One model of business structure applicable to Seasteading is the member- or worker-owned cooperative.
Cooperatives are a type of company in which control is on a one person/one vote basis. Cooperatives can be set up as partnerships or corporations, and in some states, there are worker cooperative statutes. Whatever form a cooperative takes (most are set up as corporations), they qualify for special federal tax benefits. Cooperatives are the oldest form of employee ownership in the United States, dating from the early 1800s. Although they are not common in larger businesses, they make up a large portion of small employee-owned businesses. In the United States, a commonly accepted metric defining “small business” is less than 500 employees and/or 25 million dollars per year in revenue.
This structure places ownership of the enterprise directly in the hands of the people most affected by its operation; the customers and workers involved. Most cooperative enterprises run just like any other business with the difference being employee ownership stakes. So a solid business plan with defined leadership roles is critical. Leadership roles must be chosen carefully due to increased responsibility, experience level and the need to attract and retain talent. Additionally, which decisions are in the realm of delegated leadership, and which decisions are subject to ownership and democratic processes must be firmly established at the outset. While the “one member, one vote” rule would be applied to strategic business decisions, key operational roles will necessarily have specific authority over immediate situations and policies.
Formal voting control must be on a one-person/one-vote basis. Usually most employees must be shareholders, although as many as half can sometimes be excluded. Cooperative businesses are owned and controlled by members, not by absentee investors. The board of directors is elected from the cooperative’s membership to represent the interests of the members. The members are the users or consumers of the cooperative’s products or services. Unlike business ownership, which is based on the percentage of the business a person owns, cooperative ownership is based on how much of the products or services the member purchases. Members vote on all activities of the cooperative business. Cooperatives allot one vote to each member. A corporation allots one vote for each share, which means an investor may purchase many shares to gain many votes. Cooperative members may purchase one share of voting stock. Membership requires the voting stock and engaging in business with the cooperative. Generally, a cooperative cannot pay dividends, and must pay out any excess earnings not held in the company to employee shareholders based on salary, time worked, or some other work-related basis. Owner/workers usually invest with a buy-in amount of money when they begin working.
Compensation and management of employee contributions can be through a "360 review" process where everyone rates everyone.
In this model the enterprise and its assets are owned by the people who operate it. Each worker has an equal vote and an equal share. Disbursements of equity are equal, although compensation for work performed may vary according to fair and objective plans, such as qualifications, skills, and amount of work performed.
At the end of each year, worker-owners are paid a portion of the money the business makes after expenses. In conventional businesses this money is called profit, in co-ops it is called surplus, and it can be distributed based on hours worked, seniority, or other criteria.
Persons who sell shares to a worker cooperative are exempt from capital gains taxes if the gain is reinvested in U.S. securities. Cooperatives are exempt from double taxation on dividends to employees that are based on time worked or salary rather than equity. Most small businesses will not need to pay out dividends anyway (see discussion in Financial Benefits in a Corporation), but this exemption gives cooperatives more flexible tax planning options than other corporations, letting them treat profits like either an "S" or a "C" corporation without changing their legal structure.
Set-up costs for cooperatives are even cheaper than direct ownership plans for two reasons: worker cooperative laws in many states make it simple to incorporate and qualify as a cooperative; and, there are professionals and organizations offering inexpensive services or financial support for cooperatives.
Typically, a worker cooperative makes employees owners after a probation period. Employees then either buy shares of stock that have real equity value that fluctuates with the company's value or they purchase a membership share, which has a fixed value that may or may not have interest added on to it as the employee accumulates seniority. When an employee leaves, either the cooperative or another employee buys the share (if it is real equity), or (if it is a membership share), the cooperative pays off the employee and a new employee buys a share at the base price.
Most cooperatives establish an internal account to which profits are allocated, usually to all cooperative members based on hours worked or some other equitable measurement of their contribution. These profits are deductible to the company, but taxable to the employee. When employees leave, they are paid out their account balances, usually with interest. In the interim, cooperatives may also pass some of the profits directly through to members, perhaps to help them pay taxes they owe on the profits allocated to their accounts.
