LOPSIII
The Legal Pathway
LOPSIII is a business form that does not yet legally exist. This page sets out exactly where current law cannot accommodate it, what can be built anyway, and how the gap gets closed.
We keep this register in public because the argument is technical rather than ideological, and technical arguments should be checkable. Every entry names the authority that creates the obstruction. If you can show that one is wrong, we would rather hear it than not.
The form
Three commitments, taken together
LO
Locally Owned
A majority of ownership stays with people who live where the business operates.
PS
Profit Sharing
No salary, no hourly rate, no predetermined wage. Surplus is shared by role.
III
Income Inequality Inhibitor
Surplus above a threshold set by local income flows to the community, not upward.
Individually, each is unremarkable. Cooperatives share profit. Community businesses stay local. Foundations give money away. Taken together and made irrevocable, they describe an entity that current law has no category for — and the absence of that category is the subject of everything below.
Part one
Where the law and the model disagree
Twelve entries in total. The four that defeat a core commitment are set out in full; the remainder follow in brief.
C-01Defeats a pillar
There is no form to file. A LOPSIII must be assembled by hand, in a contract, by a lawyer fluent in cooperative law — of whom there may be a few dozen nationally.
Authority— absence of statute —
EffectNo registry, no recognition, no default rules. Every LOPSIII is a bespoke drafting project, which puts the form out of reach of the people it exists to serve.
Closed byA state entity statute.
C-02Defeats a pillar [the cleanest gap we have]
You may have participant ownership, or you may have cooperative tax treatment. Federal law will not permit both.
AuthorityIRC §1381(a)(2) · PLR 200119016 (not citable precedent)
EffectCooperative treatment reaches only a corporation operating on a cooperative basis. An LLC gets there solely by electing corporate taxation — which reimports the presumption of employment the model is built to avoid.
Why it mattersAn entity that operates cooperatively is denied cooperative treatment because of the box it checked on a form. Federal law is taxing the shape of the paperwork rather than the conduct.
Closed byFederal tax classification — or a Revenue Ruling, which requires no Act of Congress.
C-04Defeats a pillar
Every protection against a future majority undoing the model is contractual, and a contract can be litigated, bought, or drafted around.
Authority— no US statutory analogue —
EffectGolden shares, supermajority locks, poison pills and indivisible reserves all raise the cost of abandoning the commitments. None makes it impossible. A statutory asset lock cannot be voted away; a contractual one can.
Closed byA state entity statute. This is the single strongest argument for the state route.
C-05Defeats a pillar
The inhibitor — the model’s most original element — has no legal scaffolding at all.
Authority— the gap is the absence of one —
EffectThe community fund is money the business chooses to give away. Not clearly deductible, not recognised as an obligation, and economically punitive: the entity pays tax on the surplus and then gives it away.
Closed byFederal tax treatment for deductibility; state statute for the obligation.
C-03Allocation by membership is not a legally recognised basis — only patronage, meaning hours worked.Federal tax class
C-06Health and injury protection are tied to employment. A form built on non-employees leaves both gaps open.State amendment
C-07Retained working capital is taxed to participants as though they had received it.Federal tax class
C-08The name means nothing. Anyone may call a business a LOPSIII, including in bad faith.Certification now
C-09The defence of the no-wage rule makes participants’ income less predictable — a doctrinal cost borne by people.Federal + carve-out
C-10The pay-ratio cap is unenforceable against a determined majority.State statute
C-11Local ownership is a transfer restriction, self-policed, rather than a feature of the form.State statute
C-12Governance is shaped by the need to avoid a securities characterisation rather than by what works.State statute
Part two
What can be built today
A close approximation is available now, inside an ordinary limited liability company. It is not the form — it is a simulation of the form, held together by contract, and it works.
1An LLC, taxed as a partnership. Do not elect corporate taxation.
Under partnership treatment, employment is not presumed to apply to the owners. Elect corporate treatment and it is — which defeats the profit-sharing pillar in a single filing.
2Member-managed. Not manager-managed. No separate board. Every member participates in decisions.
This is the load-bearing choice. The published cooperative-development guidance is explicit that owners’ draws may replace wages only in a member-managed LLC. It also does double duty: holders with genuine managerial power are far less likely to hold a security.
3Draws on profit, never wages. No salary, no hourly rate, no predetermined compensation for labour contributed as a participant.
This is what “busts” the employee — and with it the employer’s obligations, including health coverage. That is a genuine loss, not a technicality. See the cost below.
4Call operational leads something other than “Manager.”
“Manager” has a specific meaning in LLC law. A role called Manager in the operating agreement risks being read as a statutory manager, which would make the entity manager-managed and undo step 2.
5Advances against anticipated profit, reconciled at period end. Sized to actual cash position, recoverable if allocations fall short.
The answer to lean months. An advance against profit is not a wage; a fixed regular payment is.
6A cash floor of at least 20% of any allocation.
