BUSINESS LAW

A COOPERATIVE is an organization of individuals or businesses (“members”) that provides services that the members need. The goal of a cooperative is to provide services to its own members at a lower cost, and more efficiently, than if third parties were used. Unlike a corporation, members of a cooperative share equal control and ownership (“one member, one vote”). Also unlike a corporation, a member’s interest in a cooperative is not saleable (however, an interest may be transferable, if allowed under the cooperatives articles of incorporation or bylaws).

In California, the Consumer Cooperative Corporation Law, enacted in 1982, regulates entities which operate as cooperatives.  However, cooperatives may be organized as corporations, limited liability corporations (LLC), or even remain unregistered with the State.

TYPES OF COOPERATIVES

The U.S. Tax Court has divided cooperatives into two categories: consumer and producer. In consumer cooperatives, the members are consumers, and the cooperative offers products to benefit the members. In producer cooperatives, the members are producers, and the product the members make is processed or marketed by the cooperative.

INDUSTRIES

Cooperatives exist in many industries, including agricultural (e.g. Sunkist, Blue Diamond, Sun-Maid); utility (e.g. Palo Alto Park Mutual Water Company, Central Florida Electric Cooperative); housing; consumer goods (e.g. REI, ACE Hardware); education. Cooperatives can be established in nearly any industry, for any purpose, so long as they are organized and conduct business activities primarily for the benefit of its members, and not to make a profit.

INVOLUNTARY DISSOLUTION of a CORPORATION (S-CORP/C-CORP) in CALIFORNIA

May be filed by:

• ½ or more of directors
• 33 1/3 or more of share holders or equity holders*

* can be 33 1/3 of total shares or 33 1/3 of total common shares; in any case, the total excludes shares of those who are in control of the corporation and are “guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers”

DISSOLUTION OF A CALIFORNIA LLC

A CA Limited Liability Company (LLC) is dissolved when any of the following occur:

• A specific event (e.g. a date set, a goal reached, etc.) that is specified in the operating agreement
• Members with 50% or more of the voting interest decide it is
• Generally, if it has no members for more than 90 days
• A Court Order

If an LLC is formed, it can be cancelled within a year if it does no business and meets certain other basic requirements (filing a Franchise Tax Board return)

If a court case for dissolution is filed, the member(s) that oppose the dissolution can prevent it by buying out the member(s) that want the dissolution.

• Purchase must be cash
• Purchase price is “fair market value”
• If the parties cannot agree on fair market value, the Court will halt the dissolution until it can determine the fair market value
• The Court determines fair market value by appointing 3 independent appraisers

[CA CORP § 17707.03]

A LIQUIDATED DAMAGES CLAUSE in a contract specifies an amount of damages that party is entitled to for a particular breach of that agreement. The purpose is to streamline, or even deter litigation altogether by setting a fixed amount for the breach. They are very useful in eliminating unpredictability, and ultimately costs. However, there are several rules that must be followed, or the clause will be invalidated by a Court.

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.

501(c)(3) ORGANIZATIONS*

Types of Organizations That May Qualify:

• Religious
• Charitable
• Scientific
• Testing for public safety
• Literary / Educational
• Amateur sports competition
• Prevention of cruelty to children or animals

* 501(c)(3) organizations are exempt from paying federal income tax, and, in some cases, charitable contributions to a 501(c)(3) organization are deductible by donors.

Note that 501(c)(3) status is a federal tax exemption, and state organization and other laws must still be complied with.

Every 501(c)(3) organization is either a Public Charity or a Private Foundation.  The classification is important because different tax rules apply to each one.  In general, Private Foundations are subject to more stringent requirements than a Public Charity.

(Note that the name of the organization has nothing to do with the classification.  For example, there are Public Charities with the word “Foundation” in the name).

If you do not qualify as a Public Charity, you are a Private Foundation.  Private Foundations are further broken down into Nonoperating Private Foundations or Private Operating Foundations.  Private Operating Foundations have more favorable tax rules in regard to donor contributions and grants, but your organization must qualify based on IRS tests.

PARTNER MUST BE BOUGHT OUT AT THE GREATER OF:

• Liquidation value*
• The going concern value**

* In the context of a partnership, liquidation value is not distressed sale value; in the context of a corporation, the fact that assets are being old under distressed conditions is considered

** What a willing buyer would pay a willing seller (includes goodwill); this amount is reduced based on the fact that the dissociated partner will not longer be involved; however, the dissociated partner does get value for the goodwill that was already built in the business

VALUATION BUYOUTS: S-CORP/C-CORP VS LLC

A corporation buyout is based on “Fair value”

An LLC buyout is based on “Fair Market Value”

* Fair Value “shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation” (CA Corp Code §2000)

** Fair Market Value has not been defined, but it appears to involve less “deductions” than Fair Value, meaning it will generally yield a higher buyout value

WINDING UP AN LLC : THE PROCESS[1]

1. Determine all the known debts and liabilities of the LLC (including debts and liabilities to members who are creditors of the LLC)
2. Pay or settle all debts and liabilities[2]
3. Distribute remaining assets according to member rights and preferences (paid in the following order):[3]
   1. Compensation for work in dissolution process
   2. Return of contributions
   3. Distributions to members

[1] CORP § 17707.05

[2] Even if dissolution has been filed, an LLC continues to exist as long as it is pursuing and defending court actions necessary for winding up

[3] CORP § 17707.05(a)

WINDING UP AN LLC : WHO CONTROLS?[1]

If dissolution is by Court Order, the order controls the winding up process.  If dissolution happened without a Court Order, the following person(s) are in charge of the process:

• The manager(s) who did not wrongfully dissolve the LLC, or if none:
• The members, or if none:
• A majority of the people who signed the Articles of Organization

* The person(s) responsible for winding up is/are entitled to reasonable compensation.

** Even if dissolution was not done by Court Order, members or managers can file action for an order determining how the winding up process should go.

[1] CORP § 17707.04