Clearing the Legal and Financial Pathway for Worker Cooperatives in Illinois – Next City

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Clearing the Legal and Financial Pathway for Worker Cooperatives in Illinois

Salsedo Press is an established worker co-op in Chicago that incorporated prior to Illinois's new worker co-op law. Advocates are hoping the new law will lead to many more co-ops like this one. (Photo by Oscar Perry Abello)

For Renee Hatcher, it was growing up in Gary, Indiana, seeing what the loss of 25,000-plus jobs from U.S. Steel alone had done to her neighborhood and others in the city that many think of as the murder capital of the country. The resilience and cooperative spirit of those around her planted a seed that flowered into Hatcher’s work today, providing free legal assistance to worker co-ops and other cooperatives in and around Chicago.

“A lot of times what we don’t hear about disinvested neighborhoods is all the relationships, the wonderful things that take place, the connections people have, all of the things that are possible and that people make possible in those places while also knowing that there are challenges,” Hatcher says.

For Brenda Rodriguez, it was organizing as part of the worker rights movement in Chicago, when her colleague at Centro de Trabajadores Unidos (CTU) brought up worker cooperatives as an alternative economic model during a period of fever-pitched searching for alternatives to an economy that had left the 99 percent behind. Rodriguez went on to help launch a project to incubate worker cooperatives.

“The worker cooperative project felt like the space where I could go an envision an economy that would work for us, it was something I could focus my energies on to build something different,” Rodriguez says.

For Camille Kerr, it was doing prison reform work during law school in Cincinnati that brought her to worker cooperatives.

“I saw how much the economic insecurity affected people’s physical security and wanted to see what alternatives there were to help build a more just economic system. There weren’t a lot of other options out there,” Kerr says.

Kerr, Hatcher, Rodriguez and Ana Guajardo Carrillo (Rodriguez’s colleague, the director of CTU) recently played key roles in passing the Limited Worker Cooperative Association Act, voted unanimously through both houses of the Illinois state legislature earlier this summer and signed into law by Governor J.B. Pritzker this month. The act creates the new Limited Worker Cooperative Association (LWCA) entity under Illinois state law, allowing worker co-op members to register their businesses in a legal form tailored to protect the essential features of worker ownership and control. The act also eliminates or reduces some major barriers for worker cooperatives to raise capital from their members and their communities. The law goes into effect on January 1, 2020.

“Thinking about the moment, it’s sort of the zeitgeist,” Rodriguez says. “All the candidates recently running for mayor [in Chicago] were talking about co-ops, folks were realizing this is a proven model to help communities of color control their destinies and write a new narrative of the economy so we’re not always the ones at the bottom being exploited and reclaiming the economy so that it works for us.”

According to the latest “State of the Sector” report from the Democracy at Work Institute, which supports worker cooperative development across the United States, there are now some 450 known worker co-ops around the country, up from 297 in 2013. Altogether, worker co-ops today are earning around $467 million in gross annual revenues, supporting more than 6,700 worker-owners.

Those numbers might be higher if not for unfamiliarity with the business model among funders, local agencies and a lack of startup capital — just some of the key barriers facing worker cooperatives. Advocates in Chicago and in Illinois more broadly hope the new law will help address some of those barriers in their state.

Rodriguez is now community partnerships manager at Chicago Food Policy Action Council, one of the key organizers of the Illinois Coalition for Cooperative Advancement, which formed over the past year or so to get the LWCA Act passed. She still works part-time as a worker co-op developer with CTU, the worker and immigrant rights center on Chicago’s southeast side where she first learned of worker cooperatives from her boss.

Rodriguez tells of an experience last year helping four women form a worker-owned catering co-op business. Rodriguez accompanied them to Chicago’s Department of Business Affairs and Consumer Protection for what might have otherwise been a standard meeting in order to obtain some of the necessary permits and licenses for a catering business. An administrator needed to meet with the business owner, so all four women went, but Rodriguez says the administrator refused to meet with more than two of the women at once. It didn’t sit well with the women, who had been working as a group at all other stages of forming the business.

“We had to pick two people on the fly and go over the talking points again with only two of them instead of four,” says Rodriguez.

The four women eventually formed Cooperativa Visionarias last year, incorporating a conventional limited liability company (LLC) as a workaround like many worker co-ops do. Only a dozen or so states actually have worker co-op entities on the books.

“In the course of representing co-ops we’ve found a way to work the laws that are available to best fit their needs,” says Hatcher, the pro-bono co-op lawyer who helped get the new law passed. She’s also an assistant professor of law and director of the Community Enterprise & Solidarity Economy Clinic at The John Marshall Law School in Chicago.

Hatcher says the lack of a worker cooperative entity in Illinois state law has made it somewhat difficult to get resources to worker co-ops, especially in Chicago.

“In stakeholder meetings or funder meetings, one of the reasons they would hesitate is there was nothing in the law that recognizes worker co-ops,” Hatcher says. “That wasn’t exactly the case but it is certainly helpful for those wanting to form co-ops and for funders if it is explicitly written into law.”

