The Legal Structure of Cooperatives

Legally speaking, what is a cooperative? It is an organization that is legally owned and mutually controlled by those who make up the cooperative. Members are most often producers, consumers, or employees related to the enterprise.

Cooperatives can exist in a variety of legal forms. They can be incorporated and limited by guarantee, shares, or partnerships, or they can be unincorporated. In some European countries, such as Sweden and Finland, these are the specific forms of incorporation that cooperatives may adopt, while in the United States, state-specific laws govern the legal structure of cooperatives. Under various state and federal legislation, cooperatives can either be unincorporated or structured as limited liability companies, partnerships, or non-capital stock corporations. In the case of incorporated co-ops, the variations allow for varying degrees of return and amounts of control, most often based on members’ participation in the co-op.

Economic benefits

The success of cooperatives and mutual enterprises may be due in large part to the creation of a competitive environment. What follows is an environment that has regulation, longevity, and the margins and underlying structure to allow for welfare objectives to be practiced. In this sense, the cooperative finds substantial benefit in a competitive environment, provided that maintenance of regulatory structures and adherence to basic principles.

There are other factors, however, in determining the health of a cooperative in the face of competition. In 1991, Llewellen and Holmes posited that mutuals must have a rather large efficiency advantage in comparison with Plcs. This allows them to create goals that significantly differ from those of the Plcs, however, without this efficiency advantage, the two forms of enterprise begin to lose their distinctiveness. From this perspective, competition and small margins are damaging to mutuals, as behavioral differences with Plcs are minimized.

There are definite ambiguities and questions of judgment in these areas, particularly in the case of building societies and mutual life insurers in the UK. If banks are distinct from building societies, then UK Plc and its mutual competition may not exhibit the same differentiation.

Building societies, for example mutual life insurers, can make choices on their objectives when in a regulated environment where capital returns are high. And of course, this ability to choose creates complications because those objectives relating to price levels can be set based upon the market, not only in terms of serving individuals who are denied access or given poor terms by another provider, but also in the presumed analysis of non-mutual competitors’ behavior.

Customers and their perspectives are also of great consequence when considering competition and its effects. If a consumer is well-informed and the market environment is very competitive, then consumers will demand only the best. On the other hand, when competition in markets is imperfect, and the consumer is uninformed, institutional policies can determine greatly how the consumer will be treated. Throughout cooperative history, sellers have either exploited or taken on an ethical responsibility for the consumer in such situations.

The importance of mutuals in the savings market may largely be due to small depositors’ generally uninformed decision making. According the Rasmusen’s Uninformed Depositor Model, banks typically operate on the basis of information asymmetry, where managers have an understanding of risks faced, whereas depositors are given relatively little information. Of course, this is explained by the high cost of meaningful involvement in building societies, where the benefits obtained by keeping in constant awareness of and participating in affairs do not justify the costs of maintaining that awareness, as illustrated by Ingham and Thompson. At one time in cooperative history, building society members were levied with fines for not showing up to yearly meetings, until such time as people began slipping off to the nearest bar once roll was called. Rasmussen asserts that depositors will show preference for a mutual where they perceive increased regulation and thus a lack of risk-taking behavior. They may also have an understanding of the propensity towards risk in bank managers versus prudence in mutual managers, as posited by both Rasmusen and Masultis.

The argument could be made that mutuals’ success is a result of simplified relationships due to the lack of external shareholders, or to the mutuals’ capacity for using surpluses to lower product prices. However, when a market for corporate control is in place, or when there are external claimants, there can be substantial pressure on cost economies. Prior to deregulation in the UK, building societies aimed for growth through increased and maintained earnings, which was in the managers’ interest. Such minutiae, however, is of little consequence to the uninformed depositor.

Masulis has proposed that the boards of directors of MS&Ls have access to only a portion of the earnings garnered by the Saving and Loan, therefore they are less compelled to take risks, where as Plc executives are able to sell their stocks are profit enormously from the company’s profits.

The Identity of Cooperatives

The values of “self-help, self-responsibility, democracy and equality, equity and solidarity” are what cooperatives are based on. This is in addition to the seven cooperative principles of open membership, fair control by all members, economic participation by all members, independence and autonomy, education, helpful and friendly relations with other cooperatives, and civic concern.

