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Maryland Creates a New Limited Worker Cooperative Association Structure

Maryland Creates a New Limited Worker Cooperative Association Structure

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    The Maryland Limited Worker Cooperative Association Act creates a new business structure for worker-owned enterprises: the Limited Worker Cooperative Association (LWCA). The structure allows workers to participate in both the ownership and governance of the business while operating through a limited-liability entity with articles of organization and a cooperative agreement.

    Key LWCA Requirements and Governance

    An LWCA generally must have at least three worker members before it begins business, unless its sole member is another LWCA. A worker member is an individual whose participation in the association includes contributing labor to the business.

    An LWCA may operate as a collective worker cooperative, in which all members are worker members and directly manage the association. Alternatively, an LWCA may use a representative governance structure with a board of at least three individuals. This flexibility allows the governance structure to be tailored to the size and needs of the business.

    Importantly, not every employee must be a worker member. An LWCA may employ individuals who are not members, allowing the business to maintain a worker-ownership structure while hiring additional employees as needed. Public reporting on the law likewise notes that employees do not automatically become owners merely by working for an LWCA.

    Legal Framework for Maryland LWCAs

    The Act gives Maryland businesses a specific legal framework for worker cooperative ownership rather than requiring them to adapt another entity structure to achieve cooperative ownership and governance. The statute establishes rules addressing the formation, governance, conversion and dissolution of LWCAs.

    The structure also provides flexibility in how the cooperative is governed. Smaller or highly participatory businesses may favor direct worker-member management, while other organizations may use a representative board structure.

    Tax Considerations for Maryland LWCAs

    The Act does not establish a general Maryland income-tax exemption for LWCAs. Instead, the legislation integrates the new entity type into Maryland’s existing statutory framework, including amendments to provisions of the Maryland Tax-General Article addressing tax administration, withholding, and sales and use tax.

    Accordingly, the formation of an LWCA should include a separate analysis of its federal and Maryland tax classification and the resulting income tax, withholding, and other tax obligations.

    What Maryland Businesses Should Consider

    The Act gives Maryland businesses a new option for combining worker ownership, worker participation in governance and limited liability within a single entity structure. For existing businesses considering succession to employees, as well as new businesses designed around worker ownership, an LWCA provides a Maryland-specific alternative that should be evaluated alongside traditional LLC, corporate and other employee-ownership structures.

    Contributors

    Vadim Ronzhes, Partner, Frazier & Deeter Advisory, LLC

    Szymon Maziakowski, Associate

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