CTU has been working on the legal entity issue since at least 2014, Rodriguez says. That’s when the organization looked to pass legislation to include worker co-ops under the state’s existing cooperative act. Ultimately, that didn’t happen. Instead, the new law creates an entirely new legal entity, the LWCA, akin to an LLC but especially designed for worker cooperatives. There will be a few more kinks to work out going forward, but in time advocates expect the new legal entity will also make it easier for worker cooperatives to open business bank accounts or obtain the necessary insurance as a worker co-op instead of an LLC or other entity. In Rodriguez’s view, it turned out even better, as the new law is specifically tailored to worker cooperatives instead of just grafting them onto the existing law.

Each LWCA must have at least three members, and one of the key features of an LWCA is that worker-owners are not strictly defined as employees, which would require significantly more regulatory compliance and startup costs. It’s a departure from even the previously existing cooperative and agricultural cooperative entities, and one that advocates see as key to paving a new pathway for business ownership for the 70 percent of Chicago who are people of color.

In contrast with Chicago’s population at large, only 15 percent of Chicago businesses are black-owned and less than 10 percent are Latinx-owned. Counting only businesses with at least one employee besides the owner, just two percent of those businesses are black-owned and six percent are Latinx-owned. Advocates hope to bring up those numbers using the LWCA as a pathway for worker cooperatives to incorporate and launch without some of the typical startup burdens of hiring full-time employees.

“One of the drivers of this bill was that many of the new worker cooperatives have been created in communities of color, a lot are majority or entirely owned by women of color,” Hatcher says. “So we’re seeing this as a tool for grassroots, neighborhood-level community economic development.”

With the surplus funds from her consulting work supporting worker cooperatives all over the country, Kerr, the former Cincinnati law student who went on to work in worker co-op development around the country, is currently funding the incubation of a worker co-op made up entirely of women returning from incarceration to Chicago. The co-op itself doesn’t yet have a name, but she calls the project “Re-Enter and Own.” Working with a business consultant (whom Kerr hired) and other key partners, the founding group selected prepared meal production as their business, and hope to sell to universities, hospitals and other large institutions as well as finding ways to increase access to healthy prepared meals across Chicago.

“We’re going to use the LWCA law,” Kerr says. “And we are working with [Hatcher’s clinic] to make the template and have this kind of become a model for others to go through this incorporation process.”

Advocates also hope the new law will help worker cooperatives raise startup capital. In a white paper Hatcher authored a year ago, she explains how there are some sources of startup capital, like Accion, for businesses in historically underserved neighborhoods of Chicago, but these lenders generally rely on borrowers to sign personal guarantees as part of taking out a loan — something that doesn’t work for a cooperative with multiple owners. At the same time, the white paper notes, there are lenders like Chicago Community Loan Fund who have made loans to established worker cooperatives like Salsedo Press in Chicago, but those lenders tend to rely on borrowers being able to to show multiple years of revenue in order to underwrite a loan.

That gap for startup worker cooperatives was a big reason why new law includes what’s known as a “securities exemption,” permitting an LWCA to raise an unlimited amount of capital from members as well as “community investors” without having to go through the costly, complicated process for registering an investment opportunity that most conventional LLCs or other business entities must go through to raise capital from private investors in the state of Illinois. Community investors must be residents of the state of Illinois.

“Part of what we’re signaling there is that this really is meant to support community-based enterprises,” Hatcher says.

Advocates hope that the securities exemption will allow worker-owners to invest as much of their own savings as they want in their business, though that might not be a lot of cash given who is currently organizing worker cooperatives in Chicago. But some worker co-ops might convince their personal or professional networks to pull some money from their retirement accounts and invest in a worker cooperative in their neighborhood or in their city. Worker co-ops have started doing that already in other places, like Oakland.

To protect workers’ interests from the potential of investor interference, under the LWCA law, outside investors are not guaranteed any voting rights unless members decide to give them any, LWCA members must maintain at least a 51 percent majority of voting power, and the business cannot be dissolved or converted into another legal entity without a two-thirds vote by members.

The idea for the securities exemption came from Kerr’s previous work, helping to get a similar worker cooperative law passed in California, which contained a similar securities exemption for that state. With any exemption from securities regulations, the potential for fraud exists. In Kerr’s view, however, investing in one’s own community isn’t riskier than investing in the stock market — it might even be safer.

“Millions of people have invested millions of dollars in some companies that have never made a dime of profit,” Kerr points out. “We’re absolutely going to tell people what the risks are, but if people want to invest some of their surplus earnings in their community or in something they actually believe in, they should have that option.”

Rodriguez is careful to temper expectations about how much capital might be available to flow through the new LWCA securities exemption, but on balance, she’s still excited by the possibilities.

“This will be an experimental part of the law, but it’s something that will be crucial to help people step into their power and raise capital, though at the end of the day we’re still operating within a systemically racist economy,” she says. “We need the legal pathways, but also the financial ones, and that’s where I think we have to go next, to help people figure out how to find capital.”

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.

Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.

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