Operating Agreement for Cooperative LLC

This is an operating agreement for a worker cooperative structured as an LLC.

Operating Agreement

of

JustDesign Cooperative, LLC

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Disclaimer: This Agreement is not legal advice. Some parts of this agreement are customized to JustDesign Cooperative, LLC’s needs and will not fit well for all cooperatives.

The agreement starts below:

***

This is a legally enforceable contract between the Members and the Company, and among the Members, effective as of August 30, 2017.

This operating agreement is much simpler than the standard kind. The purpose of writing it this way is to make it easier to use, and thus more effective.

This operating agreement was drafted by Sarah Kaplan with input from JustDesign Cooperative, LLC. Many parts of this document are copied or adapted from the Cartoon Operating Agreement for a Co-op LLC, created by the Sustainable Economies Law Center, under the Creative Commons Attribution Share-Alike License. This operating agreement may be used, adapted, and shared, as long as you give appropriate credit, indicate whether changes were made, and share your work under the same license.

Notes

This operating agreement contains notes in the “speaker notes” area below the slides. You might need to adjust your screen to see the notes. The notes give context and help to explain the terms in the operating agreement, but the notes, and this slide, are not part of this operating agreement!


Name

The Company’s name is JustDesign Cooperative, LLC.

In this Agreement, it is also called the “Company.”

Cooperative

JustDesign Cooperative, LLC, is a worker cooperative legally structured as an LLC.

This operating agreement has provisions to make sure that the Company is and will remain a worker cooperative.

Notes:

A worker cooperative is a business in which:

  • members are workers,
  • worker members have a controlling ownership interest,
  • membership is open to any eligible worker,
  • each member has one vote.
  • earnings are split among the members on the basis of patronage.

Limited Liability

No Member of the Company shall be personally liable for the Company’s expenses, debts, obligations, or liabilities.

Notes:

“A principle of limited liability is that Members, generally, will not be responsible for paying off Company debts and expenses, EXCEPT in cases of bad conduct or in cases in which Partners distribute too much money to themselves, and as a result make the Company incapable of paying its debts and obligations.” - Sustainable Economies Law Center’s Cartoon Operating Agreement for a Cooperative LLC, page 9. Thanks, Janelle!

Manager-Managed

The Company is managed by its Managers. Normally each new Member automatically becomes a Manager.

A new Member may request to join without becoming a Manager, and the Company may allow that, using its normal decision-making process.

The Managers are listed on Appendix B, which may be changed when a new person is made a Manager or when someone’s time as a Manager ends. Members do not need to sign the operating agreement again when this is the only change.

Decision-making

Managers make decisions, unless the law requires a decision to be made by Members. Each Member has one and only one vote.

Managers each have one and only one vote.

Decision-making

In order to make decisions efficiently, and to give each Manager some autonomy in their work, the Managers may create committees. For each committee, the Managers must designate, in writing, an area of authority and a budget.

Decision-making

Organization-level decisions will be made democratically by all Managers.

Organization-level decisions are those that affect the entire Company. Some examples are:

  • accepting a new Member,
  • accepting a new project,
  • assigning Managers to a particular project,
  • approving Company-wide budgets,
  • resolving conflicts,
  • terminating a Member, and
  • allocating overhead.

Decision-making

Each proposal for an organization-level decision is posted as a poll in an electronic forum that all Managers can access. Each poll must be posted with a clearly defined time period for voting. After a poll is posted, all Managers must be alerted at least 48 hours before the end of the voting period.

Decision-making

Each ballot or poll response must include a “Yes,” a “No,” and a “Block” option.

Organization-level decisions must be approved by the “Yes” vote of a majority of all Managers. A proposal is approved if a majority of Managers have voted “Yes,” even if some Managers have voted “No.”

Managers who do not vote are considered “No” votes.

Notes:

A “No” vote allows Members to express misgivings but still allow the proposal to pass if enough Members (acting as Managers) vote “Yes.”

Decision-making

A “Block” acts as a veto. A “Block” triggers a meeting between at least one Manager who voted “Block” and at least one Manager who voted “Yes.” These Managers will meet within a reasonable time, depending on the urgency of the decision, to attempt to create a proposal that will address the concerns of those who voted “Block.” If no agreement can be reached, the Company’s conflict resolution policy is invoked.

Decision-making

The exception to the rules above is that a Manager who has not participated in the Cooperative’s business in the last 12 months is considered “inactive.” An inactive Manager may not vote until they become “active” again. An inactive Manager is not counted when determining the number that makes a majority.

Decision-making

Poll responses may have more than one option or candidate. If a majority is not reached on the first vote, the option or candidate with the fewest “Yes” votes is eliminated. The proposers may amend the remaining option(s) before submitting them to another vote. Polls with more than one option or candidate must still include a “No” and “Block” response.

