Tag Archives: worker co-op

Cooperatives, Education

Fundamentals of Co-op Taxation — A “Must Watch” NSAC Webinar, 4/19/23

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Everyone who reads my blog or works with me knows I’m a vocal proponent of the cooperative structure as a sustainable and enriching alternative to classic shareholder business models. Co-ops allow companies to distribute wealth among those that do business with it, rather than to investors just trying to make a buck. They exist to fulfill member needs, rather than to generate profit — though they can be lucrative to those involved. They also often have “collateral goals” that are in concert with the main mission, which often are focused on community engagement, social equity, and environmental issues.

However, there simply aren’t enough accountants out there who know about this model, or how to navigate some of the special treatment under Internal Revenue Code. That’s why the work that the National Society of Accountants for Cooperatives is essential. They provide the education and outreach to help accountants excel in this often-misunderstood realm of society.

To that end, I want to encourage folks who might be interested in breaking into this area to attend the upcoming “Fundamentals of Cooperative Taxation” webinar coming up next Wednesday, April 19th. What better way to relax after Tax Day than by watching a webinar on an unfamiliar area of taxation, right?

I happen to know one of the presenters, Teree Castanias, personally, and let me say, she is a powerhouse of knowledge! You don’t want to miss this class. As a bonus, the webinar is FREE to NSAC members (and only $59 for non-members). Use this as an opportunity to join today and get an amazing slate of webinars delivered to the comfort of your home every month.

And while you’re in there, consider watching a recording of my recent NSAC presentation on grocery, housing, and worker co-ops, entitled “Hippie Co-ops? Expanding Your Co-op Expertise to Other Cooperative Niches“. It was a hit, if I do say so myself!

Fundamentals of Cooperative Taxation

Date: Wednesday, April 19, 2023
Time: 01:00 PM ET / 12:00 PM CT / 11:00 AM MT / 10:00 AM PT
Presenters: Teree Castanias, CPA, Principal, Teresa Castanias, CPA, Brett Huston, CPA, Tax Managing Director, Associate National Director of Cooperative Tax Services, KPMG – retired
Moderator: Wayne Sine, CPA, MBA, Director of Education, National Society of Accountants for Cooperatives
Objective: 
1. To operate on a cooperative basis for tax purposes, a company must meet specific tax rules in Subchapter T of the Internal Revenue Code. Attendees will understand the basic rules that must be met under Subchapter T.
2. Attendees will learn the definition of a patronage dividend and how it can be computed and distributed to members/patrons.
3. Attendees will also learn about the taxation of the member/patron, and the Form 1120-C that is used by Subchapter T cooperatives for filing its tax return.
Field of Study: Taxes
Program Level: Basic
CPE Credit: 1.5 Credit Hours
Delivery Method: Group Internet-based
Prerequisite(s): No advanced preparation or prerequisites are required for this course.

Course Description

Teree Castanias and Brett Huston, both CPAs, will present the basic rules of Subchapter T of the Internal Revenue Code and describe how those rules affect a cooperative’s tax return, Form 1120-C.

This session will be helpful for anyone who wants to know what tax rules are required for a cooperative.

Presenter and Moderator Bios

Presenter: Teree Castanias, CPA, Principal, Teresa Castanias, CPA

Teree is a CPA and has been working with cooperatives for over 40 years.  She retired from KPMG in September 2009 after 32 years where she was a Tax Partner and the firm’s National Director for Cooperatives.  She has worked with many types of cooperatives over the years, including large and small agricultural marketing and supply cooperatives, wholesale grocery, specialty supply, rural electric, Farm Credit agricultural lending, consumer grocery, and worker cooperatives of various types.  She has assisted cooperatives from inception throughout their corporate life.  Teree has been active in legislative issues affecting cooperatives, including Section 199 in 2005 and its predecessor provision, Section 199A, in 2017.  Teree is active in several cooperative organizations – National Council of Farmer Cooperatives, National Society of Accountants for Cooperatives, and recently Cooperative Professional Guild.  She has been in leadership positions in NCFC and NSAC and is a frequent speaker at webinars and conferences of all of these organizations.

Teree continues to provide cooperative consulting and litigation support services to all types of cooperatives in her own firm from October 2009 to present.

