Summary
What It Is
The legal structure of a Liberty Workforce business is bifurcated. It is comprised of the owners’ legal entity (called the “Ownerle” for short) and of the workers’ legal entity (called the “Workerle” for short). The two entities are joined through a lease agreement.
What Problem It Solves
The standard option employees have who seek to govern their own workplace is to buy the firm themselves. This limits them to capital they can obtain. The bifurcated structure frees them of this limit and gives them access to all capital markets. It also gives them a legal structure that preserves their rights to share governance with the owners.
How It Works
Almost all the business assets are owned by the Ownerle. The Ownerle leases these assets to the Workerle. The lease agreement incorporates a Constitution which preserves the worker’s right to share governance with the owners. The Workerle performs almost all the work of the business. It makes lease payments to the Ownerle from revenue it obtains through these business operations.
Benefit: Why This Is Better
In exchange for the privilege of sharing governance, the workers agree to pay the lease before they compensate themselves. Thus, by sharing power with the workers, the owners are virtually guaranteed to never have a real business loss except through an act of war or of God.
Discussion
There appears the idea that for workers to govern in the workplace, they must own the business. Furthermore, if they own the business, they will govern in the workplace. However, neither of these is necessarily true. Nevertheless, these misconceptions lead to the goal of employee ownership being substituted for, or at least intertwined with, the goal of worker governance.
There are several examples of businesses changing their practices to involve workers in the governance of the workplace. Harley Davidson’s work groups are an example of this. GM’s Saturn division in the early days is another example. These were supported by labor-management agreements. This helps. But what management gives, it can take away. For several reasons, the Saturn experiment has reverted to the standard management governance. Newer businesses sometimes adopt a more participative style. Google is an example of this. Even though not expressed in writing, the workplace culture carries these forward fairly well. Thus, it is not necessary to have worker ownership in order to have workers share governance.
Neither does worker ownership necessarily result in worker governance. Workers, through pension and retirement plans and personal investments, own many shares of stocks in many businesses. Workers owning stock does not translate into workers governing in business. Granted, this is not the same as the workers owning all of the stock of the company where they work, but it illustrates the point that worker ownership does not automatically equal worker governance. Nonetheless, there are specific examples. The workers (both miners and their management) of a mine in New England bought their mining operation and became the owners. The miner-owners were dissatisfied with the management-owners. They did what they had always done in such cases. They went on strike! Ownership did not give them any more participation in decision making than they had before.
The goal of Liberty Workforce is workers governing in the workplace. Employee ownership is only weakly linked with worker governance. Furthermore, employee ownership is not easily obtained. The goal of worker governance can more readily be obtained by divorcing it from the goal of employee ownership and focusing on worker governance directly. The bifurcated legal structure of the Liberty Workforce model does exactly that. It provides a way for workers to share governance of the business with the owners, whoever they may be.
The legal structure of a Liberty Workforce business is comprised of two business legal entities, one of the owners and the other of the workers. The business relationship between the entities is set forth in a lease agreement.
The Owner Legal Entity (Ownerle)
The Owner Legal Entity or Ownerle, for short, is like any other business today. It owns the assets of the business. It could be any legal entity or combination of entities desired by the owners: sole proprietorship, partnership, corporation, trust, etc. Its owners could include workers, but it is not required to have any at all. The main difference is that the Ownerle has few, if any employees. It would only need to perform limited accounting, investor relations, minor legal work, and so forth. All the other functions of business are performed by the workers in the Worker Legal Entity
The Worker Legal Entity (Workerle)
The Worker Legal Entity or Workerle, for short, leases the business assets from the Ownerle. The Workerle conducts nearly all the functions of the business. The type of legal entity chosen for the workers does matter. It must provide the following benefits:
- Provide immunity for personal assets from business liabilities.
- Allow the workers to govern in the way they determine best.
- Preserve their rights legally.
- Allow the possibility of not having any employees.
Limited Liability Company is the Preferred Form for the Workerle
There are only two possibilities for meeting these requirements: corporation and limited liability company (LLC). It can be seen from the listing of advantages below that the LLC is the preferred form of business entity for the Workerle. The owners of an LLC are called a “members”. An LLC can be managed by member or by managers. Members in a member managed LLC can perform all the functions of owners such as opening bank accounts, signing agreements binding on the company, etc. In a manager managed LLC, these ownership powers are restricted to persons identified as “managers”. Obviously, the manager managed option is the preferred for the Workerle.
Limited Liability Company Advantages
- Fewer administrative requirements, resulting in lower costs.
- Members can set up the governing structure as they choose.
- The distribution of profits (i.e., worker compensation) does not have to be done proportional to ownership ratio. This simplifies ownership administration. In a corporation, when a worker received a raise, he would have to also be given additional shares of stock so that his compensation (a percentage of the profits) would increase.
