29 October 2009

Case Study: Software.coop an LLP

We are seeing more new-start co-operatives set-up as LLP's and even some conversions of existing co-operatives. software.coop has written up their personal experience of setting up a Limited Liability Partnership and some of the practical things you should know. If you want to know more or interested in setting one up please contact Co-operativesUK. We can put you in touch with existing LLP's like software.coop or help regsiter your LLP, with the co-operative values and principles in mind.

Software.coop is a tech worker co-op centred on web and GNU/Linux development and maintenance, with particular interests in library management systems, email services and Django, Drupal and Wordpress web applications.

As well as being strongly in favour of Free and Open Source Software (FOSS) because of its importance for cooperative values, we're also fairly unusual in being a Limited Liability Partnership (LLP) instead of a Ltd company.

In 2002, we incorporated Turo Technology LLP (Turo means tower and we started in King's Lynn, which is famous for its towers, including the nationally-famous Greyfriars Tower), which may make us the oldest LLP cooperative. Our early days were assisted by a New Entrepreneur Scholarship, but we were also still heavily dependent on "sweat equity".

The co-op currently has four members and no employees. Our headquarters are now in Somerset, but no two members are currently in the same region, while we work for clients around the world. That wasn't intentional, but it seems to work.

Software.coop became a CooperativesUK member in 2007 and has recently applied to join Cooperatives-NW. Member MJ Ray currently represents tech/worker co-op views on the board of Cooperatives-SW and is struggling to get involved with the North Somerset Partnership and West of England Partnership.

Why We Chose the LLP Model
"The essential feature of an LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members." - Explanatory Notes to the Limited Liability Partnerships Act 2000

We chose LLP as the corporate form because it appeared to have low start-up costs and low administration costs. Also, we took the enthusiasm of professional services businesses like accountants for the LLP as a good sign. Finally, because we didn't have to file particular rules with the registrar of companies, we could improve them if we found any flaw or mistake in them, without much bureaucratic process. We actually used this feature when we replaced our original rules with a modified set that made it more obviously cooperative in 2005.

Pros and Cons
The main benefits:

  • Lower overheads, although I feel you need to be clear with all partners from the outset that the LLP will only address partnership tax affairs and not all members' personal tax returns;
  • it is an "inherently cooperative model"[1] and you can see this in the "Default provision" section of the Limited Liability Partnerships Regulations 2001. It implements several (but not all) of the key cooperative values: voluntary membership, economic participation, member control and autonomy;
  • there was no requirement to file our rules, so we could fix initial mistakes fairly cheaply.

But there were drawbacks:

  • LLPs had poor support from banks. Initially, we failed to open a bank account because banks did not recognise LLPs. This has improved since Community Interest Companies (CICs) were introduced (because they also have letters in their company numbers), but even in 2007, some banks would not accept company numbers that contained letters. I thank Norwich and Peterborough Building Society's Cambridge branch for living up to their mutual status and patiently learning about LLPs in 2002 while helping us to open an account with them.
  • LLPs get fewer services from Companies House than Limited companies. While there is a helpful specialist LLP Team there, LLPs are excluded from key online services, but you have to use those online services to get discounts on filing fees. In effect, this means LLPs now pay higher filing fees than Ltd companies, although I think we don't file as many forms.
  • LLPs get poor support from HMRC. Because LLPs are taxed as ordinary partnerships, we have the same limited range of software for filing tax returns as ordinary partnerships and I don't think any of them are Free and Open Source Software. So, we have completed paper tax returns for all but one year to date. In effect, this means LLPs must complete their tax returns months earlier than Ltd companies.
  • LLPs are not always understood or promoted as an option by some Co-op Development Advisers and many Social Enterprise Advisers. I have been surprised by how many will tell us we cannot be a cooperative or a social enterprise because we are an LLP. In our region, Social Enterprise materials include phrases like "most Limited Liability Partnerships (LLP) are not eligible" before it even considers any rules!
  • Co-operativesUK questioned our worker co-op status three times: before we joined, when we joined and once since we've joined. [edit JA: Co-operativesUK checks all members are bona-fide co-ops. As the LLP model is/was a new model, we took special interest in this case.]
  • LLP co-ops seem to be generally uncommunicative about their cooperative rules and most LLP co-ops that I know are not members of any larger body. I feel that this is a consequence of the initial hostility from advisers. An LLP could lose a lot by describing how it implements cooperative principles and gain little, particularly because most seem to trade more with non-cooperatives than with other cooperatives. This leaves LLP co-ops "semi-detached" from the wider movement and fails to demonstrate the cooperative difference to them.