Cooperatives can be split into two categories: producer cooperatives or consumer cooperatives. They are closely related to collectives, although social wellbeing is placed before profit-making. The identifying suffix of cooperatives on the internet is.coop, and any organization using this must maintain the values of the cooperative.

Cooperative historyhas shown that, like their predecessors, members of cooperatives place high value in honesty, social responsibility, openness, ethical decision-making, and caring for the well being of others. There is a range of social characteristics that are attributed to such legal entities, however they all foster open memberships and proportionately distributed economic benefits based upon participation rather than capital investment.

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Value-Added Legal Process Outsourcing Service

Legal process outsourcing or LPO is a great support to legal entities. This involves obtaining legal support from an external service provider to manage your legal business administrative functions. This service allows many law firms to enjoy quality work and save money as well. So, legal process outsourcing services are becoming more and more popular with professionals becoming aware of the many advantages ensured.

A Range of Services That Can Effectively Meet Your Requirements

Legal process outsourcing services include typing, document review, transcription, coding, and drafting services. All services are customized to meet specific client requirements. Service providers utilize the latest innovations in technology that enable them to serve clients faster and in a better manner. A reliable LPO firm is your best option for all digitization requirements. Legal data in any format, whether paper or electronic, audio/video can all be digitized efficiently and made readily available whenever and wherever you need it.

Legal process outsourcing service providers also undertake legal research in order to obtain significant information on certain legal matters. They ensure that the data collected is accurate, unambiguous and useful. This job requires the provider to have considerable knowledge in different areas and aspects. Experts in reputable outsourcing companies often carry out dedicated research in order to collect authentic information on some definite issue.

While looking for efficient outsourcing services, you must find the LPO firm with long term experience since the job requires lots of attention, knowledge and understanding in legal matters. Hence, without enough experience an LPO firm will not be able to offer you top class services as per your requirement.

Advantages Ensured by Legal Process Outsourcing

Value-added services customized to meet specific client requirements
Access to experienced legal professionals and outstanding expertise
Cost savings up to 30 – 40%
Save valuable time that can be utilized for more core processes
24/7 customer service
Dedicated workforce
Complete document security through confidentiality agreements, password protection and restricted access

Find a Competent Legal Process Outsourcing Company

To enjoy the full benefits of legal process outsourcing, you need to identify a reliable LPO company. This can be done by comparing various service providers active in the industry. Make use of any free trial offer available that will give you a firsthand experience of their service quality. Consider the pricing and terms of service including turnaround time ensured. Tie up with a provider that can ensure you customized services at a pricing within your budget.

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The Business Legal Checkup – Preventive Advice For the Legal Health of Your Business

More than 250 years ago, Benjamin Franklin famously said, “An ounce of prevention is worth a pound of cure”. He was advising Philadelphia homeowners to insure their homes against fire to avoid catastrophic losses. Franklin’s advice is just as applicable today to the legal issues of your business.

In this article, we explain a new legal service, Canadian Business Legal Checkup, an audit of legal matters affecting your business. Business Legal Checkup is a diagnostic tool most small and medium size businesses could use to verify if legal aspects of their operation comply with the law and to minimize risk, litigation and expense. When the Business Legal Checkup is completed, the business owner receives a lawyer’s report red-flagging matters which need correction, improvement or further legal advice.

A closer look at the Business Legal Checkup

Your business is built on a foundation of laws and legal procedures. As a prudent business owner, you have probably considered the following legal matters:

