Introduction

In the U.S. today, youth face the rising price of college tuition and a job market particularly inhospitable to young people. As of early 2014, 15 percent of young people ages 16 to 24 (not including those in school or otherwise not looking work) are unemployed as compared with 7.3 percent of all workers. Early unemployment and underemployment has long-term consequences. Individuals who are unemployed as young adults tend to earn lower wages for many years due to missed work experiences and skill development. According to recent research by the Center for American Progress, young Americans will lose $20 billion in earnings over the next decade due to today’s historically high levels of youth unemployment. U.S. youth unemployment trends reflect what some have called a global “youth unemployment crisis.” Moreover, unreflected in these numbers is the growing number of young people working in unpaid internships.

Simultaneously, interest in entrepreneurship – particularly social entrepreneurship – appears to be growing among young people. Some organizations are emerging that seek to promote youth entrepreneurship as a way to combat poverty. Social entrepreneurs are emerging, but few organizations have explored youth cooperative development as a possible approach. However, youth cooperative development presents many compelling opportunities for combating poverty and “brain drain,” generative leadership development, and engaged citizenship.

Young people can generally start working in non-agricultural, non-hazardous jobs when they are 14 and many young people – especially low-income youth looking for a way to earn extra money for themselves or their families – do. Youth can, and often are encouraged, to start enterprises because the benefits of doing so are well documented and extensive.1 By helping youth create worker co-operatives, the benefits of entrepreneurship will be multiplied through more individuals taking leadership roles in the creation of a business. 2

Combatting poverty and brain drain. Brain drain occurs when youth leave their communities due to lack of opportunities. As the youth leave, a leadership void is created in the community which outsiders view as an opportunity to capitalize on.  This brain drain harms the community in a multitude of ways, with two in particular: (1) profits from development do not enrich the community and (2) leaders in the community do not always have the community’s best interest in mind. When youth are able to grow within their own communities into leaders, they are able to preserve the culture and stabilize the local economy.

Generative Leadership Development. Modernly, leadership development all too often part of the non-cooperative, command and control variety which is inherently hierarchical. Governmental 3 research and business results 4 suggest that more cooperative structures are necessary in our society due to the myriad of benefits they create. And Richard Wolff’s “Democracy at Work”, shows that happiness and productivity markedly increase when people are given autonomy over themselves and their jobs. For our society to progress for the better, a new kind of leadership development is required. We must begin molding leaders interested in generating wealth rather than extracting it; leaders interested in building up the world rather than breaking it down.

Engaged Citizenship – Democracy in Crisis. The cooperative organizational structure teaches self-governance skills and creates stakeholders in local communities. Currently, the youth are taught democratic principles but are not allowed to engage until they “come of age”. This model is contradictory because it shows the youth that our democracy is willing to impose laws on them without considering their input in the least. By offering the youth an outlet to practice democratic principles, we ensure that they will “hit the ground running” and be a fully engaged electorate when they do “come of age”.

There are a variety of issues that arise when advancing youth economic development ideals. Legal issues may arise because these individuals are minors (under 18 years old). Other issues arise due to more general characteristics of youth. This primer is written primarily for non-minors working in youth development seeking to support youth entrepreneurs.

Legal Considerations When Working with Minors

Who is a Minor?

A minor is any person who is under the age of 18.

Organizations Working With Minors

When engaging in development work, be cognizant of whether or not the work you do qualifies as “child care” or “child services.” This classification imputes stringent requirements on providers to conduct background checks dependent upon if you fall under state or federal regulations and work with children under the age of 18. According to the Safe Schools Act, even individuals working “with or around children” in a school or educational agency are required to undergo a fingerprint background check.5 In some instances, local laws distinguish between volunteers and employees of organizations and volunteers are not required to undergo a background check.6

Minors and Contracts

A cooperative enterprise will almost certainly require some kind of contractual activity – with member-owners, suppliers, and/or clients. This must be thoughtfully considered when dealing with youth cooperatives.

The law of contracts is generally governed by the states through case law. For most contracts, it is perfectly legal for a non-minor to enter into a contract with a minor. However, in order for the court to enforce the contract, both parties must have had the legal capacity/competence to enter into it.