Decision-making

The Company will maintain a written record of all votes.

Meetings

Full group meetings are every other week. Committees meet as needed. Groups of Members working on projects meet as needed.

Meetings are held via online conference, unless otherwise specified in the notice.

Notice is given on an online calendar; All Members have access to the calendar, and all Members receive the agenda and updates on the Cooperative’s slack channel.

Minutes

The Managers will make sure that written minutes are taken for each Manager, Member, and Committee meeting. Minutes are kept with the Company’s records.

Notes:

Minutes should include:

Date:

Who was there:

Topics discussed and decisions made, in reasonable detail.

Some note-takers write down who said what. This can be very helpful. If a discussion is important and the note-taker cannot capture every detail, capture at least the important points made.

At the very least, for each proposal, record how many Yes votes, how many No votes, and how many Block votes.

Contracts

Any Manager authorized by the Company may sign contracts on behalf of the Company.

Each contract needs its own authorization unless the Company makes a policy allowing a Manager or committee of Managers to enter a certain kind of contract.

A Member must not enter into an agreement on behalf of the Company without approval.

New Members

A person may become a Member after a) meeting all of the requirements of the Company’s new member procedure, b) the Company approves the new Member using its decision-making process; c) paying or arranging to pay the Company for the Membership Interest; and d) signing this Agreement.

The Company may adopt a written procedure for adding Members, which must be equally open to all qualified individuals.

The payment to the Company for the Membership Interest is called the “initial capital contribution.” The initial capital contribution, and any later capital contributions, will be recorded in Appendix A. Each new Member’s name and address are added to Appendix A, and if the Member will be a Manager, the new Manager is added to Appendix B. Then the new Member will sign the current version of this Agreement. Existing Members do not need to sign this Agreement again when adding a new Member is the only change.

Departing Members

Resignation: A Member may resign by giving notice to all other Members. A Member may resign at any time except that a Member must complete or arrange for completion or termination of all projects for which the Member is responsible, for example by finding another qualified Member to take over or by refunding any un-earned fees to the client.

If a Member dies, the Member is deemed to have resigned at the time of death.

If a Member files for bankruptcy, the Member automatically resigns as of the date of filing.

Departing Members

The Company will adopt a conflict resolution procedure.

Expulsion: If a Member fails to abide by any of the Company’s ethical and/or participatory policies, then another Member may propose to expel that Member. The Member will be expelled if the proposal to expel is approved using the Company’s normal decision-making process.

If a Member commits an act or omission that would be grounds for expulsion, but no proposal to expel is made, then the Company will use the conflict resolution procedure to resolve the issue.

Notes:

For clarity, I suggest that each policy the violation of which would be grounds for expulsion should say so.

Departing Members

When a Member leaves for any reason, the Member sells the Membership Interest back to the Company in exchange for the balance of the Member’s Capital Account. A Member cannot sell a Membership to anyone other than the Company, and any attempt to do so is void.

Payout to a departing Member: The accounting of amounts due to a departing Member will not be complete until after the end of the fiscal year. The Company is only obligated to pay a former Member to when the Company has cash available to do so, after making the hourly rate payments to all Members and providing for operating expenses. Amounts due to a departing Member must be paid before the Company allocates profits to current Members. If the Company dissolves, the capital account balances of all former Members and all Members who remained until dissolution will have the same priority.

Money

Reimbursements. The Company will reimburse each Member for Company expenses paid by the Member, as long as the expense was authorized, approved, or ratified by the Company.

Money

Capital Accounts. A Capital Account is a ledger on Company’s books. There will be a Capital Account for each Member.

When a Member makes a capital contribution, it is added to the Member’s Capital Account. When money is allocated to a Member but not paid out in cash, it is added to a Member’s Capital Account. When the Member is paid out in cash from their Capital Account, that distribution is subtracted from the Capital Account.

Members may not withdraw money from their Capital Accounts without the Company’s permission. Capital Accounts do not earn interest.

Money

Hourly (But Not Guaranteed) Payments. Members will track their hours worked, including project, administrative, and any other kind of work for the Company.

The Managers will set an hourly rate that the Company will aim to pay the Members for their work. This rate will be the same for all Members and for all types of work. This hourly rate is a goal but is not guaranteed. It is not a wage, because Members are owners, not employees.

Money

Profits. If income is left over after the Managers have paid all business expenses, debts, and hourly rate payments, then the rest of the Company’s net income will be split among the Members equally.

Notes:

This is part is written this way because we expect the Company to be taxed as a partnership for now. If the Company elects to be taxed as a corporation, then it could set aside a collective reserve before splitting income among all the Members. Under Subchapter T of the Internal Revenue Code, the cooperative pays tax on income allocated to an undivided reserve, and if all other income comes from patronage, is allocated to Members, and qualifies as a “patronage dividend,” then the cooperative will not pay tax on it. This means that for a cooperative, one of the main tax consequence of electing corporate taxation is that the cooperative, not the Members, pays tax on money kept in reserve. The other tax consequence is that workers become employees for tax purposes, and taxes must be withheld from their paychecks by the cooperative.