o You had to incorporate your business. The corporation has been properly set up. All shares are properly issued. Directors and officers have been appointed. The corporate minutes and register are up-to-date.
o You and other directors of the corporation know exactly what your duties and liabilities are. All directors are protected from liability by sufficient insurance coverage.
o You have a shareholders’ agreement so that all shareholders know their roles. All partners are treated fairly. There is an orderly method for valuation and termination of the corporation. You understand the minority shareholders rights requirements of the Business Corporations Act.
o You filed a business registration and have a system to renew it before expiry and you have registered any business names that you are using.
o You filed trademark, patent and copyright applications to protect the intellectual property of your business.
o Your URL (web address) is trademarked. You have audited your website to check for breaches of privacy law, defamation and technology law issues. Your online sales portal is set up to avoid legal problems with privacy law, identity theft and contract issues.
o Your licencing and registrations are up-to-date. If your salespeople have to be registered or licenced, you have a system to ensure that their registrations are up-to-date and that their regulatory requirements are being monitored.
o You have a long term lease for your plant or office. You had your lease vetted by a lawyer. You know what it says, including the extra rent the landlord can demand. You know the deadline for your right to renew.
o You use several legal standard forms and contracts in your business. These have all been vetted by a lawyer to comply with applicable laws including the PPSA, the Interest Act, the Consumer Protection Act, the Sale of Goods Act, the Mercantile Law Amendment Act and the Bills of Exchange Act and contract law.
o If you extend credit, you know that your service charges don’t exceed the “criminal rate of interest”.
o You know prohibitions against misleading advertising and unfair competition in the Competition Act.
o You understand the privacy legislation and you have a system to ensure that you comply each time you collect, use, or disclose personal information.
o Your employees have signed agreements which spell out the length of notice they are entitled to receive if you terminate their employment. You know who is entitled to how much and what to do if you decide to terminate an employee, whatever the reason. You understand your obligations under the Employment Standards Act.
o Your employees have all signed non-competition covenants and non-solicitation agreements to prevent them from taking away your best clients, business procedures, best employees and trade secrets if they leave to set up shop on their own.
o You have a procedure to prevent violation of the Human Rights Code and you know the protected grounds of discrimination. You also understand all of the elements of sexual harassment and you know how to deal with it.
o You know your company’s rights and obligations under the Workplace Safety Insurance Act and the Occupational Health and Safety Act.
o You have liability and multi-peril insurance and you know what it covers.
o Your manufacturing and distribution processes are set up to avoid potentially devastating product liability and class action lawsuits. You have minimized risks.
o You keep up-to-date with changes in the law which affect the corporate, contractual, insurance and employment law issues in your industry.
o You have complied with the filing requirements for income taxes, sales taxes and GST. You have had your business and municipal tax assessment vetted.
o You know what precautions to take to help prevent litigation.
o If you are about to get involved in litigation, you have an action plan to maximize your chances of success and to keep the cost in check. When hiring a lawyer, you know what you need and what to expect.

Stop the presses – before we continue – do we hear you saying there are many items on this list that you haven’t looked after, that you haven’t thought of or which could be updated?

We’re not surprised. In our experience, small and medium-sized business owners don’t get around to dealing with many important legal issues involved in organizing their business relationships with partners, shareholders, customers, employees and government and in preventing or managing the risk of expensive litigation. Often, agreements are not fully thought through.

Small business owners tend to do only what they absolutely have to do to comply with the law and are reluctant to spend money for top drawer legal services when an inexpensive shortcut appears to do the trick. Your focus is getting your business up and running, getting your product to market, making sales and keeping costs down. You could be lucky and run your business for years without anything going wrong.

Fair enough, but if you disregard preventive legal measures like the ones mentioned, your business is like a driver without a seatbelt in a car that has never been serviced —in other words, a catastrophic accident waiting to happen.

Here are two examples of business legal nightmares that could have been easily avoided with a program of preventive law such as the Business Legal Checkup. These are actual cases, decided in Ontario courts:

o A Toronto RV dealer sold a motor home to a customer. After using it for a couple of weeks, the customer complained that the salesperson had misled him about a “rental program” and brought the motor home back and refused to make any payments. The dealer sold the motor home as a used vehicle and suffered a $25,000 loss for which it sued the customer.

The Ontario Court of Appeal decided that customer was entitled to return the RV and cancel the contract because the salesman’s Motor Vehicle Dealers Act registration expired and was not renewed. This made the contract illegal. The RV dealer didn’t have a system to check if all their salespersons’ registrations were current. The dealer not only lost $25,000 but also had to pay about $30,000 to their own lawyer and almost that much in legal costs to the customer’s lawyer. A Business Legal Checkup could have saved this business most of the $100,000 and a lot of aggravation.

o A southwestern Ontario company was a wholesale distributor of car alarm systems, which started as a basement operation and developed into a successful business. The owner used contract forms he found on the internet. Why pay a lawyer when forms were right there for the taking? His standard form contracts had statements that he didn’t fully understand but if they were on the internet, they must be OK. He didn’t have a lawyer check them. The standard form agreements didn’t create a problem for several years.