Generally, minors are understood by courts to lack capacity to enter into contracts. This means that the contract will be voidable at the discretion of the minor – that is, the minor (or her/his guardian) is able to cancel or revoke the contract.7 While the minor can avoid any contractual obligations she may enter into, the other non-minor parties do not have that option. Provided the minor does not cancel this contract, the contract is still valid.

Understandably, this makes business contracts with youth an inherently risky proposition. Additionally, due to these limitations on a minor’s ability to contract, a minor generally cannot own land or property.  Property can, however, be held in trust for a minor.

Minors and Financing

First, a bank won’t open an account for a minor unless a parent or guardian is also on the account. Since contracts with minors may not be enforceable (see above), a parent or guardian is a must in order for banks to feel comfortable.

Second, many banks don’t have products designed for teens. Because teenagers generally don’t have a lot of money to put in the bank, some financial institutions made the business decision that these types of accounts aren’t worth their time and effort. A minor may be able to open a checking account, but it will likely feature unattractive fees alongside it.

Similarly, contractual limitations make most lenders wary of (or have an explicit policy against) entering into a loan agreement with a minor.  Additionally, most minors have insufficient or poor credit history, in part because credit accounts are limited to non-minors.  All of these factors will make it difficult for minors to independently secure traditional financing.

In addition to the aforementioned hurdles youth face in starting businesses, they have also been turned away due to a lack of business experience and collateral. However, organizations have sprung up willingly to fill this need and provide low interest loans to youth entrepreneurs just starting out.

This assistance, as of now, has mostly comprised of loans to entrepreneurs, however.These low interest loans, though helpful, still do not address a core concern. Rather than building communities from within, outside institutions are still injecting capital and profiting from it. This gap may be filled by a new Community Development Financial Institution (CDFI) that is able to distribute awards through grants provided by the U.S. Treasury.

Minors and Taxes

Income Tax:  Youth may need to pay income tax and self-employment tax to the Internal Revenue Service (IRS) after starting profitable businesses. Some youth businesses, such as lawn mowing and babysitting, are exempt from self-employment taxes, however.

Sales Tax:  Sales tax must be collected on products qualifying for such a tax, regardless of who sells the products.  Selling products that require levying a sales tax require a sales tax permit; these permits can be acquired through one’s local state revenue office.

Minors and Intellectual Property

Trademark:  Trademarks are issued depending on one’s relevant state law. According to the U.S. Patent and Trademark Office, if a minor can validly enter into binding legal obligations in that state, and may sue or be sued, then the minor may file an application in his or her name. Otherwise, applications must be filed in the name of a parent or legal guardian, clearly stating his or her status as parent or legal guardian.

According to Copyright.gov, “minors may claim copyright, and the Copyright Office issues registrations to minors, but state laws may regulate the business dealings involving copyrights owned by minors.” Copyright.gov advises that minors consult a local attorney for specific guidance.

Minors and Labor Laws

From the Department of Labor website:

“The Fair Labor Standards Act (FLSA) sets wage, hours worked, and safety requirements for minors (individuals under age 18) working in jobs covered by the statute. The rules vary depending upon the particular age of the minor and the particular job involved. As a general rule, the FLSA sets 14 years of age as the minimum age for employment, and limits the number of hours worked by minors under the age of 16.

Also, the FLSA generally prohibits the employment of a minor in work declared hazardous by the Secretary of Labor (for example, work involving excavation, driving, and the operation of many types of power-driven equipment). The FLSA contains a number of requirements that apply only to particular types of jobs (for example, agricultural work or the operation of motor vehicles) and many exceptions to the general rules (for example, work by a minor for his or her parents). Each state also has its own laws relating to employment, including the employment of minors. If state law and the FLSA overlap, the law which is more protective of the minor will apply.”

