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7 Understanding Cooperatives: How to Start a Cooperative Cooperative Information Report 45, Section 14 United States Department of Agriculture Rural Development Cooperative Programs September 1995 Revised April 2011 Stage 1 Is there an economic need? Yes - Proceed to Stage 2 No - Stop cooperative development When Should a Cooperative be Organized? Cooperatives are formed in response to an economic need, such as providing marketing, processing, bargaining, manufacturing, and purchasing services not currently available, or available only at excessive cost. If interested in forming a cooperative, learn all you can about the legal, economic, and financial aspects of a cooperative business. Careful planning increases the chances of success. Why Groups Organize Cooperatives: To improve bargaining power; To reduce costs; To obtain products or services; To create new and expand existing market opportunities; To improve the quality of products or services; To increase income. Steps in Organizing Determine the Economic Need A cooperative is organized in response to a specific problem or opportunity. The idea is often initiated by a small group that meets to discuss the need. The meeting should focus on the economic need and the potential use of a cooperative as a solution. Discussion topics should include: What information about the perceived need is readily available? Could a cooperative effort address this need? What information about cooperatives is available? Who can serve as an adviser to the group? Who should be invited to a meeting of potential users? How should potential users be contacted? If a cooperative seems to offer a solution, a larger meeting of interested potential users may be planned. Hold Initial Exploratory Meeting A meeting of potential member-users should be called to decide if interest is sufficient to support a cooperative. The meeting date, time, and place should be publicized in advance. The leadership group should select a chairperson to conduct a meeting and develop an agenda. These items should be discussed: What is the need; Possible solutions; Cooperative principles and terms; Advantages and disadvantages of a cooperative; What financial and other commitments are expected of user-members; Cooperative organization and feasibility analysis process; Allow time for potential members to ask questions. If the group votes to continue with more detailed study, a steering committee should be selected. 1

8 Member participation in decisionmaking activities and sense of cooperative spirit are important for success. Stage 2 Can a cooperative offer a soution? Yes - Proceed to Stage 3 No - Stop cooperative development. Consider other organization structure. Select a Steering Committee Steering committee members should have both an interest in the cooperative and sound business judgment. They often become the cooperative s incorporators and may serve as its first board of directors. The committee has a two part job: Deciding the feasibility of the cooperative: Will the proposed cooperative succeed? Will it be valuable to members? Preparing a specific, detailed business plan for the proposed cooperative. The committee should consult specialists in the areas of law, finance, and cooperative business operations. Two essential studies must be initiated: a member-use analysis and an initial market analysis. Conduct a Member-Use Analysis and Initial Market Analysis. The steering committee must take steps to learn all it can about the cooperative s potential members and what the cooperative can do for them. The survey should explore four areas: Members needs The cooperative is formed and operated for the sole purpose of meeting members needs; Anticipated business volume The cooperative must have some assurance of sufficient volume to operate as a business and to plan for facilities and needed equipment; Location and business or service characteristics of prospective members Where, how, and when the cooperative delivers its services is a prime consideration; Opinions of members How do potential members feel about cooperatives and participation in one? Member participation in decisionmaking activities and sense of cooperative spirit are important for success. Prior to conducting the initial market analysis, the steering committee will first meet to review the member-use analysis. Potential members have been surveyed regarding their interest in jointing the proposed cooperative, anticipated business volume, and willingness to commit their product and capital. Depending on results, the steering committee then decides whether to proceed with the project. Following a decision to proceed, an initial market analysis is conducted to determine if the proposed cooperative has an economic role in the marketplace. This analysis will identify and examine market conditions to provide insight into appropriate activities for the cooperative, volume, facility, and technological needs, and other pertinent factors. The market or supply analysis will determine if the proposed cooperative has an economic role in the marketplace. The analysis will identify which activities are appropriate, business volume, and financial capabilities of the potential cooperative members. Second Member Exploratory Meeting This meeting of potential members reviews results of the member-use and inital market analyses. Based on the information presented, the participants vote either to continue or abandon the project. If they choose to continue, the next step is to conduct a comprehensive feasibility analysis. Potential members may be asked to invest earnest money at this point to demonstrate their commitment to the cooperative and to cover further analysis and organizational costs. 2

