There was a case not so long ago where a former partner won an employment tribunal on this basis (a non coop LLP but same law applies). I also know of a (non co-op) LLP in which a partner resigned and then intended to sue as an employee. The LLP had no realistic assets so, on the advice of a solicitor, wound up and took the intellectual property to start trading again.
The LLPs you help may just not have come up against the personality clash yet so I don't think we can use that as a measure of the legal form.

You have nailed it with the complication of managing 2 sets of rights (employee and member). This also applies to housing co-ops who cannot disentangle tenant responsibilities and member responsibilities.

I am wary of advising people to use LLPs unless I believe they have sufficient capabilities to understand and use the form - it is far easier to make a mess of it. It also far easier for a democratic deficit to be created by people having differing levels of technical understanding.

I'm with Bob on this - it's primarily a question of culture not of law. In an LLP, as long as the partners agree, they can accumulate a common pot from taxed profits. A common fund is not the same as a locked asset (nor should it be).

@graham2 I'm one of the (many?) people who think it is actually really great that we don't have one fixed set of rules for co-ops in the UK. I think we're very lucky that here in the UK "a co-op" is a set of principles and not a restrictive straight jacket like it is in most other countries.

re common funds and LLPs - at UnitedDiversity LLP we're going to build up a fund in an Community Benefit Society, and invite everyone else to join us to boot! :)

Whilst I agree that necessity has once again proved to be the mother of invention and that we have an array of tools available through which to create cooperatives, at the same time I do believe that the lack of a legal definition or statute has in no small way contributed to the fact that particularly worker cooperatives are highly marginalised in the UK in comparison with many other countries.

Looking forward to hearing more news about these exciting developments at United Diversity!

It would certainly be good to have some simple 'off the shelf' models for cooperative working. It sometimes feels like Outlandish is trying to invent the coop rather than become a great example of one.

We're actually pretty clear about what we want out of the legal organisation but some employee-ownership lawyers quoted us £15,000 to set it up. It's not like it included a brass plaque in the Cayman Islands.

£15,000 for 10 people is a lot, but for the whole coop movement it's much more feasible. I'm sure someone's done some work categorising the different forms that they might take.

@outlandish Harry, I don't think Matt could have conveyed that you absolutely do not need to spend that kind of money and you don't need to use EOA-type lawyers - EBTs are a bit of a scam and they don't get co-ops.This is not rocket science, and you don't have to reinvent anything! See me!

Harry, for 10 people a EBT is not worth the hassle.CMS would be happy to advise you on a co-operative form which meets your needs. CMS can advise you on your legal form and on the tax implications of each for the employeees (and whether there are any tax schemes that fit your needs) Frankly, if you are sure what you want out of your structure then that makes it all much easier.

I would be happy to have a chat and quote for the work,. Our quote will not even be within barge pole distance of £15k. You can e-mail me on dave@cms.coop

A matrix would be useful showing legal entities, there usefulness for fulfilling coop principles and the forms of finance that that they can use. In fact a UK coop-shared benefit wiki would be very welcome where much of the advice and wisdom in these threads could be consolidated, validated, freely shared etc. A wiki would be a great place to go and locate coop business advisors and finance.

http://www.can.coop/images/site_graphics/downloads/Raising_Finance_for_your_Enterprise_v10ac.pdf

@sionwhellens thanks I've seen CAN site before and they have offered help, encouragement and support to ethicalBay, the guide is useful. Is the cooperative sectors presence on the internet simple and easy to negotiate and engage with? That's another discussion!

@nathan-brown commented about LLP and common ownership (as far as I could tell) that the partners would have some unusual claim on the reserves and "This is what makes it a partnership rather than a corporation. I find it hard to believe a court would see it differently" but we don't need them to see it differently. In the past, the courts have upheld partnership agreements that specify all sorts of strange ways of distributing profits (including not distributing to certain partners at all) so I'd be very surprised if they overruled an agreement to distribute to other common ownership co-ops in the event of dissolution.

In general, I agree with @Bob. You can write whatever you like in the rules but unless you appoint wise officers and educate members about common ownership then those rules might as well not exist, as we've seen often enough.

I don't think a monopoly single co-op form that @Graham seems to advocate would be helpful. It would offer an easy way for unfriendly organisations to exclude or punish all co-ops. At the moment, worker co-ops seem fragmented mainly by a bizarre desire to overclassify and divide us, to say to co-ops "no, you're a consortium" or "no, you're an Employee-Owned Company" based on bureaucratic rules rather than actions.

Ultimately, though, software.coop is an LLP partly because our key assets are non-monetary - the copyright and related rights in the software which we place in the commons - a co-operative commonwealth. The taxman undervalues such rights so it makes sense to us.