Types of Businesses:
Any business can be a worker-owned and -controlled business. Worker co-ops have been successful in many different sectors and industries. Some examples are:
- Service - housecleaning, day labor, restaurants, taxis, childcare
- Retail - grocery stores, bakeries, bookstores, bike shops
- Health care - nursing, home health care, clinics, bodywork
- Skilled trades - printing, plumbing, woodworking, contracting
- Manufacturing and engineering - machine parts, fabricating
- Technology - web hosting, networking, voice and data systems
- Education - charter schools, teacher/student/parent-run schools
- Media and the arts - designers, galleries, performers, publisher
- Bio-fuels producers
Member owned cooperatives are organized for the benefit of consumers of their goods and services. These often include food or fuel co-ops, sometimes electric or water utilities. This could also easily be modified to provide telecommunications services. Again, each member has a single vote. Surpluses are disbursed according to an equitable plan, and members that also work for the co-op are often compensated for their work separately from equity distributions.
In both versions of co-op, daily operational decisions are generally delegated to a management board, with strategic decisions made by voting at regularly scheduled member meetings. Managers and board members are selected by the membership body. In some very small co-ops, decision making may be by unanimous consensus or conversely by the individual responsible for a given function with little overt democracy.
Book keeping typically follows the same rules as for other ownership structures and non-profit organizations.
It is important to have a business plan for co-ops, perhaps even more than for a corporation, and definitely more than for single proprietors. This plan spells out expectations, roles, responsibilities, and controls funds which keeps down and resolves conflicts.
Advantages of a Cooperative
- Less Taxation. Similar to an LLC, cooperatives that are incorporated normally are not taxed on surplus earnings (or patronage dividends) refunded to members. Therefore, members of a cooperative are only taxed once on their income from the cooperative and not on both the individual and the cooperative level.
- Funding Opportunities. Depending on the type of cooperative you own or participate in, there are a variety of government-sponsored grant programs to help you start. For example, the USDA Rural Development program offers grants to those establishing and operating new and existing rural development cooperatives.
- Reduce Costs and Improve Products and Services. By leveraging their size, cooperatives can more easily obtain discounts on supplies and other materials and services. Suppliers are more likely to give better products and services because they are working with a customer of more substantial size. Consequently, the members of the cooperative can focus on improving products and services.
- Perpetual Existence. A cooperative structure brings less disruption and more continuity to the business. Unlike other business structures, members in a cooperative can routinely join or leave the business without causing dissolution.
- Democratic Organization. Democracy is a defining element of cooperatives. The democratic structure of a cooperative ensures that it serves its members' needs. The amount of a member's monetary investment in the cooperative does not affect the weight of each vote, so no member-owner can dominate the decision-making process. The "one member-one vote" philosophy particularly appeals to smaller investors because they have as much say in the organization as does a larger investor.
- The cooperative business is formed and operated to meet the needs of its members.
- Cooperatives leverage the buying power of membership to purchase products or services. Members of cooperative businesses pay lower or stabilized prices for products and services because of the buying power of the cooperative.
Cooperative businesses have lower failure rates than traditional corporations and small businesses, after the first year of startup, and after 5 years in business. About 10% of cooperatives fail after the first year while 60-80% of traditional businesses fail after the first year. After 5 years, 90% of cooperatives are still in business, while only 3 - 5% of traditional businesses are still operating after 5 years.(3) Cooperative business members also benefit from shared ownership, which results in shared risk, both liability and financial
- Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow since a member's incentive to contribute depends on how much they use the cooperative's services and products. While the "one member-one vote" philosophy is appealing to small investors, larger investors may choose to invest their money elsewhere because a larger share investment in the cooperative does not translate to greater decision-making power.
- Lack of Membership and Participation. If members do not fully participate and perform their duties, whether it be voting or carrying out daily operations, then the business cannot operate at full capacity. If a lack of participation becomes an ongoing issue for a cooperative, it could risk losing members.
Considerations for Seasteads
For a sea-going enterprise on a traditional vessel class that provides (as part of its operation) housing and associated family services to its crew, it's necessary to take into account the essential crew functions for:
1. Operation and Maintenance of the vessel/platform
2. Operation and Maintenance of the money-making enterprise (may overlap with point 1). Think in terms of traditional merchant ventures of the sailing days, where the owner of the vessel might be aboard for a trading trip, but the captain had operational authority over the vessel.
3. Support of the additional functions imposed by full-time residence of crew and family on the vessel (life support, entertainment, education, legal, medical/health etc.)
In addition, provision needs to be made for:
4. (Family) Occupancy agreements. Is there a compensation adjustment (deduction) in light of number of family members or space allocated per family? Or do you charge rent? Per crew member or per person or per cubic meter? Common area maintenance (restroom/bathing facility/cleaning supplies)? How does off-duty living space get allocated?