9 Conduct a Feasibility Analysis A comprehensive feasibility analysis, conducted by an experienced practitioner, will help the steering committee determine if the proposed cooperative is feasible given well-determined assumptions, researched information, and the member-use and initial market analyses. This study determines management, marketing, technical, economic, and financial feasibility, and presents the entire cooperative concept in one document. It will provide the foundation for the business plan if a decision to proceed is made. Third Member Exploratory Meeting At the third exploratory meeting, the steering committee presents the comprehensive feasibility analysis findings to potential members and provides the committee s recommendation on whether to proceed. If the decision by the group is then to proceed, the next step is to prepare a business plan and draft legal documents. Prepare a Business Plan Every business should have a business plan. The steering committee should arrange for completion of an in-depth business plan prepared by a professional familiar with cooperative organization. The plan is developed from the foundation provided by the feasibility analysis and provides an organizational map that the new cooperative will follow as it begins operations. Draft Legal Papers and Incorporate The articles of incorporation state the purpose and scope of the cooperative business and give the cooperative a distinct legal standing. The bylaws state how the cooperative will conduct business and must be consistent with both State statutes and the arti- cles of incorporation. Legal counsel should be consulted on these and other legal documents, such as membership or marketing agreements. Fourth Exploratory Member Meeting At this meeting, potential members review the work and recommendations of the steering committee, including the articles of incorporation, bylaws, and any adjustments made to the business plan. Support for the cooperative should again be evaluated by a vote on whether or not to form the cooperative. If affirmative, the incorporators file the articles of incorporation. First Annual Meeting of Cooperative At the first meeting of the cooperative, members carry out two very important member responsibilities: Approve the bylaws; Elect the board of directors. Steering committee members are often board candidates, but other members may also be elected to these leadership positions. First Board of Directors Meeting The first meeting of the board of directors should focus on selection of the board officers, committee appointments, and carrying out the business plan. Additional agenda items include arranging debt capital, conducting a membership drive, establishing manager qualifications, and conducting a manager search. Acquire Capital The board of directors is responsible for arranging adequate capital. Capital may be raised by members purchasing stock (equity) and borrowing funds (debt) from a lending institution. Members must invest or Stage 3 Is there member interest? Yes - Proceed to Stage 4 No - Stop development Stage 4 Is cooperative plan feasible? Yes - Proceed to Stage 5 No - Stop development 3

10 4 Stage 5 Do members commit capital and business volume? Are resources available? Yes - Begin operations To see this and other USDA cooperative publications online, visit: usda.gov/rbs/pub/ cooprpts.htm To order hard copies, coopinfo@wdc. usda.gov or telephone: pledge sufficient capital in the business to demonstrate commitment to the cooperative s success. Exact amounts will depend on activity and lender requirements. Projected cash flow schedules and financial statements from the business plan are important in determining capital needs and arranging for debt capital. Hire a Manager One of the most important duties of the board of directors is to hire a qualified manager who is responsible for day to day operations. Hire Employees, Acquire Facilities, Begin Operations The manager hires capable employees and advises the board on what facilities and equipment to acquire, within the budget and operation guidelines established by the board. Important Factors for Cooperative Success Experience shows that a newly organized cooperative s chances for success can be improved by doing the following: Clearly identifying the economic need; Reaching agreement on the cooperative s mission; Developing good leadership; Gaining the commitment of members to do business with the cooperative; Following sound business practices. Summary A cooperative is a unique form of business used by people and businesses for their mutual benefit. Whatever its purpose, starting a cooperative requires considerable time, energy, and commitment by potential members to finance and use the business and select knowledgeable directors who will hire a competent manager. Where to Get Help The U.S. Department of Agriculture s Rural Development (RD) offices in some States have cooperative development specialists on staff who can help you. For additional information, contact USDA s Rural Business- Cooperative Progams in Washington, D.C. Its staff of professionals can help organize a new cooperative and provide technical assistance to existing cooperatives. Write to: Rural Business-Cooperative Service Stop 3254 Washington, DC Phone (202) FAX (202) , Attention: CDD cooperatives.html For more details, see the following USDA Rural Development publications: How to Start a Cooperative, CIR 7 Cooperative Feasibility Guide, SR 58 This circular is one of a continuing series that provides training information and presentations for education resource persons who may or may not be familiar with the cooperative form of business. This series provides the basic background material they need and in a form that can be readily adapted, with limited preparation time, to a lecture or other presentation. The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an individual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA's TARGET Center at (202) (voice and TDD). To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC , or call toll-free at (866) (English) or (800) (TDD) or (866) (English Federal-relay) or (800) (Spanish Federal-relay). USDA is an equal opportunity provider and employer.