2amase LLP are probably the best-documented example: a group of MA Social Enterprise students who are probably more sure about their ability to assert their co-op status against hostile experts. Yet the 2006 case study of 2amase LLP (available from [1]) also reports poor support from banks and advisers.

While being asked to explain LLP co-ops so many times means that cooperative status has probably been a slight net cost for TTLLP so far, we believe in the long-term benefits. The pros are very compelling and long-term, while the drawbacks seem to be mostly short-term: banks are becoming friendlier, Companies House and HMRC should catch up eventually, which just leaves raising awareness with advisers and the wider movement.

How can we persuade them to treat LLP co-ops fairly?

The Process for Setting One Up
In essence, you find at least two partners, complete form LLP2 and send it to the Registrar of Companies with the appropriate fee (£20 as of 14/10/2009). It's generally a good idea to write a partnership agreement at the same time, but it's not actually required. If you want to be really thorough, read the first LLP Act and Regulations (they're fairly short and clear as legislation goes). The Companies House guides about LLPs are also worth reading.

However, like any incorporation, it comes with responsibilities and risks of fines for maladministration, so I feel that this is not to be taken lightly.

Practical Things - Tax, NI and so on

  • Tax and NI behave as if the workers are self-employed, so each member needs to:
    1. register with their tax office as self-employed,
    2. pay self-employed National Insurance quarterly and
    3. complete a tax return each year that includes partnership pages.
  • In addition to the personal tax returns, a Partnership Tax Return will need to be completed. It is worth getting the LLP's tax reference number from HMRC as soon as you can because of the previously-mentioned poor support for LLPs by HMRC. In seven years, I haven't had a trouble-free partnership tax return yet.
  • Other than that, you'll need to send a membership return (on the anniversary of the incorporation date or previous membership return) and financial accounts to Companies House each year (within 9 months of the accounting reference date). These are usually at different times.
Further Resources

21 October 2009

Business Referral Network

I attended a Co-operativesNW event yesterday and had a revelation. 30 or so co-operatives in the room stood, and told me about their business. What they want, who they want to talk to, and that dream contract they would like to land.

Although we talk to each other about values, promoting the movement and improving society, how often as co-operatives do we actually talk about what our business needs are and what business opportunities we could help each other with?

Not as much as we should, and not as much as many other businesses. Whether through the local chamber of commerce, sharing a round of golf, or as a member of a select club or Network, businesses with less history of co-operation are co-operating with each other to increase their business opportunities.

One of the priorities of the worker co-operative council is to improve trading between worker co-operatives. So we asked Co-operativesNW if we could hold our meeting on the same day and run a session at their event. Sion Whellens from Calverts a long standing member of the BNI ran a session on this topic.

Sion started by talking about the BNI, the point of it and the amount of business referrals received from these weekly meetings. He then invited attendees to do a 60 second pitch about their business:
  • Name
  • Where they are based
  • What they provide
  • Why people should buy from them
  • Who you want to talk to:
Although we didn't have time it is also usual to reverse the process, with everyone returning to the stage to tell the room what business referrals they can make, based on what people have asked for. This really would get you paying attention to other peoples pitch!

