A coop incubator is an organization set up to help coops form. Most coop incubators are nonprofit 501(c)(3)s or they are coops themselves.
How can a 501(c)(3) justify setting up coop businesses as a charitable/educational activity? Generally speaking, an organization that provides business services to disadvantaged populations qualifies for 501(c)(3) status. So if a nonprofit helps low income people set up worker coops, for example, it should be eligible for 501(c)(3) tax exemption.
Also, an organization that offers education and training to people interested in learning more about coops and how to form them should qualify for 501(c)(3) status as an educational organization.
One example of a nonprofit that is a coop incubator is WAGES. The Arizmendi Association of Cooperatives (AAC) is coop that incubates coops. The members of the AAC are the coops that the AAC has incubated.
Is it a good idea for the incubator to retain ownership and/or control of the coops it incubates?
Some of the reasons to do this are
- Protect community assets – allows the incubator to ensure that the coops it sets up continue to be coops and to serve the incubator’s mission
- Generate resources for the incubator – if the coops that the incubator sets up are successful, they can channel some of their profits to the incubator, making it possible for the incubator to set up more coops
- Ensure ongoing participation in a larger movement – for example, some unions are incubating coops and would like the coops they incubate to be unionized
The amount of control the incubator has over the coops it incubates does not need to be static. Control can be transferred over time as the coop members gain skills for self-management. It is important to be clear up front about the timeline for transition.
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If the coop is taxed under Subchapter T of the Internal Revenue Code, it is necessary to ensure that patron member control is meaningful – if the incubator has too much control, this could jeopardize the coop’s eligibility to be taxed under Subchapter T.
What kinds of relationships can there be between the incubator and the coops it incubates?
- The coops can have a special class of membership for the incubator – this special class can have the same voting rights as other member classes or can have limited voting rights, such as the right to vote only on major decisions like dissolution of the coop
- The incubator can be named in the coop bylaws as an entity that has the right to designate some of the coop board members (under some state coop statutes)
- There can be contractual relationships between the incubator and the coops – examples include licensing of intellectual property to the coop, lease of space to the coop, etc.
Note that the incubator will need to consider whether the relationship that it creates with its incubated coops could create an inadvertent franchise.
Also note that if the coop is a “pass through entity” (i.e. taxed under Subchapter C or Subchapter K of the Internal Revenue Code), its activities can be attributed to its owners. If a 501(c)(3) owns an interest in a pass through entity that does not conduct charitable/educational activities, the nonprofit’s tax exempt status could be jeopardized.
When AAC starts a new worker coop bakery, AAC appoints the initial board. The workers go through a 6-month candidacy process before they become members. After the initial workers become members, the AAC-appointed board resigns and appoints the first worker-member board.
AAC coops must agree to certain principles if they want to continue to use the Arizmendi brand and trade secrets. These include
- requirement to do quarterly reports
- minimum 3-month candidacy period for new workers
- no permanent/indefinite non-member employees
- one member-one vote
The AAC provides a lot of support to its member coops to get off the ground – they deposit funds in the coop’s bank to guarantee their loan, they enter into a lease with the landlord and sublease to the coop, and they provide extensive training on baking and coop governance.
There are currently six Arizmendi coops and more on the way!