The growing market for CPAs in the cooperative business sector
By Emily Stewart, Kristin Forde and Char Vrieze
August 8, 2023
Introduction
A pressing issue has come to the forefront in the cooperative business community: the scarcity of Certified Public Accountants (CPAs) specifically equipped with expertise in cooperative accounting. This issue highlights the need for accounting professionals who comprehend the distinctive principles underlying cooperatively owned entities. However, by bridging this knowledge gap, CPAs can seize the opportunity to enter this rapidly expanding market for their services. This dynamic market encompasses a broad spectrum of opportunities, ranging from providing financial literacy coaching for small cooperatives to conducting annual audits for high-revenue producing businesses.
The Cooperative business model
Cooperatives represent a distinct business model characterized by member ownership and operation. Ranging from small groups to large associations with millions of members, cooperatives offer diverse ownership structures. These entities are governed by democratically elected boards composed of co-op members, and they adhere to internationally recognized cooperative principles.
Cooperatives thrive in numerous sectors, including finance, real estate, healthcare, insurance, manufacturing and transportation. Each sector features various types of cooperatives defined by their unique membership structures. For example, consumer cooperatives are owned by the individuals who shop there; housing cooperatives are owned by residents; producer cooperatives unite similar product producers for improved market access; purchasing cooperatives are owned by entities that pool purchasing needs for enhanced pricing; and worker cooperatives are owned and operated by employees. This article primarily focuses on worker cooperatives.
Profit redistribution and member benefits
Fundamentally, cooperatives operate on the principle of profit redistribution. They prioritize returning annual profits to members through refunds that align with each member's utilization of the cooperative's products or services. This commitment ensures that the benefits derived from a cooperative's success are equitably shared among member-owners, fostering fairness and inclusivity within the cooperative movement.
The "Silver Tsunami" and cooperative opportunities
As the baby boomer generation approaches retirement, the economy faces the significant impact known as the "Silver Tsunami." It is estimated that nearly six out of 10 business owners will sell their businesses in the next decade. While private equity firms view this as an acquisition opportunity, the cooperative community recognizes the potential for preserving legacies through employee ownership. Worker cooperatives offer numerous benefits to businesses, workers, and communities, including increased local spending, business longevity, higher retention and productivity and improved pay and benefits. When employees purchase a business, annual profits are distributed among the workers, thereby keeping assets and resources local.
Legal structure and tax considerations
Cooperatives operate within legal frameworks structured according to state statutes. For example, most worker cooperatives in Minnesota are incorporated as 308B corporations, which can be classified as either S or C corporations. Formal incorporation shields individual members from personal liability for the cooperative's debts, with the corporation's collateral primarily securing loans. When filing taxes, cooperatives typically submit Form 1120 annually to determine their tax liability. Similar to an LLC, cooperatives can allocate year-end profits among worker-owners, reducing the cooperative's tax burden. These profits are divided into each worker-owner's Individual Capital Accounts (ICA) as patronage. Accountants play a vital role in advising worker-owners on managing their patronage allocations.
Section 1042 election and employee ownership
The Section 1042 election enables business owners to defer the proceeds from the sale of stock by reinvesting them in Qualified Replacement Property (QRP). This provision incentivizes business owners to sell their companies to employees, providing them with a stake in the company's future while potentially avoiding capital gains taxes.
Other opportunities for CPAs
As more worker cooperatives are incorporated each year, the demand for accounting services and financial literacy increases. The new employee-owners that do not have experience interpreting financial documents need to be trained in these skills. Alongside traditional services, CPAs have an opportunity to offer this training, coaching, and support as employees transition to ownership and assume fiduciary responsibilities.
The future is co-op
The cooperative business sector presents a growing market for CPAs who understand the unique accounting principles and needs of cooperatively owned entities, particularly worker cooperatives. By gaining familiarity with cooperative accounting and offering specialized services, CPAs can contribute to the success and sustainability of cooperatives while tapping into a market that ranges from financial literacy coaching to annual audits. As the cooperative movement continues to thrive and expand, the role of CPAs in supporting these businesses becomes increasingly vital.
The Minnesota Center for Employee Ownership serves as a free unbiased source for education and resources around all forms of employee ownership. With 52,000 business owners over the age of 55 in Minnesota exiting their business in the next 3–5 years, there is a crisis looming. What will happen to their legacy, employees, community? Business owners will look to their advisers on how best to exit. Contact us for more information on how we can be a resource for you at www.mnceo.org or Kirsten Kennedy, executive director at kkennedy@mnceo.org
Kristin Forde is a Cooperative Development Specialist at the University of Wisconsin Center for Cooperatives. She arrived to the worker co-op world via taxi in 2004 as a Union Cab member. While working as a cab driver, she helped launch member education initiatives, participated in newly developed cooperative grievance procedures and conflict resolution systems, was a founding member of Madison Worker Cooperatives (MadWorC), served as Board president, and participated in the planning of Madison’s first Cooperative Business Conference in 2012.
Emily Stewart is Associate Director of the Northcountry Cooperative Foundation, leading the development and implementation of the organization’s lending programs and also oversees the organization’s cooperative technical assistance team. Before joining NCF, Emily founded BreadHive Worker Cooperative Bakery (Buffalo, NY) and worked in community organizing.
Char Vrieze is a Cooperative Development Specialist at Cooperative Development Services. Char’s background growing up on a farm picking pickles, eggs, potatoes, and helping her family clean apartments lends itself well to the main focus of her role working with worker-owned cooperatives. She was the Executive Director of 40 Square Cooperative Solutions from 2017-2022 and also served for six years as the Executive Director of the Minnesota Cooperative Education Foundation, a nonprofit organization which provides education on co-ops and scholarships for students seeking careers in cooperatives.