Partnership members are taxed on income allocated to them whether or not they received it. Never allocate taxable income without the cash to pay the tax on it. This is an ethical floor before it is a tax rule.
7A membership share of fixed value. It does not appreciate, and it is not transferable except back to the entity.
Where the buy-in price floats, it eventually exceeds what a new participant can afford — and the form closes to the people it exists for. A LOPSIII whose share price rises has already re-enclosed itself.
8An indivisible reserve, and an operating agreement executed before the year it governs.
The reserve is the nearest available approximation of an asset lock. The timing matters because a split decided after the results are known is a discretionary bonus — and a discretionary bonus looks like a wage.
A general partnership achieves a similar labour structure — partners are not employees either — but at the price of unlimited personal liability, which for most collectives is disqualifying.
What you accept by building it now.
Self-employment tax applies to everything, costing a participant roughly $1,400–$2,000 a year more than a cooperative corporation would. Retained earnings are difficult. The community fund is not deductible. Income is less predictable by design. And participants have no employer-provided health coverage or workers’ compensation, because they are not employees.
This is the sharpest objection to the model and it comes from allies, not opponents — cooperative developers raise it because workplace injury is real and artists work with kilns, looms and solvents. We do not have a complete answer yet. Anyone forming one of these should know that before they start.
Part three
How the gap closes
Four routes. They are not alternatives — they are a sequence, because each one makes the next plausible.
Now · needs no permission
Certification
A published standard and a public register of businesses meeting it. Fixes almost nothing legally. Its purpose is to make the constituency visible.
Closes C-08 in part
Two to five years · one legislature
A state entity act
The highest-leverage single move, and the only route that delivers a statutory asset lock. Hawaii first.
Closes six and a half of twelve
Alongside · one legislature
Elective injury coverage
Workers’ compensation is state law. A scheme permitting non-employee participants to elect coverage needs no federal action at all.
Closes C-06 — the one with a human cost
Longer · federal
Tax classification
Fixes the deepest problems — the fork, capitalisation, the inhibitor’s deductibility. A Private Letter Ruling is a cheaper first step than an Act of Congress.
Closes four and a half of twelve
Why the order matters. The benefit corporation exists in roughly forty states today. The L3C, introduced two years earlier, reached about ten and stalled — because its value depended on federal treatment that never arrived. The lesson is not subtle: build the constituency before the bill, and never ship a state form whose worth waits on a federal decision you do not control.
And the objection we expect. Someone will say this is a way to avoid employment law. Any firm attempting that must also accept a cap on the ratio between highest and lowest income, mandatory community outflow, majority local residency ownership, an irrevocable asset lock, and full member governance. No extractive employer takes that deal to save payroll tax. The idealism is the immune system.
Part three · addendum
Precedents elsewhere
Several of the gaps above are already solved somewhere. None of these is American law and none is directly citable here — but each is proof that the thing being asked for is buildable, which is a different and useful kind of argument.
United KingdomCommunity Interest Company. A statutory asset lock — permanent, and not removable by a future majority. Precisely what C-04 says has no US analogue.answers C-04
SpainMondragon. A worker-cooperative federation operating a pay ratio in the region of 1:5 across decades. The source of the ratio our own model adopts.context for C-10
FranceWorker-cooperative longevity. Survival data comparable to conventional firms, which is the empirical answer to the assumption that shared-ownership businesses are fragile.answers a common objection
ItalyCooperative development funds. Cooperatives are reported to contribute a fixed share of annual profits to national development funds. If confirmed it is the only statutory analogue to the inhibitor that we have found yet.Unverified — would answer C-05
Every example above is European, and that is a limitation of our research rather than of the idea. Indigenous, Pacific, African and Asian traditions of collective ownership and obligation long predate all of them. We are researching those traditions now, including here in the islands where we live, and this section is incomplete until they appear in it. We would rather show the gap than let the list imply the idea is European in origin.
Part four
Why it is worth the trouble
Capital flow is not a law of nature. It is the emergent result of decisions written down in ordinary documents — and the operating agreement is where most of those decisions are actually made. Change what the document permits and you change where the money goes.
A LOPSIII cannot concentrate income past a threshold its own community sets. It cannot be sold out from under the people who built it. It cannot quietly become something else once it succeeds. Those are not aspirations in a mission statement; in the finished form they would be properties of the entity, as fixed as limited liability is today.
Limited liability was invented. Someone argued for it, and it did not exist until they won. Every business form in use was once a proposal that the law had no category for. We are asking for one more — an option, never a mandate, that a founder may choose at formation.
It is a new species of entity, designed for the version of capitalism it is now our responsibility to bring into being.
This page is educational and is not legal advice. We are not lawyers, we do not advise particular businesses, and nothing here creates a professional relationship. Any collective forming an entity should retain its own counsel — the structures described above are genuinely intricate and the consequences of getting them wrong fall on real people. Entries marked unverified are exactly that; we would rather show you the gaps in our own research than present them as settled. Corrections are welcome and will be published.