legal issues in phase i what you need to know about incorporation, equity and liability

www.cdsconsulting.coop

Legal Issues in Phase Iwhat you need to know about incorporation,

equity and liability

Ben Sandel Thane Joyal(540)421-6976 (315)380-4522

[email protected]

April 16, 2013

[email protected]


Four Cornerstones in Three Stages

More information about the Four Cornerstones in Three Stages model is available at:

http://cdsfood.coop/fourcorner


Outline

Incorporation– Why and How– Paperwork basics (Articles, Bylaws)

LiabilityEquityQuestions & discussionResources


Incorporate sooner than later.Why?

Mitigate or eliminate personal liability

Create your entity: A new business is a “person”– Eligible for Tax ID #

Commitment and action move the enterprise forward

Develop early relationships with professionals and others


Cooperative Structure whenever possible– This is a business, not a Non-Profit– Operate as a co-op; organize as a co-op– Tax advantages for cooperatives– Carefully research new co-op forms Next best is Corporate Structure

Still operate as a co-opConsistent with business enterpriseMany states this is the only option

What form of Incorporation?


Where do we incorporate?

Preferably in Home State

– simplify capitalization strategy

Some states are more co-op friendly

– Do research your options

– Some co-ops choose out of state incorporation despite complexity

Consider advocacy for better laws but don’t delay your process


What do we need? Original Incorporators will sign Articles of Incorporation

Articles of Incorporation establish the first Board of Directors

Initial Bylaws usually are filed with Articles

Filing Fees typically are modest

Establish agent for service of process (often Secretary of State)

Other details specific to state law


So, what’s a Board?

The Board of Directors has a fiduciary responsibility to the co-op– Trust responsibility

• Duty of Care• Duty of Loyalty

– Business judgement rule• Decisions must be reasonable in light of

circumstances• It is reasonable to rely on experts


So what are bylaws?

Bylaws are the owners’ agreement with the State of Incorporation

Basic lifecycle processes:– Owner meetings– Board composition, election– Bylaw amendment process– Capitalization information– Dissolution process


Initial Bylaws

Don’t give these short shrift!

Initial bylaws carefully done can be adequate for years--in some cases for the life of the co-op

Good templates exist: Use them!• Fresh Start Bylaws Template

https://cdsconsulting.centraldesktop.com/cbld/file/12694422/

• FCI Legal Primer http://www.foodcoopinitiative.coop/sites/default/files/LegalPrimer.pdf


Bylaw Pitfalls: Watch Out!

Keep clear role delineation– Avoid staff on board

– Avoid independent nominating committee

Maintain financing flexibility: keep options open

Address unclaimed equity

Allow board to amend bylaws with accountability

Allow board to remove a director for cause

Provide for extended balloting: decisions at owner meetings should be advisory only


A special note on quorums..

Be mindful of quorum and voting thresholds for decisions by the board and decisions by members

Prevent overpowering by a vocal minority while protecting broad participation

Distinguish certain decisions: ex: dissolution, amendment of Articles of Incorporation

Imagine:• 7 member board, quorum is 50%, 2/3 majority needed to

remove a member• 4 members show up (quorum), 3 vote to remove others (2/3

majority)


Liability Protection

Protect co-op and protect directors

Incorporation protects directors– Generally no liability except where intentional

wrongdoing

– Co-op’s failure to pay taxes can subject individuals to personal liability

Best practices protect directors and the co-op– Disclose conflicts within board

– Keep accurate records

– Use experts as customary (lawyers, accountants, general managers)


But we can’t afford a lawyer!

You can’t afford not to have a lawyer--they are insured!Sometimes (not always) you get what you pay forCo-op experience counts! Ask for recommendations from existing co-opsAsk for recommendations from consultants and professionalsBuy wisely: check references– Is the attorney responsive? Work products reported

timely?– Is the work solid? Did clients need follow up of any kind?

Buy wisely: do your homework.– Ask for a review of your drafts: is anything missing?

Anything there that isn’t consistent with State Law?


Other notes on liability...

Directors and Officers Insurance provides additional protection to Board

Board is the decision-maker: EVERYTHING the co-op does is the board’s responsibility– Have a governance system– Show up and participate in meetings– Keep good records. Keep good records.

Keep good records. I said, keep good records.


Legal Aspects of Equity Planning

Sources of Equity: Keep your Options Open!– Member paid in capital = member equity

• Refundable if co-op solvent• But this WILL be spent--that’s what it’s for• Thus, it is at risk

– Preferred shares, investor shares are treated differently

• Securities laws can apply if not designed carefully


More equity planning:

Include bylaw provisions for retaining patronage dividends as capital– important in mature co-ops– start off right by creating expectation of

patronage: don’t use register discounts!