11 Developing Cooperatives for the Alaska Seafood Industry

12 Starting a Seafood Cooperative 5 There are a number of basic steps to take and items to have in place before forming a successful seafood cooperative. Compelling reason Why would someone form a cooperative in lieu of a regular corporation? Whether the problem is low fish prices or high costs of supplies, there must be a compelling reason to form a cooperative. However, need alone is not enough to achieve a successful cooperative. Fish prices and supply costs fluctuate significantly from year to year, and before a group invests time and energy into a new venture, they must critically analyze their willingness to make a long-term investment of time and money. The compelling reason(s) must be well articulated and able to stand the test of time. To develop adequate support, it is important to clearly articulate why a cooperative is necessary and what will be gained from having one. Develop the core support The first step in building support is to meet with prospective members. Initial meetings among potential members do not need to be large. Gather your core supporters to discuss why you want to form a cooperative and then refine and expand the concept. From there, identify an expanded group of potential cooperative members and begin to gather information. If you are thinking about a marketing cooperative, find out how many pounds of fish each member could produce. What are they getting paid? What would they expect a cooperative to do for them? If you are thinking about a purchasing cooperative, determine roughly what kinds of supplies the members buy. What volumes

13 24 Starting a Seafood Cooperative Kurt Byers photo A lask a A irlines promotes w ild A lask a seafood. With high freight costs, transportation is one area w here A lask a seafood operators could w ork together to lo w er costs b y forming a cooperative. do they buy, and could the cooperative provide those supplies at a price to make it worthwhile? At this stage, the information gathered can be approximate, but it will help refine your ideas for the cooperative and will help with the next stage drafting a business plan. Once it appears you have the critical mass to push the issue through, seek assistance from professionals who can help facilitate meetings and outline the process. The Alaska Cooperative Development Program, at the University of Alaska Anchorage Center for Economic Development, can help you in forming a cooperative. Visit them on the Web at The U.S. Department of Agriculture, Rural Development, awards grants to organizations to assist in the formation of cooperatives. Prepare a business plan Regardless of the type of business venture, business plans are critical. Understanding costs and production requirements is just

14 Developing Cooperatives for the Alaska Seafood Industry 25 as important for cooperatives as other businesses. In preparing a business plan, take general information and refine it. Given cooperatives unique status as businesses that buy from their owners and the inherent problems in not gathering enough volume to break even, all members must understand the required output before investing in the organization. File articles of incorporation and bylaws To organize a cooperative in Alaska, you will need to file articles of incorporation with the Alaska Department of Commerce, Division of Corporations, Business and Professional Licensing. A form version of the articles is available at their Web site ( You will also need to adopt a set of bylaws. Samples are available at the Alaska Cooperative Development Program Web site ( index.html). Once the cooperative is registered with the state and the bylaws are in place, obtain a business license and employer ID number. The business license application is online at commerce.state.ak.us/bsc/cforms.htm, and employer ID applications are available at article/0,,id=98350,00.html. Determine board of directors With the passage of bylaws, the cooperative needs to elect a board of directors. For continuity, the board may include the individuals who initially started the organization. Board members must be prepared to work hard. Be sure to stagger the director s terms of duty to maintain institutional knowledge. Draft a membership agreement A membership agreement can be as simple as a one page form that sets out how membership refunds will be paid by a purchasing cooperative, or they can be complicated contracts that spell out the terms under which members will deliver their seafood to the cooperative. Guidelines for drafting a membership agreement are available at the Alaska Cooperative Development Program Web site (

15 26 Starting a Seafood Cooperative Hire a management team As stated previously, it is important to have enough volume and activity to justify hiring individuals to run the day-to-day affairs of the businesses. The actual members are busy running their own businesses and should not be saddled with running the cooperative. A good management team is critical for a successful cooperative.