The distributor extended credit to CAG, a company owned by a Mr. Don for more than $90,000 worth of car alarms. He wasn’t worried about payment because Mr. Don signed the standard form contract — the one he found on the internet for free — which stated that Mr. Don was personally liable for everything CAG ordered. When CAG went out of business, the distributor sued Mr. Don. The Ontario Court of Appeal dismissed the claim against Mr. Don because the personal liability clause in the standard form agreement was unclear and was capable of two meanings. The distributor didn’t recover his $90,000 and had to pay legal fees to his own lawyer and costs to Mr. Don’s lawyer. A Business Legal Checkup could have saved him almost $150,000 and possible financial ruin.

These examples are the tip of the iceberg. As you read this article, you can probably think of other examples that affected your business. In each case, it’s more than the legal expenses that are at stake. The business owner has to devote time and sleepless nights to the legal dispute and loses time from running the business.

How does a Business Legal Checkup work?

o You will be asked to complete some forms to provide confidential information about your business.
o You will have a discussion with the lawyer to assess the scope of the Business Legal Checkup. For example, it doesn’t cover tax law, environmental law or succession planning unless special arrangements are made.
o A basic Business Legal Checkup will provide a diagnostic review of the legal status of the following issues in your business: (1) Set up and governance of your corporation; (2) Relationships among the owners of the business; (3) Relationships with employees; (4) the contracts and forms used in the business; (5) Competition Law and Illegal Advertising; (6) Intellectual Property, Trade Secrets, Confidentiality and Privacy; (7) Safety and risk management; (8) Risk analysis and efficient management of existing litigation; (9) Internet Issues; (10) Regulatory licencing issues.
o A Business Legal Checkup can also be customized to meet the business owner’s specific requirements. This may require consultation with outside legal experts.
o In preparation for the Business Legal Checkup, you will be asked to provide documents and information concerning each category of the analysis.
o After the documents have been reviewed by a lawyer, consultation may be required with other lawyers. Further clarifications may be required from you and other senior officers of your business.
o A report will be prepared explaining the status of each topic and red-flagging issues which require attention and indicating their level of urgency.
o When the Business Legal Checkup report is ready, the business owner may prefer to have the Business Legal Checkup lawyer or legal team present the findings orally. An oral presentation followed by a Q&A session can assist the business owner to plan the next steps efficiently.
o The Business Legal Checkup legal team will facilitate referrals to lawyers who are specialized in resolving the legal problems identified by the Business Legal Checkup.

How much will a Business Legal Checkup cost?

For a small startup business with less than five employees, operating out of a single location and having only one business entity, a Business Legal Checkup can usually be completed for about $5,000 to $7,500 if there are no unusual problems.

Who needs a Business Legal Checkup?

Every business needs to know whether its legal processes are efficiently compliant with the law. Public corporations are obliged to provide certain levels of legal compliance to government and regulatory bodies. A small private corporation does not have the same levels of mandatory compliance but failure to do so voluntarily is like the proverbial ostrich with its head in the sand.

A Business Legal Checkup is also useful for a business owner who is considering the sale of his business or for a prospective purchaser of a business. Minority shareholders could insist on a Business Legal Checkup annually or bi-annually to ensure that management and the majority shareholders are meeting their obligations to the corporation.

A Business Legal Checkup may also be a credibility tool for a business seeking financing or government contracts. Unlike a financial audit, ISO9001 and ISO 14400 compliance standards, the Business Legal Checkup is a confidential report to management only and expressly excludes reliance by outside parties. If an outside party, such as a lender or investor, will receive a copy of the report, the Business Legal Checkup legal team must be informed in advance so that concerns relevant to these outside parties can be taken into account.

Where can my business get a Business Legal Checkup?

So far as we know, the Business Legal Checkup, as a fixed-price legal diagnostic tool for private small and medium-sized businesses is a new legal service in Canada. Interested business owners are invited to contact us for information.

