Founding Limeleaf: Part 2, Writing Our Operating Agreement

In this second installment of our series on starting a tech company as a cooperative business, we’ll discuss how we wrote our Operating Agreement (OA).

The Importance of an Operating Agreement

An OA is a legal document that governs the operations and management of an LLC. (Corporations, by comparison, use by-laws, see this guide for more info). For a cooperative business like ours, this agreement is even more critical, as it sets the foundation for our democratic decision-making processes and equitable compensation practices. Think of it as a rule book that outlines the rights, responsibilities, and obligations of the LLC members (i.e., the owners).

Here in New York State, LLCs are required to have an OA. You aren’t required to file the OA with the state, but it must be in writing, agreed upon, and signed by all members of the LLC.

In keeping with our culture of openness, our OA is publicly available (minus the signature page, for privacy reasons).

First Things First

It’s common for LLCs to include a Purpose section in their OA. This section usually comes first in the document and is a general statement about the LLC’s business activities, the kinds of products or services it will offer, and so on. Our Purpose section covers these things and also includes our philosophical purpose for operating as a worker-owned business. We state that Limeleaf is "democratically controlled and is not organized to make a profit for itself, as such, but primarily for its Members."

In addition, we wanted our Purpose statement to reflect our core beliefs and the values we aim to instill in our company culture. To achieve this, we added a section called Guiding Principles that outlines the key priorities and ideals that are important to us.

Establishing Fair Compensation

We structured Limeleaf as a cooperative business to ensure that every member was fairly compensated for their work and had an equal stake in the company's success. However, determining the specifics of our compensation structure and understanding how profits are shared in co-ops proved to be more complicated than we expected.

In a co-op, the proceeds from members' contributions to the business (either money or labor) that are left over after paying operating expenses are called surplus.. On a regular basis, the surplus is divided among the members; these payouts are called patronage dividends. We learned that there are a lot of factors to understand and consider with these dividends, not least of which is how they are taxed.

We researched compensation models used by other co-ops and then consulted with our legal and financial advisors. We arrived at a structure that compensates us through a combination of W-2 wages and patronage dividends, which aligns well with our values and financial needs. Our OA also includes provisions for minimum wages and equal ownership of the company among members to ensure that every member is rewarded for their contributions. But more on all of that in a future post.

What Happens When Things Don’t Work Out

Much as we didn’t want to, we also had to consider and document how we’d handle cases of members leaving Limeleaf, either voluntarily or not. In the latter case, we wanted to ensure fairness and due process but at the same time be crystal clear about behavior that we won’t tolerate.

For cases when disagreements escalate or personalities clash, we crafted a three-step process for "transforming conflict" (a new phrase to us but one we like). Conflict will be resolved first through discussion, then through mediation, and finally through arbitration.

In cases of involuntary termination, a unanimous vote of all members (except the person being voted on) is required to dismiss a member.

Lessons Learned

Keep it simple. For a co-op of our size (currently three people), we don’t need a complicated OA. In our research, we read OAs that were dozens of pages long, with sections defining everything from complex management structures to multi-tiered ownership share classes. Large co-ops may need those things, but we don’t–yet. We might need to add them as we add more members, but for the time being, our priority is to keep our OA simple.
Your Operating Agreement can be a living document. We are learning more every day about running a cooperative business, and as we do, we modify or amend our OA. We’ve done this several times since signing the first version in the middle of March.

Conclusion

Crafting an OA for Limeleaf required extensive research, communication, and collaboration among all three members. In the end, we think we created a document that serves as a solid foundation for our company's future.

We were also reminded that successful co-ops require open and honest communication, a willingness to listen and adapt, and a shared commitment to the collective good. As Limeleaf grows and evolves, we know that our OA will help us navigate the complexities of running a (we hope) successful company while staying true to our democratic principles.

We Want to Hear From You!

We hope this post is useful to anyone who is setting up a (very) small tech worker cooperative. Look for more posts in the coming weeks. If you want help starting a co-op in New York, or just talk co-ops in general, drop us a line.