5. Common kitchen meal plans/rates? How does the food budget work? What constraints are there on providing/taking food?
6. Clear divisions of responsibility and decision-making authority between Crew, and Owners, including any delegations of Owner authority to elected representatives/directors/officers. Ship's officers/crew have authority by law in immediate ship handling, safety issues by regulation, and emergencies.
7. As a business, the business must be making enough money to have a crew of licensed mariners on board who are professionals at maintaining a vessel afloat and all of its systems, who know how to navigate, steer, and handle a vessel in a variety of conditions, and understand the international laws related to making port. But does the compensation of the licensed crew have to be the same as it would be in a straight wage scenario? Perhaps not. Part of seaman compensation is isolation from family, squeezing every efficiency out of movement of cargo, austere conditions such as small, shared living space. If it becomes a family lifestyle, those conditions change a bit. People with less expenses tend to require less compensation to be happy, we see this in the arbitrage of wages across urban and rural areas. Getting someone to do a hard task requires an incentive. That can be a salary, or it can be an ownership stake. The Co-Op/employee ownership idea is a way to make sure everyone has skin in the game, that everyone has an incentive and potential profit in co-operating.
As an example, a yacht club in Portland Oregon, as a pure non-profit dedicated to providing a service and furthering a lifestyle, charges a membership application fee, a monthly membership fee that allocates portions to several funds for dedicated purposes, and a moorage fee for those who choose to use the moorage. In addition, there are per-use fees for reserving the club house for private/personal functions (free if all club members are invited), and there is a surcharge on our fuel dock that is calculated to provide maintenance, insurance, and refilling of the fuel tanks. This works out much cheaper than commercial fuel docks and is limited to the club membership.
The monthly fees are allocated variously to the dredging fund, parking maintenance, walks and docks, social fund, etc. There are two boards, the Board of Directors, and the Board of Managers. The Directors run the social and strategic aspects of the financial decisions such as raising funds, hiring accountants, allocation of funds to specific accounts, etc. They also interact with the membership on voting for charter changes, enforcing the provisions of the membership agreement, publishing available moorage and assigning per the charter's provisions on seniority, and arbitrating members' disputes. The Board of Managers direct the maintenance of the facility, hire the specific contractors and purchase materials within the budget of the accounts set aside for each purpose.
An equivalent fee structure for a Seastead commercial Co-Op might be:
- per-head occupancy fee
- meal plan fee
- telecoms access fee
The Co-Op aspect of the business is the operation of the platform itself. An occupancy fee would allocate portions to emergency and scheduled maintenance fund for living quarters and off-duty areas, maintenance of supplies for common areas such as cleaning and toiletries, paint, and common area furnishings etc.
Meal plan fee covers supplies for cooking and cleaning the kitchen area.
Telecoms fee covers access to internet and telephone, perhaps with a supplemental education fee for families with children being tutored on board.
Maintenance of operational areas would come from Seastead's operating funds gained through space fees assessed on the Seastead's enterprises. Pay for the crew members of the Seastead's operating crew (equivalent to Board of Managers above) comes from this budget.
Subsidiary business units would be customers of the platform co-Op and my be organized as Co-Ops in themselves, or in any other format including sole proprietor. these business units engage in whatever profitable enterprise they can devise in the space, location, or route that the Seastead platform provides and within rules agreed to by the governing body (in most cases, an Owner's Council of Seasteaders).
Each business unit would petition for and be allocated space by the Owner's Council (consisting of all equity-holders, with elected officers equivalent to the Board of Directors above) and relative space/service fees are charged by the Seastead to the business unit, most likely on an individually negotiated and periodic basis. Some spaces are more suited to certain purposes than others due to size, shape, or relative location. Otherwise un-allocated space may be bargained for. Final decisions on strategic allocations and business units come from the owner's council, but the details of engineering a particular space for a particular purposes is a matter of technical collaboration between platform engineering (Board of Managers/Crew/Ship's Engineer) and the business unit, much like details of remodeling, business type mixture/desirability, and terms may be negotiated between the owner of a strip mall, indoor mall, or office building and a prospective tenant. This allocates space efficiently among business units while encouraging individuals to experiment with entrepreneurship in niches that might eventually become main lines of business. Each business unit pays the individuals involved in that enterprise, full time or part time. This would operate much like vendor booths at market. Ship's officers must receive Owner's Council/Board of Directors approval for engaging in other business units to prevent conflict of interest or neglect of primary duties.
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