Teree recently retired from the Farm Credit West board of directors upon its merger with Northwest Farm Credit Services which became AgWest Farm Credit.  She also served on the board of directors of California Center for Cooperative Development in Davis, California for over 15 years.  Currently she is serving as a board advisor to Wine Service Cooperative in Napa, California, and as a Finance Committee member for Davis Food Cooperative in Davis, California.

Presenter: Brett Huston, CPA, Tax Managing Director, Associate National Director of Cooperative Tax Services, KPMG – retired

Brett is a CPA located in Auburn California. He has been working with cooperatives for over 32 years. He will be retired from KPMG in February 2023 and will continue to work with cooperatives in retirement. Brett was a Tax Managing Director with KPMG and the Associate National Director of cooperative tax services for KPMG working out of the Sacramento office. He has worked with agriculture marketing, supply, rural electric, consumer and Farm credit cooperatives. He has experience in providing tax compliance and consulting services to cooperatives including consultation regarding Section 199A, patronage and nonpatronage allocations, cooperative bylaw review, and state and local cooperative issues. He is currently a tax member of the National Council of Farmer Cooperatives and the National Society of Accountants for Cooperatives.

Moderator: Wayne Sine, CPA, MBA, Director of Education, National Society of Accountants for Cooperatives

Wayne Sine is an experienced and highly knowledgeable professional in the field of Tax. Wayne recently retired as Tax Director from his company, Southern States Cooperative. He has extensive experience working with agricultural cooperatives and has been a long-time member of the NSAC. He is extremely active in the NSAC, serving as both past Chapter President of the Atlantic Chapter, and past Chair of the Tax Committee, and is currently serving as the NSAC Director of Education. Wayne’s career is marked by several accomplishments, and he has always been involved in many organizations, spreading his knowledge. Wayne is a member of the Legal, Tax, and Accounting (LTA) Committee for the National Council of Farmer Cooperatives. He is also Past Chair of both the Tax Committee of the Virginia Chamber of Commerce and the Virginia Manufacturers Association. Wayne also served on the Tax Policy Committee at the Virginia Society of CPAs and served as past Region Vice President for the Tax Executives Institute.

Cost
Free for NSAC Members / $56.00 for Non-Members

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Cooperatives, Education, Tips

Transitioning To Employee Ownership: FREE On-Demand Webinar

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Yesterday I attended an excellent webinar on how two different small business owners transitioned ownership to their employees — one using an ESOP and one using a Worker Co-op structure.

As a CPA and consultant to many small business owners, I often am asked about succession planning and exit strategies, and my experience in cooperative taxation often leads me to recommend a transition to employee ownership. So I was glad for the opportunity to learn from the experiences of these folks who are in the thick of it.

My colleague Courtney Berner of the University of Wisconsin Center for Cooperatives led the webinar and Q&A, and Steve Storkan of the Employee Ownership Expansion Network interviewed business owners Gina Schaefer and Marty Ruddy.
– Courtney – https://uwcc.wisc.edu/staff/berner-courtney/
– Steve – https://eoxnetwork.org/
– Gina – https://acehardwaredc.com/pages/employee-owned — gina@acehardwaredc.com
– Marty – https://www.terrafirmamn.com/

I strongly recommend the informative and helpful free recording!

And just in case they might be helpful as an outline or while following along with the recording, the notes I took during the session are below.

Thanks again to Courtney, Steve, the panelists, and UWCC for this excellent resource!

Three main EE ownership structures —

  • ESOPs, most common, about 70% – better for larger busineses
  • Worker co-ops, less common but fast-growing
  • EE Ownership Trust, more common in Britain

Half of privately-held businesses are owned by boomers — who will be retiring soon (the “silver tsunami”).

ESOP – Employee Stock Ownership Plan
Employee financial control, not management control.
How does it work? the company gets a loan (from bank or owners) to pay the owners (whatever percentage ownership is agreed upon; can happen in tranches)
The owners get paid, and the company pays the loan off over time on behalf of the staff, and releases the stock to the employees
Employees just “get” their shares as opposed to worker co-ops where each member has to buy in.
Owner can remain CEO as long as necessary.
The tax benefits of an ESOP can save about 20% of value in terms of the company price compared to selling to private equity.
Vests in 20% increments annually until the employee is fully-vested.
If someone departs, the company has five years to pay them off.

