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Setting up a Worker Cooperative With an LLC

Cliff Ennico on

"I have run a successful service business for many years.

I am getting ready to retire and have been approached by several local competitors who would love to buy my business.

The problem is that I have several long-serving employees in their 40s and 50s who would probably be terminated if I sold the business, with little chance of their being reemployed in this area.

I would prefer to sell this business to my employees, but an employee stock ownership plan sounds too complicated for a small business like this one.

I've been reading online about worker cooperatives that can be set up using a limited liability company, but as I understand them LLCs cannot retain earnings; everything must be distributed to the owners at year-end, which would prevent this business from growing over time.

Could you please address this in one of your future columns?"

 

First of all, this reader gets my nomination for sainthood. Most of my retiring clients would grab at the cash being offered by the competitors and leave their former employees twisting slowly, slowly in the wind.

The concept of a worker cooperative, dating back to the 1930s in the United States, is beginning to be dusted off and looked at with fresh eyes, not only in situations like this one but in Millennial-owned ventures that are rejecting the traditional pyramid-shaped hierarchy in favor of a more collaborative (some might say socialistic) approach to management.

In a worker cooperative, the employees run the show and own the stock. Decisions are made either by the employees directly in periodic meetings or by a committee of employees who handle the day-to-day business, leaving only big decisions to a vote of all employees.

An employee stock ownership plan, or ESOP, is a tax-driven device designed to give employees a stake in the future profits of the business, but without necessarily giving them management rights. The IRS rules for ESOPs are very complicated and are easy to foul up (explaining why most ESOPs are managed by professional investment firms, for sizable fees), and I agree would probably not be appropriate for this reader's company.

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