- Employees are not needed (assuming LLC taxation as a partnership)
Corporation Advantages
For a Workerle, the only advantage the corporation has over the LLC is for a small business using the sub-chapter S form of the corporation. In an S-Corp, compensation (e.g., bonuses and profit sharing) which is more than the amount of salary an owner-employee would typically make can be given in the form of a distribution (like a stock dividend). As such, it is not subject to the self-employment tax. In an LLC, all compensation is subject to either the self-employment tax or the equivalent combined employer-employee FICA-Medicare tax. However, to take advantage of this exception requires that workers be employees. Furthermore, an S-Corp cannot have more than 100 shareholders (i.e., workers). Non-resident aliens (e.g., non-US citizens living outside the US) cannot be stockholders in an S-Corp.
Taxation as Partnership Preferred for the Workerle LLC
The LLC can either be taxed as a partnership or a corporation. When taxed as a partnership, the amount of the profits of the LLC is divided among the members and is reported and taxed on the member’s individual tax return. For the Workerle, a worker’s share of the profits is his compensation. When taxed as a corporation, a corporate income tax is first paid on the profits of the LLC. Then, the remaining profits are distributed to the workers who have to pay income tax again on the part they receive. To avoid this double taxation when the LLC is taxed as a corporation, the workers would have to be employees and receive their compensation as employees. Wages to employees would be an expense to the LLC and therefore, would not be taxed at the LLC level. Thus, it can be readily seen that taxation as a partnership is preferred for the Workerle. Below is a more specific enumeration of the advantages of each method of taxation.
Advantages of LLC Taxation as a Partnership
- Makes possible the “no employee option”
- Avoids double taxation
- Avoid certain state franchise taxes
Advantages of LLC Taxation as a Corporation
- (Due to double taxation, in order to gain the following advantages, the Workerle would choose that its members be employees.)
- Avoid certain state tax paperwork that requires every member’s signature.
- Avoid each member having to file individual state income tax returns in most, if not all, the states where the Workerle conducted business.
Note : As the growth of the business would justify it, it appears very possible that this advantage can be negated through a more complicated layered LLC structure. If tax law research bears this out, it would mean that workers would only have to file individual tax returns in just one state despite being taxed as a partnership. The thought is that this could be accomplished by having an overarching LLC taxed as a corporation with subsidiary LLCs in each state taxed as partnerships. Each worker would be a member of the overarching LLC and the one subsidiary LLC in the worker’s resident state.
Ownerle-Workerle Lease
The Ownerle-Workerle Lease sets forth the legal relationship between the Ownerle and the Workerle. The assets of the owners are leased to the workerle in exchange for a lease payment. It establishes a legal right for the workers to share governance with the owners. While by both Ownerle and the Workerle may form agreements with other entities, the lease between them must indissoluble and enduring.
Lease of Owner Assets
The Ownerle leases it assets and loans working capital to the Workerle. The assets include all elements of the business such as intellectual property, buildings, machinery, and so forth.
Finances
The Ownerle Secures and Provides Financing
The Ownerle furnishes all the capital to the Workerle. It provides the working capital as well as capital for improvements, growth, R&D, expansion, and so forth. As with any business, the Ownerle capital could come from lease revenue from the Workerle (i.e., profits), borrowing, equity funding, etc.
To assure proper financial stewardship accountability for this capital, the Workerle performs financial management as in the typical business. It prepares budget proposals for the owners’ (e.g., Board of Directors) approval. It provides financial accounting information to the owners. The Workerle handles the financial transactions of the business operations (e.g., sales revenue, raw material purchases, payments for service providers, etc.).
Lease Payment
There are two components to the lease payment. One is a minimum based on a percentage of the Ownerle assets and the other is profit sharing with the Workerle. For details on this and start-ups (i.e., where there are no assets, revenue, or profits), see the article on finance.
There is a priority for the use of revenue to the Workerle. First, the expenses are paid. Second, the minimum lease payment is made. Third, any contract or temporary workers are paid. Fourth, compensation is given to the workers out of the remainder of the revenue after meeting the first three priorities. And finally, if there are funds left after meeting these priorities or, in other words, if there are any profits, they are shared with the workers and the Ownerle.
This priority system requires that compensation to workers be variable, depending on the revenue, rather than be fixed salaries and hourly rates. This requirement is written into the lease.
Business Constitution
The principle purpose of the bifurcated structure of the Liberty Workforce business is the preservation of the worker’s right to share governance through force of law. The Ownerle-Workerle Lease is the legal document that establishes these worker rights. The Lease incorporates by reference the Business Constitution. The Constitution is the supreme law in the Business. It describes the shared governance of the Business by the owners and the workers, elections, amendment process, worker’s rights, compensation, membership, and so forth. Thus, the bifurcated structure of the Liberty Workforce provides a legal repository for the rights of the workers to share governance that is safe from unilateral actions of the owners.