Minors and the Duty of Care in Negligence Actions

If the actor is a child, the standard of conduct to which he must conform to avoid being negligent is that of a reasonable person of like age, intelligence, and experience under like circumstances.8

A non-profit incubating a youth-led cooperative will need to pay close attention to the relationship between the two organizations. If the cooperative members are deemed employees of the non-profit under the 13 factors laid out in Reid,9 then the nonprofit may be vicariously liable for any actions of the cooperative. A finding of vicarious liability will make the organization responsibility for an unintended class of employees, the cooperative.

Also, if an organization works with youth but does not do background checks in compliance with a state or federal statute, then the organization may be deemed negligent per se. Failing to follow statutory requirements may cause a court to rebuttably presume negligence on the organization’s part.

Design Considerations Working With Youth

Other issues arise due to characteristics of youth owned cooperatives, whether the youth are minors or not. Two issues likely to arise in any youth cooperative is turnover and intergenerational dynamics.

Turnover

It is likely that youth may not be around for more than a few years considering the target population is usually under 24 years old. This requires developing strong internal institutional memory! Not only will the cooperatives need great record keeping, the coops will need to build and foster an “each one, teach one” mentality. Institutionalizing this culture will promote the coops members to transcribe efficient process in order to cut down on learning curves and increase productivity.

One may surmise by looking at cooperatives run by adults, however, that youth owned cooperatives must have strong governance and procedures set forth in their by-laws in order to plan for this potential pitfall. Though voidable, incoming coop members must be told what is expected of them, and presented with a contract to sign. This will allow everyone to know what the expectation for every member is. Thus, if a member falls short of what is required, they know why they are being asked to leave.

Intergenerational Dynamics

A big question surrounding the intergenerational dynamics of youth owned cooperatives is whether surplus dividends should be distributed to youth or held in trust until they reach age 18.  This appears to be a question which will be determined on a case-by-case basis, depending on circumstances of the youth, however. The bylaws for youth cooperatives should lay out explicit terms on how to tackle these dynamics and ways a cooperative may go about changing them if desired. Different communities will almost certainly need different strategies for handling surplus.

Regardless of structure and policies, youth coops must educate those outside the organization about the value of cooperatives. This may be done through suggested reading lists, suggested documentaries, role play activities, class discussions, and art. Each community is different and the vehicle the messages travels through must be adaptable.

Youth coops must also tackle the extent to which money earned by the efforts of youth will be retained in the co-op, or passed on to a nonprofit in order to “pay forward” and provide opportunities for future generations.  Again, the best answer appears to be that a case-by-case analysis is necessary. It does, however seem prudent to advocate that a percentage be passed on to nonprofits assisting in the business’s development, nonprofits building up the community in other ways, and future generation coffers.

Existing Youth Cooperatives

Housed in Educational Organizations

Dragon Apparel

Bronx Compass, a New York Charter School, has taken a radical stance on how high school students are taught. The school has incubated two student cooperatives: Dragon Apparel and Dragon Entertainment. Dragon Apparel was launched through gofundme.com in August 2013. The coop has recently completed a huge milestone and supplied the Bronx Compass High School with uniforms for the 2014-2015 school year.

Dragon Entertainment is the innovative way Bronx Compass implements to help students develop in  STEAM (Science, Technology, Engineering, Art, & Math) subjects. This student-led co-op allows students to gain experience in “music production, media arts, video game desing, and interactive electronics engineering.”

MECH Creations

MECH Creations is a student-owned cooperative based out of the Austin Polytechnical Academy (APA) in Chicago that manufactures trumpet mouthpieces.  The four founders of MECH began meeting in the autumn of 2012 and their operations began in May 2013.  They have been supported by the Center for Workplace Democracy (CDW) and Manufacturing Renaissance.  They have secured a patented design, created a business plan, acquired materials, and had sold one unit as of June, 2014. The trumpet mouthpieces are $50 each.10

Austin is on the west side of the city with 30% unemployment. MECH was founded by a group of four female African-American Chicago-native students, 17-18 years old.  Two are going off to college out of town and two are attending community college.  Currently, they are recruiting others from the general student body.  This illustrates the difficulty that youth cooperatives sometimes deal with with respect to turnover.  Students and alumni of APA are eligible for lifetime member-ownership.  This will enable college students who are able to come back and work at MECH during their summer breaks. Other questions remain.  For example, the students have not yet decided whether they are going to limit ownership to students who have experience.