16 Starting and Maintaining Community Supported Fishery (CSF) Programs A Resource Guide For Fishermen and Fishing Communities

17 Starting and Maintaining Community Supported Fishery (CSF) Programs: A Resource Guide for Fishermen and Fishing Communities This guide is the product of a collaborative effort between the National Sea Grant Law Center, the National Marine Fisheries Service, New Hampshire Sea Grant, Maine Sea Grant, MIT Sea Grant, the Island Institute, and the Northwest Atlantic Marine Alliance prepared in association with the National Summit on Community Supported Fisheries held in Portsmouth, New Hampshire, May 30 June 1, It provides general information to assist fishermen and fishing communities with starting and/or maintaining a Community Supported Fishery (CSF). The guide is not intended to be a stepby-step set of instructions. Rather, the authors hope the CSF Resource Guide will serve as an introduction to the CSF concept, identify common business, management, and legal issues, and direct fishermen and fishing communities to additional resources that can help them develop their businesses. This guide is a starting place. Fishermen and fishing communities considering entering into this brave new world of direct marketing should reach out to fishermen and organizations with experience in developing or running CSFs, such as the collaborating organizations for the National CSF Summit, to learn more about this emerging business model, what it takes to get a CSF off the ground and keep it running, and how to gain access to specialized expertise. National CSF Summit Planning Committee Padi Anderson, Director, Granite State Fish Erik Chapman, Assistant Extension Professor, New Hampshire Sea Grant Niaz Dorry, Director, Northwest Atlantic Marine Alliance Madeleine Hall-Arber, Anthropologist, MIT Sea Grant Amy Scaroni, Program Analyst, National Sea Grant Office Kim Selkoe, Associate Research Scientist, UC Santa Barbara Stephanie Showalter Otts, Director, National Sea Grant Law Center Joshua Stoll, Policy Analyst, National Marine Fisheries Service Ellen Tyler, unaffiliated, Fish Locally Collaborative The Planning Committee would like to thank the National Sea Grant Law Center for overseeing the production of the CSF Resource Guide and the National Marine Fisheries Service for providing the funds to print hard copies of the CSF Resource Guide for distribution at the National CSF Summit. May 2012 NSGLC

18 Contents Introduction... 1 Potential Beneficiaries of CSFs... 2 Things to Consider Before Starting a CSF... 4 Marketing a CSF Additional Resources... 15

19 1 Introduction Community Supported Fishery (CSF) programs are a new and innovative form of direct marketing modeled after Community Supported Agriculture (CSA) programs. CSFs are contractual arrangements between fishermen and consumers, where the CSF members (also called shareholders) provide fishermen with financial support in advance of the season in exchange for a weekly share of seafood caught during the season. By receiving payment upfront, instead of post-harvest, fishermen know what they are going to earn and in doing so they have the means to invest in their operations (e.g. through the purchase of new gear, additional quota, or infrastructure). CSFs create a community of consumers who buy fish directly from local fishermen. Through the CSF, members are reconnected to the source of their seafood and fishermen develop personal relationships with the people who buy their products. CSFs provide mutual learning opportunities. Consumers learn about local fisheries practices and concerns directly from the fishermen and fishermen gain knowledge about what their consumers value. Consumer demand for locally produced food is growing. Although it is difficult to define local food with precision, consumers are increasingly seeking to purchase food produced within close proximity to their homes as evidenced by the recent growth of farmers markets, CSAs, and other agricultural direct marketing programs. In coastal areas, seafood has always been a local source of food and it is important that seafood continue to be included in local and regional food systems. CSFs are one way for fishermen to tap into the local food market. By emphasizing sustainable fishing practices, minimizing processing, and decreasing the distance traveled, CSFs can help meet consumer demand for affordable, fresh, sustainable seafood products. There are more than twenty CSFs in existence in North America and several more in development in the U.S. and beyond ( Though each CSF is designed to fit its local context, several core elements tie them together. CSFs: Establish a transparent chain-of-custody from boat to fork; Increase access to premium, locally caught seafood; Ensure fishermen receive a fair price for their catch that reflects the value of their work; Engage fishermen and community members in a more robust, viable, local food system; and Provide a framework through which fishermen and customers alike can creatively steward our marine resources. The first nationally recognized CSF in the U.S. was launched in December 2007 when the Midcoast Fishermen s Cooperative of Port Clyde began selling weekly shares of pink wild-caught shrimp to 29 subscribers. Today, Port Clyde Fresh Catch delivers seafood year round to numerous communities throughout New England.