Include bylaw provisions to protect unclaimed equity– possible in most states– valuable as owners move, lose touch, etc.


Still More on Planning Equity:

Plan for any legal person to be members (individuals, corporations, organizations)

Avoid household memberships. – Stick to one member, one vote– Promotes cooperative value of equity (in

the sense of parity, fairness)


There will always be surprises...

Specific to State of Incorporation and Structure, watch for:– Annual fees as income rather than equity– Statutory limits on member share price– Option for additional shares not “preferred”

– Restricted to intra-state members until state securities filings made

– Registration and approval required for all member loans and preferred shares


Cooperative Principles1. Voluntary and Open Membership Cooperatives are voluntary organizations, open to all people able to use its services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.2. Democratic Member Control Cooperatives are democratic organizations controlled by their members—those who buy the goods or use the services of the cooperative—who actively participate in setting policies and making decisions.3. Members' Economic Participation Members contribute equally to, and democratically control, the capital of the cooperative. This benefits members in proportion to the business they conduct with the cooperative rather than on the capital invested.4. Autonomy and Independence Cooperatives are autonomous, self-help organizations controlled by their members. If the co-op enters into agreements with other organizations or raises capital from external sources, it is done so based on terms that ensure democratic control by the members and maintains the cooperative’s autonomy.5. Education, Training and Information Cooperatives provide education and training for members, elected representatives, managers and employees so they can contribute effectively to the development of their cooperative. Members also inform the general public about the nature and benefits of cooperatives.6. Cooperation among Cooperatives Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures.7. Concern for Community While focusing on member needs, cooperatives work for the sustainable development of communities through policies and programs accepted by the members.


The Madison PrinciplesDeclare Conflicts of Interest: Cooperative developer subscribe to the highest level of ethics and shall declare any conflict of interest, real or perceived, so that they can be a credible source of objective feedback and an articulate advocate of the project as needed.Develop Co-ops Using Proven Models: There are essential development steps that must be taken in a critical path to success.Facilitate the Goals of the Steering Committee: An enthusiastic group of local, trustworthy leaders is a prerequisite for providing technical assistance. The effective cooperative developer nurtures that leadership by helping them shape a vision that will unite members and provide ongoing training.Use a Market Driven Approach: Cooperatives only work when they are market driven; the cooperative developer works to ensure that accurate market projections precede other development steps.Acknowledge the Importance of Member Involvement: Member control through a democratic process is essential for success. Success also depends on the commitment of the members’ time, financial resources and loyalty to the cooperative.Seek Tangible Benefits: There must be tangible benefits for members.Steer Toward Revenue Generation: The cooperative’s products and services must generate sufficient revenue so the effort can be financially self-sustaining. Provisions must be made to share any surplus equitably.Honor Diversity: Each cooperative responds to its unique economic, social and cultural context; as a consequence, each cooperative is different.Make Co-op to Co-op Connections: Cooperative developers link emerging cooperatives with established cooperatives to facilitate mutual communication and learning.Promote Social and Economic Empowerment: Cooperatives are tools for development and promote social empowerment and economic goals.Understand that Cooperatives Work Everywhere: Applied appropriately, cooperatives have value to all population groups and for all businesses and services in the public and private sectors.Our Vision of the Cooperative Community Is Global: Opportunities for human cooperation exist throughout the world. Cooperative development transcends national boundaries.


Links to more resourcesCBLD Startup Policy Template

https://cdsconsulting.centraldesktop.com/cbld/file/15334222/CDS CC Fresh Start Bylaws Template

https://cdsconsulting.centraldesktop.com/cbld/file/12694422/Food Co-op Initiative Resources Page http://www.foodcoopinitiative.coop/resourcesCDS CC CBLD Library http://cdsconsulting.centraldesktop.com/cbld/doc/3154572Roberts Rules of Order http://www.robertsrules.comCDS Consulting Co-op Information for Startups http://www.cdsfood.coop/for-startupsWebinars for Startup Food Co-ops http://cdsconsulting.centraldesktop.com/cbld/doc/5469096/w-Fc500WebinarArchives


Thank you!If you have questions or desire further information/support for your co-op about the issues discussed today, please feel welcome to contact:

Ben Sandel Thane JoyalCDS Consulting Co-op CDS Consulting Co-op540-421-6976 [email protected] [email protected]

legal issues in phase i what you need to know about incorporation, equity and liability

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