Money

How to Manage Our Reserve. The Managers will set a target dollar amount to be kept in reserve. This target can change from time to time depending on the Company’s plans and needs. The reserve lives in the Capital Accounts (because it grows from profits allocated, but not distributed, to the Members, and from Members’ capital investments).*

We want all Members to have an equal stake in the Company. Therefore, the Managers will set a target Capital Account balance for Members, which will be the target reserve amount divided by the number of Members.

Notes:

* Thanks, Janelle!

Money

How to Split up Income:

At least once a month, the Managers will determine how much of the Company’s income to set aside for operating expenses and reserve. The remaining income will be used to pay towards and up to the goal of the hourly rate payments for all Members. Those amounts will be paid out in cash to the Members based on their hours reported.

If the Company is taxed as a partnership, for any Member(s) who might need to pay quarterly estimated tax, the Company will give the Member(s) a statement of the net income allocated to the Member.

Money

How to Split up Income:

At least once a year, within two months after the close of the fiscal year,* the Company will complete its financial records for the previous fiscal year. Then the Managers will determine the Company’s net income from that fiscal year and find how much is left after the Hourly Rate payments made in that fiscal year. That remaining amount will be allocated equally among the Members.

The Managers will determine how much of that remaining amount to hold in Capital Accounts, and how much to distribute in cash. Members with lower Capital Account balances should be building towards the target (but see the next slide). Allocations to Members with higher Capital Account balances can still be kept in the Capital Accounts if the Company needs that money to reach the overall target reserve amount and cannot yet afford to equalize Capital Accounts. If the overall target reserve amount is met, then allocations to any Member that would make their Capital Account balance go above the target can be distributed in cash.

Notes:

*This is so that the Company can give tax information to Members in time for the Members to prepare their own tax returns.

Money

Members are responsible for tax on ALL of the income allocated to them by the Company, even if they do not receive it in cash. No matter what, and even if it conflicts with another part of this Agreement, the Company will distribute at least enough cash to all Members to cover the Members’ tax liability for all allocations made to them during the fiscal year.

Notes:

LLCs are taxed as partnerships unless they elect to be taxed as a corporation. In a partnership, all income and loss must be allocated to the partners--it all must be allocated to someone. The partners will have to include all income and loss allocated to them on their tax returns. This includes hourly payments, cash distributions, and amounts the Company retains! The Members will probably want the Company to pay out at least enough cash to cover the Members’ tax liability.

Money

Losses. If the Company has a loss instead of a profit for a fiscal year, the loss will be allocated to all Members in proportion to their capital account balances*.

Members are not required to contribute cash to the Company to make up for a loss.

Losses will not be allocated in a way that would violate tax rules. If any violation is discovered, the allocation will be changed only as much as needed to conform to tax rules.

Notes:

*There are several ways to allocate losses in a cooperative. Some choices are:

Equally among all members;

In proportion to capital account balance;

In proportion to patronage for that year (leaving in place capital account balances that members earned or contributed in prior years);

Among the Members based on their appetite for a tax loss, i.e. if they have an abundant income from another source and want to set off some of that with a loss from the co-op.

Under a) this is more fair to people who worked hard and contributed to the gains the co-op did have that year (assuming that profits are split on the basis of patronage). People who worked/contributed less could have a negative capital account. We could say that they have no obligation to bring it up to zero. So the consequence is that the co-op ends up owing more to the higher capital account balance people when they leave. The co-op is only obligated to pay that if it does have extra profit, so I think that is fair to all.

b) This would allocate losses the default way for LLCs and the way the IRS would expect. It might be fair (???).

c) If you worked and were involved, you should take the loss, someone who was less involved should feel less of the loss (???).

d) If someone has a high income from another source and wants the loss, and someone else doesn’t want a loss, splitting it up according to negotiating preferences could be the best for all parties, but I think this is a bad idea because it is setting up the members for conflict with no rule on what the answer should be. Maybe the rule should be that losses are shared equally, but if someone would benefit by having the loss allocated to them, they could request it?

Money

What Happens if the Company Dissolves or is Sold.

In the event that the Company is dissolved, after all of its expenses and debts are paid or provided for, any remaining assets will be distributed:

First to all Members and former Members in the amount of (or if funds are insufficient, in proportion to) their capital account balances; and

Second to all Members and former Members in proportion to the total number of hours of work they performed for the Company.

Exception: If the amount to be distributed to former Members would be less than $500 each, then the remainder or net proceeds may but do not need to be shared with former Members, because the administrative work would not be justified.