20 2 Potential Beneficiaries of CSFs Given that many CSFs are still in their infancy, fishermen and communities are just beginning to learn about the benefits of CSFs. Here is a brief overview of some of the ways a CSF may benefit fishermen and fishing communities. Fishermen Fishermen selling their product through a CSF may realize higher income, by earning a bigger percentage of the seafood dollar spent by consumers for high quality, locally produced food. Fishermen also gain access to a stable (certain) market and often receive payment for their catch up front or on a weekly basis. This helps fishermen cover the costs associated with going fishing, such as buying fuel, ice, or bait and paying crew wages. It also reduces business risk and increases financial stability. Photo by Joshua Stoll In addition to the financial rewards, fishermen may also benefit professionally and socially by starting or participating in a CSF. CSFs can provide opportunities for local fishermen to strengthen partnerships with local organizations or other fishermen for market and policy benefits. In many communities where CSFs have started, these operations have led to improved or increased access to infrastructure and support. Finally, fishermen can benefit from increased public awareness and support. When people know who catches their seafood, they are more sensitive to policies that affect fishermen. As CSF shareholders begin to associate the seafood on their tables with the individuals who caught and delivered it, and understand how that seafood was caught, they become more aware of how their buying habits affect the well being of the fishermen and the oceans.

21 3 Local Economy Although some CSFs are a one-fisherman operation, other CSFs provide revenue streams to dozens of fishermen and work with existing buyers or processors to prepare and/or deliver their catch to shareholders. CSFs can support the existing seafood infrastructure in their communities by generating additional work for local seafood businesses and helping to improve their bottom line. Farmers markets are often willing to host a CSF because the increase in foot traffic associated with CSF members picking up their shares can increase overall sales. The local economy benefits from the additional jobs, sales, and tax revenues. Local Catch Monterey Bay supports 20 local fishermen and two processors, delivering a wide range of local seafood to over 200 members at fourteen pickup sites in Santa Cruz and Monterey counties. Consumers In addition to gaining convenient access to extremely fresh seafood, consumers participating in CSFs learn about who catches their seafood, where it comes from, and how it was caught. As the contents and quantities of their shares change over time, CSF members learn which species are locally abundant and when. This knowledge reconnects the consumer to the source of their seafood and the fisheries and fishing communities in their region. CSF members learn how to store, handle, shuck, fillet and prepare diverse varieties of seafood. Because of the close personal connection with the fishermen, CSFs members gain peace of mind by knowing that the fish they are eating is labeled correctly and free of chemical preservatives. Marine Environment CSFs promote less intensive fishing practices by helping fishermen shift their operations away from the traditional business model of catching high volume to make ends meet. Harvesting pressure is reduced as fishermen focus on delivering smaller quantities of high quality seafood on a weekly basis over the course of the season. CSFs can even out the price across species, reducing some harvesting pressure on single, high value species by making all species equally valuable to the fishermen. In addition, many consumers participating in CSFs are concerned with the environmental impact of their food choices, which provides an incentive to fishermen to maintain or adjust their fishing practices to satisfy this demand. Thimble Island Oyster Company, which runs a shellfish CSF in Connecticut, has been working with the EPA to ensure that the company s outboard engines meet the highest efficiency standards for emissions.

22 4 Things to Consider Before Starting a CSF For a CSF to generate any of the benefits discussed above, it must be a successful business. Direct marketing poses a number of challenges. It takes time and effort to develop a good business plan, secure the necessary business licenses, manage the finances and paperwork, advertise the product, and recruit and retain customers. Anyone considering launching a new business, or significantly changing their existing business, has a lot to think about. In developing a business plan, numerous questions need to be answered. Business plans for CSFs, for example, must consider such topics as: Infrastructure (including landing wharf, processor, delivery truck) Kind and form of seafood to be provided Prices of shares and payment structure Deliveries (including policies about missed deliveries and missed pick-ups) Legal requirements and regulations Marketing to attract sufficient shareholders Outreach and education for the shareholders and the communities where the fish is to be delivered Funding for start-up costs, shortfalls, etc. Photo by Becky Cliche Rather than attempt to provide exhaustive answers, this resource guide highlights some business and operational issues that are unique to CSFs and recommends resources for additional information.