Worker Cooperative
Employee-Owners have both financial and managerial control. One member, one vote.
Must sell 100% ownership to the workers; no partial purchases like with an ESOP.
Owner may become one of the many worker-owners in the new structure.
Owner or bank can finance a loan to pay the owners off over 15 years or however long.
John Abrams model – buy-in for each new owner is the price of a decent used car. :)
So they are two different things: buy-in by each worker-owner, vs company-held loan to pay off the owner.
Company can lend each owner some of the money to buy their share if that helps.
What happens if someone leaves from Marty’s worker co-op: the company has five years to pay back $9k initial investment if necessary,
but usually pay it off very quickly just to get it off the Balance Sheet if they have the cash to do it.
Then the internal capital account gets paid out in a different way, on a schedule with other owners.

Inviting staff to have an ownership mentality and be a democratically-run organization is very valuable, especially in anticipation of transitioning to ownership — but different from actual EE ownership.

Recommended book: John Abrams, “The Company We Keep”.

Neat idea – buying a pie for new owners as a way to say “here’s your piece of the pie”.

National Cooperative Resource Map – links to co-op development centers, associations, cooperative-friendly capital, co-op statutes by state:
https://uw-mad.maps.arcgis.com/apps/MapSeries/index.html?appid=a5eda85604f84f02a4f24b3b4483fb69

Questions from Q&A:
Are you using the terms “Exit Planning” and “Succession Planning” interchangeably, or do they have different meanings for you?
How did you educate your employees on employee ownership?
I am working with two businesses doing projects with students in my co-op business management course. An existing worker co-op has lots of legal questions how they can and/or must differentially treat workers as employees and workers as owners. Can you advise a good first landing on legal assistance to help get their questions answered or directed to those who should. I’m no lawyer and most that I work with are in the farmer co-op world. Thanks.
What is your advice for business-owners where the owner is the key employee with specialized knowledge and credentials that is not easily replaced by other existing staff?
In Marty’s buy in model, can that buy in level be paid to the co-op over time (installments) or is it all upfront (day 1).
What happens to the equity in the business as an employee leaves, and how is that different between the 2 structures
Could a consumer cooperative spin off, say, 30% for employees to become owners under either of these structures?
What is the difference in governance control of workers as an ESOP vs a Worker Co-op? I expect there is a range of options.
A follow up to the question about spinning off 30% of a consumer co-op, could the creation of the ESOP or worker co-op component be a vehicle for capitalizing the co-op for expansion or other purposes?
Are worker equity shares in a worker co-op appreciable over time?
Steve, you mentioned existing ESOPs or Coops bringing in another small biz as a merger/acquisition, perhaps sold by a founder with no buyer prospects. Can you talk more about this as another pathway for transitioning an existing biz to an employee-owned company?
I appreciate the conversation about sharing the wealth, but one challenge I see as a CPA is that workers are always convinced that owners are “hoarding” the profits and that’s one of the motivations for becoming worker-owned. However, the company has to be healthy and profitable for this to happen! It’s not magic. If the company is struggling, the worker-owned version of the company will struggle, too. It’s not a magic bullet.
I know there are food co-ops that are also worker co-ops. How could a consumer co-op facilitate their workers starting their own worker co-op inside the food co-op?
Are there incentives, support, programs, etc. for someone looking to start a private business with a roadmap from the beginning to convert to an employee ownership model?
If a small worker owned cooperative or ESOP is often structured as a partnership for tax purposes, does the cooperative structure only impact management?
For Marty, how do the workers owner manage or address the tension between investment in the equipment needed for the business versus profits place into the internal capital account and subsequently distributed?
Interested in any ideas or models for how workers in a consumer co-op might gain “more stake in the game,” feel a real sense of ownership and directly benefit from the growth and success of the business.
What are unique challenges associated with performance management (horizon problem, shirking, freeriding, etc) at employee owned businesses? Do you use any tools/tech for reviews, ratings, etc?
Can you highlight top 3 challenges of running an employee owned business that technology or tools can help solve?
Is there any way to plan succession or manifest employee ownership when the company is merely a one or two person shop without younger family?

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.