In the event that the Company is sold, net proceeds from the sale will be distributed in the same way.

The above provisions may not be changed without the written approval of all Members and living former Members who respond within 30 days after reasonable notice.

The payment that would go to a former Member who has died will go to the Member’s designated beneficiary. If no beneficiary is designated and the Company cannot find an appropriate representative with a reasonable effort, or if the Co-op cannot find the former Member or designated beneficiary using reasonable effort, the Company will not be obligated to distribute to that Member or that Member’s beneficiary, estate, or heir. It is the former Member’s obligation to keep the Company informed of the former Member’s current contact information and designated beneficiary’s name and contact information.

Conflict Resolution

Members will use the Company’s conflict resolution process to attempt to resolve conflicts.

Unless otherwise provided by this Agreement or by law, any disagreement or claim related to this Agreement not resolved by the conflict resolution process will be resolved through mediation. Members must attend and participate in good faith in three mediation sessions (whether part of the conflict resolution process or not) before bringing any conflict to arbitration. Any claim relating to this Agreement or its interpretation shall be submitted to binding arbitration, and a court of competent jurisdiction may enter judgment on the arbitrator’s award.bringing any conflict to court.

Notes:

This slide reflects this company’s preference for binding arbitration. Companies in other lines of business might leave open the option for a member to bring a claim to court.

Records

The Company will keep and maintain at least these records:

The records required to be kept according to Illinois law:

  • For each Member: the full legal name, last known address, all capital contributions (if property or services, include a description and statement of the agreed value), the Percent Interest, and the date the person became a Member;
  • A copy of the Company’s file-stamped Articles of Organization and any amendments;
  • The Company's federal, state, and local income tax returns for the three most recent taxable years;
  • A signed copy or copies of this Agreement and any amendments; and
  • Any financial statements of the Company for the most recent three years.

These additional records:

  • Policies and Rules adopted by the Managers;
  • Meeting minutes and voting records;
  • Work records: The hours or other measurement of work done by each Member each year. The Company will maintain these records indefinitely; and
  • Members’ designated beneficiaries.

Records

Records must be kept in a place that all Members can access. Records may be electronic, as long as they can be printed on paper reasonably easily.

Changing this Agreement

The Members may change this Agreement at any time using the Company’s usual decision-making process, unless another part of this Agreement sets a different requirement for how that part can be changed. All Members will sign all new versions of this Operating Agreement or an amendment, to show that the change was adopted.

The Company will keep a copy of every previous agreement.

Other Rules and Policies

Generally, the Managers will always be thinking of ways to improve the Company’s procedures, rules, and policies.

The Managers can adopt rules and policies outside of this Agreement, as long as they do not conflict with this Agreement. New rules and policies must be in writing and kept in the Company’s records.

Miscellaneous

The law of the State of Illinois will govern this agreement.

The notes below the slides are for informational purposes only. The notes and the table of contents are not part of the operating agreement.

Severability. If any provision of this Agreement is held to be unenforceable by a court of competent jurisdiction, then, to the extent possible, the unenforceable provision will be deemed modified to one that is valid and that most closely approximates the intent of the parties, as evidenced by this Agreement. If the unenforceable provision cannot be so modified, it will be stricken, and the other provisions of this Agreement will remain in effect.

Members may sign separate identical copies (counterparts) of this Agreement. Members do not all need to sign the same copy. Signatures may be electronic.

Definitions

“Agreement” means this Operating Agreement of the Company, as amended.

“Capital Account” means an account or ledger for each Member recorded on the Company’s books, consisting of the Member’s Capital Contribution(s), and increased or decreased from time to time under the terms of this Agreement and adjusted as required by applicable tax laws.

“Company” means JustDesign Cooperative, LLC, a limited liability company formed under Illinois law.

“Manager” means a person who manages the day-to-day operations of the Company. The term “Manager” in this Agreement has the same meaning given by the Illinois Limited Liability Company Act.

“Member” means each person who acquires any Membership Interest in the Company pursuant to this Agreement. The Members are listed in Appendix A, as may be updated from time to time according to the terms of this Agreement. Each Member’s rights and obligations with respect to each other and the Company are set forth in this Agreement.

“Membership Interest” means the entire ownership interest of a Member in the Company, including economic rights, the right to govern the affairs of the Company, the right to any and all benefits to which a Member may be entitled as provided in this Agreement and by the Act, together with the obligations of membership.

“Percent Interest” means the percent of the Company owned by a Member. All Members will own an equal percentage of the Company.

Appendix A: Members

See attached

Notes:

I suggest making a spreadsheet to include: Full Legal Name, Address (business and/or residential), Capital Contributions, Percent Interest, Date Joined, designated beneficiary’s name, phone number and address.

Appendix B: Managers

Name, Address

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