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8. Choosing your legal form
55 Chapter 8. Choosing your legal form
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Unincorporated workers’ co-ops
Any group of people may join together informally to achieve common aims and, unless their activities fall within an area covered by special regulations such as medical services, they don’t need to get permission or inform anyone. Such groups are called ‘unincorporated’ and include associations, partnerships and trusts. The law treats such groups as a collection of individuals rather than as a body in its own right.
Unincorporated workers’ co-ops are generally classified as
partnerships (unlimited) and members who are paid are classed as self-employed and are responsible for doing their own tax returns and paying their taxes. Because an unincorporated group does not technically exist in law, it can’t sign any contracts.
This means any contracts such as lease agreements, employment contracts and equipment hire have to be in a
member’s name, as does ownership of property or materials. This can cause a lot of difficulties, for example with taxes, the benefits system, if someone dies or wants to leave, the business fails or a member runs off with the assets. Another disadvantage is that
unincorporated co-ops cannot limit liability, so each member is individually responsible for any liabilities the partnership incurs. We explain this in more detail below.
Incorporated workers’ co-ops
Most workers’ co-ops find it an advantage to incorporate. This means creating a legal identity for the workers’ co-op that is distinct from its members – a ‘corporate body’. The workers’ co-op becomes a legal body in itself, so it can legally enter into contracts and obtain loans and mortgages. The co-op can own buildings and equipment. It can
also employ its members so that they aren’t self-employed. One of
the biggest advantages of incorporating is that you
can choose to have limited liability for
your members, see below for more
information.
In return for this you have to register and then send annual forms to the
appropriate registration body together with a small fee. Some details, such as names of company directors and the address of the business will be publicly available.
Legal forms that are incorporated include Companies Limited by Guarantee, Companies Limited by Shares, unlimited companies, Limited Liability Partnerships, and Co-operative Societies.
56 How to set up a Workers’ Co-op
Chapter 8. Choosing your legal form
The table below shows the key differences between incorporated and unincorporated legal forms.
Liability – why limit it?
Limited liability is the usual choice for co-ops, as it offers a lot of financial protection for its members if things go wrong.
Unincorporated No. Contracts and property will have to be in a particular member's name, who then becomes legally responsible for them.
Generally limited or no start-up costs.
Each member must keep records of the business for their personal tax records. No information need be made available to the public.
Incorporated
The co-op itself can own property and enter into contracts (such as employment contracts). The co-op is legally responsible for these, not the individual members.
Usually small start-up costs and annual fees.
Records, such as membership, need to be kept, and accounts filed with the appropriate regulator. Certain details, such as directors' names and the accounts are available to the public. Your constitution needs to be filed with a regulator (except LLPs who can keep their constitution secret).
Can the co-op own property or enter into contracts? Registration and costs Admin and record keeping Unincorporated N/A Partnership Incorporated Company Limited by Guarantee
Company Limited by Shares Co-operative Society Limited Liability Partnership Unlimited Company Limited liability
Individual liability is limited to the guarantee or shares held. All members are treated the same unless there is some other agreement in place. Unlimited liability Individuals will be liable to whatever debts are incurred – according to their ability to pay – some directors may have to pay more than others if the co-op fails or is wound up with debts.
Only incorporated workers’ co-ops can have limited liability, but you shouldn’t confuse incorporation and liability, since some incorporated bodies can have unlimited liability, as the table below shows.
57 Chapter 8. Choosing your legal form
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Limited liability means that the personal responsibility of individual members for debts of the co-op is usually restricted to the amount of money they have put into the co-op, either through
guarantees or through buying shares (usually £1). Should the business fail and go bankrupt, the individuals involved won’t have to stump up money themselves to pay the co-op’s
debt. This means your savings and your home are safe, even if your workers’ co-op fails. Limited liability covers members of the co-op only as long as they act responsibly. This usually means meeting regularly, checking accounts and making sure they’re aware how the business is running. It doesn’t protect directors who have acted fraudulently or negligently – for example, if the co-op continues trading when it’s clear that it is no longer solvent. In these cases directors will still be financially liable for their actions. While there are clear practical advantages to limiting your liability, some co-ops choose not to for ethical reasons. They argue that limiting liability means that you refuse to take
responsibility for your actions. If your co-op goes bust and it owes money to other businesses it may result in other small businesses going bankrupt too.
One of the reasons why big
corporations get away with acting so irresponsibly is that their directors and shareholders know they will never personally be held to account. By deciding not to limit your own liability you make yourselves personally accountable for the business decisions of the co-op.
If an unlimited workers’ co-op fails to pay its debts, each member steps in to the
extent they can personally afford.
Because the liability is ‘joint’, those members with more personal assets (such as a house) may have to pay more, putting some members at a higher risk than others. This is not ideal in a
democratic organisation, as it creates a power imbalance.
Common Ownership or Co-ownership?
A big decision for your co-op is who owns the assets. Most of the economy is privately owned – this is the very basis of capitalism. A lot of co-ops decide that the means of production as well as any other capital and assets should be owned not by individuals or corporations, but by society generally. This is called common ownership, and if your co-op is in common ownership
then you, as a member, are trustees of the co-op and its assets, making a living from it while at the same time looking after it for future generations.
The idea of common ownership has a rich history, and is the same concept as “the commons” and “commonwealth”. This concept of commons was advocated by writers
and thinkers as varied as Gerrard Winstanley, John Stuart Mill, Pierre-Joseph Proudhon, Peter
Kropotkin and Emma Goldman.
58 How to set up a Workers’ Co-op
Chapter 8. Choosing your legal form The idea of common ownership has a rich history, and is the same concept as “the commons” and “commonwealth”. Co-operators who believe in common ownership argue that their co-op is as much a part of wider society as the Earth itself. This concept of commons was advocated by writers and thinkers as varied as
Gerrard Winstanley, John Stuart Mill, Pierre- Joseph Proudhon, Peter Kropotkin and Emma Goldman. If a co-op in common ownership is wound up, its assets aren’t given to the members, but are passed on, ideally to a similar co-op, but failing that, other co-ops or charities will benefit. This stops co-op members from cashing in on the work previous
members have put in and encourages the co-op to be maintained and passed on from one generation of workers to the next.
Common Ownership is often called
non-profitor not-for-profit because
the members don’t profit from the business in the way that shareholders of capitalist businesses do.
The other main form of asset ownership is co-ownershipor joint
ownershipbecause the assets are co-
owned by the members. Members of the co-op have a claim on the assets, and if the business ends then members, and possibly recent ex-members will take a share of the assets, often in proportion to how long they have worked for the co-op.
The assets of the co-op are seen as the result of the work done by members. This form is often called profit making. Generally speaking, only co-ops that are registered either as Co-operative Societies or Companies Limited by
Guarantee are in common ownership. You need to
explicitly write this into your constitution in the
section that deals with dissolving the co-op.
For an example of how to write this, see Appendix III Model Articles, section on Dissolution.
Technically, Companies Limited by Shares can be in common ownership but this is unusual. Partnerships and LLPs are, by definition, profit-making and therefore unable to be in common ownership.
Common ownership and Radical Routes
Full membership of Radical Routes requires co-ops to be mutual and in common ownership and this needs to be stated in the constitution.
Consequently, only co-ops that are registered either as Co-operative Societies, Companies Limited by Guarantee or Companies Limited by Shares can be members of Radical Routes and only if their constitution stipulates that they are mutual and in common ownership. Co-ops which don’t fulfil the full membership criteria can become associate members and participate in the reciprocal support aspects of the network.