Benjamin Franklin’s famous advice has evolved. A Business Legal Checkup can be much weightier than an “ounce of prevention”. It could provide “tons” of preventive advice to save your business from damaging or catastrophic expense. The Business Legal Checkup will also provide the business owner with peace of mind which, as another saying goes, is “worth its weight in gold”.

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IRS Issues Private Letter Ruling Allowing Late “Check-The-Box” Election For Foreign Entity

Through the early 1990s, there was significant dispute over the U.S. tax classification of a foreign legal entity. Foreign legal entities have characteristics that often differ from U.S. legal entities which U.S. taxpayers are accustom to, like corporations, partnerships, sole proprietorship, and more recently, Limited Liability entities of various types, under U.S. state laws which we are trained to understand.

Tax planners and taxpayers had to apply a maze of regulations and case law to determine if a particular foreign legal entity fit the mold of a corporation or a partnership for U.S. tax purposes. This is/was an extremely important determination as the taxation of income by a U.S. shareholder, partner or trust was dependent on whether a foreign legal entity was allowed the “flow-through” treatment of a partnership of taxable income and foreign tax credits, or the deferral of such items until a “distribution” of earnings and profits is received from a corporation. The complexities grew as tax planners would establish chains of legal entities (often under a tax-haven holding company) and the questions of what taxable income and credits flowed up to which legal entity in a particular year was the subject of full-time work for many tax planners and tax return preparers.

Thankfully, the law was changed to allow a foreign legal entity (with some restrictions) to be classified as whatever a U.S. shareholder wanted amongst the choices of a Corporation (“C” not “S”), a partnership, or a “disregarded entity” which is treated as a mere branch. This was accomplished by either doing nothing and having a “default” classification under the regulations apply, or by filing Form 8832 (AKA, the “check the box” election) to, if qualified, elect a different classification. The ability to tax plan with certainty of the I.R.S.’s agreement with the desired classification is a great tool for tax planners. Unlike the old days, where Private Letter Rulings were obtained in large, sensitive situations (in some cases the I.R.S. would not even provide rulings on this subject), now, a U.S. shareholder group or sole shareholder can file Form 8832 and get a clear, unambiguous, definitive letter back from the I.R.S. stating that the classification of the foreign legal entity by the taxpayer is accepted. No IRS “user fee” is required for the processing of Form 8832, unlike a Private Letter Ruling these days. Such an election is binding for 5 years, so the I.R.S. is not “whipsawed” by taxpayers switching classifications when it best suits their tax reduction desires.

The classification of a foreign legal entity impacts Subpart F calculations, PFIC calculations, Form 5471 reporting requirements, Form 8858 reporting requirements, Form 1118 Foreign Tax Credit calculations, the U.S. tax impact of overseas reorganizations, Cost-Sharing and Transfer Pricing calculations, Form 926 disclosures, FAS 109 and FIN 48 calculations (and their related financial statement impact on earnings per share), a company’s long-term dividend repatriation policy, and on and on.

Form 8832 must be filed with the U.S. taxpayer’s service center and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date the form is filed. Great care must be given to the filing of this form and the timing. It is best to file the form at the creation of the legal entity as the form triggers a deemed liquidation of fair market value to the U.S. shareholder or foreign parent company which can clearly trigger taxable income for FMV in excess of the shareholders tax basis in the foreign entity’s equity. The legal tax fiction under the law is that the foreign entity is immediately re-established after the deemed liquidation into the newly elected type of entity. So, again, take great care in making this election.

So, therein lies the problem. Often clients don’t tell their tax advisor about the existence of the new entity (e.g., “the sales guys set this up”) until sometime after 75 days has passed from the creation of the entity or from the beginning of the tax year.

An expensive, unintended tax result may occur simply from the lack of a timely filed Form 8832. Clients either have no idea of the tax issues involved, or assume that a timely election can be filed with the U.S. shareholder’s tax return for the tax year within which the foreign legal entity was established…generally due March 15th of the following year for a calendar year corporation…before the normal 6 month extension for large corporation. Hence, the discovery of this issue in September of, say, 2009 as the extended return is finalized for filing on September 15th, for an entity set-up in, say, March of 2008, is a big problem.