Manufacturing happens after school and during the summer; students have access to school equipment during the day. Lunch breaks are used for governance meetings.11  The students have built up an inventory of approximately 30 trumpets pieces and plan to market their product locally in the 2014-2015 school year.12

Housed in Not-for-Profit Organizations

Toxic Soil Busters (TSB) is a youth-led worker cooperative that is being incubated by Worcester Roots Project, a non-profit in Massachusetts. There are approximately 10 cooperative members between the ages of 14 and 19. Since being founded in 2006, TSB has been testing soil, landscaping, and educating the Massachusetts community.

Alternatives…

Youth Cooperatives via Corporations

Corporate laws vary by state, but all states require the principals of a company that incorporates to be 18 years or older.  However, it is possible for a parent to act as an authorized signer, but the parent is liable if the minor is negligent in performing the duties of the business.

Another option, permissible in some states, is to have the minor become a shareholder in the business or serve on an advisory board.  Generally, shareholders can be of any age and in the case of minors, their share may be held in trust.  One possible way to develop a youth cooperative would be to have a nonprofit entity incorporate a closely-held corporation that states in its bylaws that it will be operated cooperatively by youth shareholders.  The shares could then be held in trust.

Youth Cooperatives via LLCs

There is nothing in the Revised Uniform Limited Liability Company Act (RULLCA) that precludes a minor from being a member in an LLC.  However, concerns over a minor’s ability to contract still apply; having a minor who can exit the LLC without any personal repercussions, in a position of actual or apparent authority does pose practical challenges.

Additional Resources:

CoFed has done amazing work helping college students create food cooperatives throughout the nation. Their website is filled with examples of how successful cooperatives operate and educational resources designed to help new cooperatives thrive

The Facebook page for USA Cooperative Youth Council offers interested individuals an awesome place to plug into the youth co-op movement and get news updates of the latest developments.

The North American Students of Cooperation is a fantastic membership organization where one can immerse themselves in cooperative principles education.

 

This page was written by SELC volunteers Marcie Hawkins-Smith and Greg Jackson.

  1. http://www.dol.gov/odep/pubs/fact/entrepreneurship.htm
  2. http://www.mlive.com/news/jackson/index.ssf/2014/02/teen_entrepreneurs_think_outsi.html
  3. Rediscovering the cooperative advantage: poverty reduction through self-help, http://www.acdivocacoopex.org/acdivoca/CoopLib.nsf/dfafe3e324466c3785256d96004f15a8/e23f0c803fc6060485256ef400575ed8/$FILE/Rediscovering%20the%20Cooperative%20Advantage.pdf;  Cooperative Advantage, http://www.gov.mb.ca/housing/coop/pdf/rib01s05.pdf; The Advantages of Co-operation, http://www.uk.coop/advantage
  4. http://arizmendibakery.com/; http://www.mondragon-corporation.com/eng/
  5. 42 U.S.C.A. § 16962
  6. http://www.osc.state.ny.us/localgov/audits/swr/2013/backgroundchecks/global.pdf
  7. Void contracts cannot be legally enforced at all. A contract to perform an illegal action, for example, is a void contract. A voidable contract, by contrast, is valid unless one of the parties chooses to cancel it.
  8. Restatement (Second) of Torts § 283A.
  9. Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751-752. (1989).
  10. http://www.austinweeklynews.com/Community/Blogs/5-16-2013/Student_run-cooperative-opens-in-Chicago’s-Austin-neighborhood/; http://www.suntimes.com/news/metro/27992381-418/trumpet-mouthpiece-business-helps-austin-students-show-their-mettle.html#.VDLNqPldWSo
  11. http://www.progressillinois.com/quick-hits/content/2014/06/02/manufacturing-green-infrastructure-co-op-businesses-offer-job-opportun
  12. http://www.suntimes.com/news/metro/27992381-418/trumpet-mouthpiece-business-helps-austin-students-show-their-mettle.html#.VDLNqPldWSo
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