The Lease is Indissoluble and Enduring
In many lease arrangements, circumstances change over time that result in one party desiring to terminate the lease. Understanding this, leases often have terms to govern the termination of the lease. The Ownerle-Workerle lease is not like such leases. There is never to be an end. Using the human body as a metaphor, it is like writing a lease agreement between the lungs and the digestive tract. The lungs agree to bring oxygenated blood to the digestive tract in exchange for the food provided by the digestive tract. The lease describes the relationship, but the termination and dissolution of the relationship is not a viable option. Human nature being what it is, there could arise people who would seek to terminate the Ownerle-Workerle lease without proper regard for the viability of the business. To the degree possible, the terms of the lease should be written to preclude this. To this end, the lease should include the following concepts:
No Escape Clause or Termination
There should be no language that talks about the termination of the lease for any reason. Neither should there be a time that the lease ends. If law requires it or if it would make the lease less breakable, a very long term could be stated such as 999 years.
Inter-dependency
The lease should create ownership rights in the Workerle to balance the ownership rights of the Ownerle such that a termination of the lease would be fatal to the business. It would create divided interests so that the Ownerle could not operate the business without the property owned by the Workerle and vice versa. Here is an example of the division of property for business engaged in R&D, manufacturing, and sales.
- All business systems (other than electronic), contacts, correspondence, intelligence (data on computers owned by Ownerle, etc.), contracts between Workerle and non-Ownerle entities, etc. are the property of the Workerle.
- All physical assets and electronic programming (other than personal), brand, product designs, patents, trade secrets, technology developed and published are property of the Ownerle.
- Intellectual property that only exists in the head of a worker does not belong to the Ownerle or to the Workerle.
To see how this works, imagine that all the workers and management of Boeing’s Commercial Airplane Division suddenly disappeared. Even though Boeing still owned all the assets, it would almost be impossible for the corporate leaders to hire a new workforce that could successfully build airplanes. Likewise, if all the workers and management decided to quit and form their own airplane company, they would require billions of dollars of capital to design their own airplane, build new factories, etc. This is an equally impossible venture.
The division of interests needs to be adjusted depending on the type of business. For example, the split illustrated above would give an excessive, unbalanced interest in a service business such as an architectural firm. In a service firm, most of its value lies in the workers’ relationships with each other, with their clients, and with the community. There is very little value, comparatively, in the business name and in the physical assets. If the split above were used for a service business, the Workerle could very easily separate from the Ownerle and successfully form their own new business. Recognizing this, non-compete clauses are sometimes included in the employment contracts of principals in service firms. In a service firm, probably no ownership rights need be given to the Workerle. And, maybe, the Workerle needs to agree to a non-compete clause just to balance power with the Ownerle in a professional services business.
Anti-End Runs
The lease needs to have terms that prevent one of the parties from making an “end run” around the lease. For example, if the Ownerle wanted to effectually unplug the Workerle, they could hire away enough key employees from the Workerle to start a separate business in competition with the Workerle. One company that is subject to periodic lay-offs ranks their employees according to their criticality to the business. Their goal is to have in the employees remaining after the lay-off all the critical relationships, skills, and knowledge of the company. When the economy recovers, these remaining employees can teach the new hires or recalled employees what they need. In recognition of this, the lease must state that the Ownerle cannot hire or enter into any business agreement directly or indirectly with any worker of the Workerle until three years have lapsed since the worker was a member of the Workerle. The lease needs to have terms in it that prevent one of the parties from obtaining the contributions of the other party through a third party.
Survivability
The lease should have the standard language that makes the lease binding upon each party’s heirs, assignees, and successors.
Each Party Free To Form Agreements with Third Parties
There must be competition and a certain amount of freedom to keep the relationship between the Ownerle and Workerle economically efficient and free of resentment. Both the Ownerle and the Workerle should be free to form business relationships with other entities provided they do not violate the terms of the lease. For example, if the Workerle wanted to diversify, but the Ownerle did not have the capital to do so, the Workerle could negotiate a lease with another Ownerle for the diversification process. Likewise, if the Workerle did not want to expand geographically, for example, the Ownerle should be free to engage in business outside of the Workerle’s market so long as it did not injure the Workerle. If the Ownerle owned several distinct, unrelated businesses, it could lease each such business to a different Workerle.
This freedom provides a way for one party to make an end run around the other, and therefore, it appears to be antithetical to the goal of dissolubility. But, it is a compromise that increases the likelihood of an enduring relationship. Without this freedom, if one of the parties desired to grow in way that the other did not, it might result in resentful compliance or in one party searching for a way to break the lease. This freedom helps avoid these results. Thus, it increases the likelihood of a longer successful Workerle-Ownerle relationship.