Private Letter Ruling 200916013 (issued January 8, 2009) gave a taxpayer an additional 60 days from the date of the PLR to make a late election. The PLR is the exercise the of the Commissioner’s authority under Internal Revenue Code Section 301.9100-1(c) to allow a “reasonable” extension. The extension in the letter ruling states the “taxpayer established to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith (which I read to mean it was just an honest mistake), and (2) granting relief will not prejudice the interest of the government.

It would be interesting to know more about how the Commissioner makes such a determination. If the U.S. tax due from the U.S. shareholder would have been $1 million without the extension, but is zero due with the extension, does that “prejudice the interest of the government? Or is the interest of the government served by allowing the taxpayer his choice of entity, as he is then stuck with that classification for 5 years. The PLR does not elaborate on this issue. Perhaps more guidance is in the Sec. 9100 regulations. Is the taxpayer required to provide a “with and without” calculation of U.S. taxable income to allow the Commissioner to make his determination?

That said, it is important to know that a PLR seeking Sec. 9100 relief is available as a last resort if the deadline for filing Form 8832 has been missed. I’d imagine that the PLR filing should be IMMEDIATELY after discovering the missed filing of Form 8832, since, as time passes, it would seem to establish the taxpayer knew what they were doing and intended to do so. Often in Sec. 9100 cases, the taxpayer pleads that they had no idea of the rules and were relying upon their tax advisor who was too busy to identify the issue until, in the tax return preparation process, the tax advisor realizes the consequences of the missed election and/or discovers that the new legal entity was established…long ago.

Often, the legal department of a corporation is required to inform the tax department or tax advisor of the creation of any new legal entity, in an effort to avoid the above and many other tax planning and tax compliance issues that can arise, when, too late, the tax advisor for a client becomes aware of a new legal entity. Various companies have SOX related requirement to avoid big mistakes that could be material to the financial statements (not to mention cash-flow) as a result of a missed tax election.

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Home Improvement Loan – Renovate Home at Low Cost Finance

You bought or build a home long time back and now it regularly requires improvements like repairing some damages. Home improvement is not limited to repairing works but instead adding a story to the home, enlarging space, building more rooms; modernizing kitchen etc works are also included. So the expenses towards making home a more comfortable dwelling place requires fair amount of money and for that a loan is the best source if own sources are not sufficient.

Lenders provide you home improvement loan on taking the very home as collateral. On securing the loan, lender can easily fulfill your demands regarding the borrowings. Secured home improvement loan is offered at lower interest rate. This means you can meet expenses on home improvements at low cost. Also a low rate of interest reduces the loan burden and you can pay off the loan easily. But how lower the interest rate will be depends on a lot of factors. For instance, if the borrower asks for a loan that is of lower amount than equity in property as collateral, then lender feels more secured and interest rate may be reduced to win the customer.

Home improvement loan is usually offered in the range of £5000 to £75000. The repayment duration for home improvement loan is given to the borrower as suits to his repaying capacity. He can repay the loan in 5 to 30 years. If you have borrowed greater amount then you can spread the loan in larger number of installments. This means the payment towards monthly installment gets reduced and you can have more money for home improvement works.

If you require a smaller amount then you need not to put your home at risk as collateral as you can opt for unsecured home improvement loan. Given without collateral, unsecured home improvement loan are a little expensive for the lenders charge higher interest rate. The unsecured loan would be repaid in 5 to 10 years. Lender may ask for documents related to annual income and employment to ensure adequate repayment capacity.

Do not worry if you are suffering from bad credit. As lenders take the home of the bad credit borrower as security, home improvement loan is no risk for the lenders. If the borrower defaults on payment, still the lender can recover the loan by selling the borrower’s home. However in case of unsecured home improvement loan, lenders would like to have necessary documents regarding repayment capability of the borrower.

You can find many home improvement loan providers on internet. Go through their websites carefully and study every aspect of the loan. See which lender has comparatively lower interest rate and better terms-conditions. Apply online to him for fast approval of the loan.

Certainly home improvement loan is a source of low cost finance that is crucial in making home improvements. Pay off the installments in time to avoid any debt burden. If installments are cleared regularly the development is recorded in your credit report and your credit score moves higher.

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