The session went incredibly well and people hung about at the end far longer than usual, to catch each other and to share contacts. It somehow felt right, and as if we should be doing this more often.

As a way of enabling co-operatives to find each other work, of helping individual co-operative grow and building the co-operative commonwealth as a whole, business referral networking is part of the answer. It’s what Principle 6 – co-operative amongst co-operatives – is all about. So if you are and experianced at business networking get in touch with us or your local Regional Co-operative Council and get organising!

07 October 2009

Worker Co-operative Survey Results

This year we asked worker co-operatives to fill in a few more questions in their annual return, to help us better understand the sector. Below is a summary from the 99 who returned their survey, Thank you!

These results only cover co-operatives that are live and trading. Roughly 25% returned the survey and some only partially completed, please view the results in this context. I hope you find this information interesting and reflect on how you are similar (or different) from other co operatives.

This first chart looks at all live worker co-operative records, we have 3 live co operatives dating back before the 70’s but these have not been included in this chart. IPS’s were the traditional legal form for co operatives, and most early worker co operatives registered as IPS’s. However this model was seen as cumbersome (needed 7 members to start) and quite expensive.

During the 80’s, the number of worker co operatives rapidly increased. ICOM and Co operative Development Bodies developed Company models that were predominately limited by guarantee, to reflect the interest in common ownership and to be more flexible (only needed 3 members).

With the introduction of new legal forms worker co-operatives have taken advantage of these; with at least 4 Community Interest Companies and a number of Limited Liability Partnerships being registered in the last few years.

This second chart focuses on the survey results and the different ownership structures; older worker co operatives tended to prefer common ownership (where the assets are held in common and not withdrawable). During the 00’s there has been a growing trend of “jointly” owned co operatives where members have an individual stake in the co-operative.

Others refer to assets held in trusts commonly used by John Lewis Partnership and Scott Bader for example.

Looking at Governance structure; 25 of the 27 “Collectives” (all members are directors) had 20 or less members. For co-operatives with a “representational” structure (directors elected from membership) there was no clear pattern with co-operatives as low as 4 members choosing this option.

Looking at Management structure; co operatives with a flat structure all had 10 or fewer members (with one exception). As co-operatives grow they tend to develop a sector or team based structure with 9 of the 13 co operatives having more than 30 members with the remaining 4 between
6 -11 members. As might be expected conventional management structures could be found at all levels of membership.

This chart looks in more detail at employees within worker co-operatives. As might be expected there is a higher ratio of women than men being employed part-time compared to fulltime and with roughly 4% of the employees from a Black or Minority Ethnic background.

Pay Structure (more than one answer could be chosen) Out of 99 responses
Members start on the same hourly rate irrespective of their role = 48
Members with longer service are paid more = 12
Members with more responsibility paid more = 31
Members pay based in part on individual performance = 9
Members pay based on need (member withdraws what they need) =1
The majority of members on a higher than industry average = 17
Profits are distributed as a bonus or dividend to members = 35
Members have individual investments that can be withdrawn = 10
Maximum differential in pay (highest can’t be paid ?x the lowest paid) = 6

This final chart gives a break down of worker co operatives by sector (where known). Worker co operatives set up in the 70’s tended to be manufacturing or retail based businesses; this has broadened out over the years, with more worker co-operatives starting in the creative and professional services sectors.

Worker co-operatives vary from 2 to 120 members, with a variety of different governance, management and pay structures, operating throughout the economy. They all however share something in common; their values such as: self-help, democracy, equality, honesty, openness and social responsibility.

We will start sending out next year’s survey at the end of the year. If you were not one of the 99 who returned your survey; please remember to fill this in when you receive your audited accounts for 2009. This information particularly turnover, member/employee figures helps us shout about the size of the sector and campaign on issues affecting our co-operatives.

If you would like to see us include different questions in next year’s survey or are a research interested in more in-depth information, please get in touch.