23 5 Community Research The first step to launching a new business is conducting market research. A business will only succeed if there is a demand for the product the business is selling. Consumers seeking to tap into local food systems value things like who is growing or catching the food, how far it travelled, where the money goes, the health of the land and the ocean, and the wider community benefit. Although consumer demand for sustainable seafood is rising, many consumers are not aware that there are other ways to buy seafood than in a grocery store or restaurant. But when given the option of buying seafood caught within 24 hours of swimming versus seafood caught weeks or months before and shipped half way around the world, consumers tend to pick the former. Starting a CSF in a community can provide options and help meet consumer demand for local food and sustainable seafood. Photo by Skipper Otto s Wild BC Salmon CSF Every community is different, though, and demand will be higher in some and nonexistent in others. In some locations, CSFs may have to work to generate consumer demand by educating the community on the benefits of purchasing local seafood. Even in areas where demand is high, CSFs must reach out into the community to build their subscriber base. Formal and informal surveys of community members are a good place to start to gauge community interest in a CSF. Through surveys distributed by mail or conducted at public events, fishermen can assess community members knowledge of local seafood varieties, willingness to purchase unprocessed seafood (i.e. whole fish), and level of interest in participating in a CSF. Because community support is the essence of a CSF, fishermen considering direct marketing their catch through a CSF should explore teaming up with a local community-based organization that is willing to serve as a partner. Doing so may help the CSF increase its chances of success, reach more people, distribute the workload (or even take away all the work other than fishing), and spread the benefits. Many of the most successful CSFs to date have teamed up with community partners, such as local fishing organizations, farmers markets, local student organizations, community economic development organizations, or other nonprofit groups. Cape Ann Fresh Catch started in 2008 as a collaboration between the Northwest Atlantic Marine Alliance, MIT Sea Grant and the Gloucester Fishermen s Wives Association. Today, GFWA runs Cape Ann Fresh Catch in furtherance of its non-profit mission of promoting the New England fishing industry, helping to preserve the Atlantic Ocean as a food supply for the world, and assisting active and retired fishermen and their families to live better lives.

24 6 Business Structure One of the first decisions a fisherman considering starting a CSF needs to make is what form the business should take. This decision is very important and should not be made without conducting the proper research, as business structure affects taxes and personal liability for business obligations. A good starting place for such research is the U.S. Small Business Administration ( There is a range of business forms a CSF can choose from. Siren SeaSA, a CSF in San Francisco, owned and operated solely by its founder Anna Larsen, is a sole proprietorship. Sole proprietorship: Under a sole proprietorship, one person owns all of the assets and is personally liable for the business s obligations. Generally, there is little formality in forming a sole proprietorship. The Midcoast Fishermen s Cooperative operates Port Clyde Fresh Catch, a CSF structured as an S-Corp. Cooperative: A cooperative is a business owned and controlled by the people who use its services. They finance and operate the business or service for their mutual benefit. Cooperatives do not pay federal income tax as a business entity; rather, members pay taxes on what they earn through the cooperative when they file their personal incomes taxes. Partnership: Under a partnership, management decisions are shared by partners and each partner is fully responsible for the business s debts and for actions of all partners. For instance, each partner includes their share of the partnership s income or loss on their personal tax return. Partnerships are easier to form than corporations, but similar to sole proprietorships, partners are personally liable for business debts and decisions made by other partners. Corporation: A corporation is an independent legal entity owned by shareholders. The corporation itself, not the shareholders, is held legally liable for its debts and decisions. Corporations file taxes separate from the owners, which only pay individual taxes on corporate profits paid to them in the form of salaries or dividends.

25 7 Subchapter S Corporation (S-Corp): S-Corporations are limited to one class of stock and no more than 75 eligible shareholders. S-Corp shareholders are taxed much like partners and sole proprietors (income is reported on personal returns). Shareholders that actively participate in the business are treated as employees and are therefore subject to payroll withholding requirements. Like Port Clyde Fresh Catch, Walking Fish, which offers shares in Durham and Raleigh, North Carolina, is organized as an S-Corp. Limited Liability Corporation: An LLC is a hybrid-type of legal structure that provides the liability features of a corporation with the tax and operational benefits of a partnership. The most significant advantage of an LLC is limited liability LLC members are protected from personal liability for certain (though not all) business obligations. Eddie and Alison Willis, the owners of Core Sound Seafood, incorporated their CSF as an LLC. Nonprofit Corporation (501(c)(3) Corp): Nonprofit corporations are a special type of corporation that are granted tax-exempt status because they are organized and operated exclusively for a charitable, religious, educational, or other exempt purpose. Nonprofit corporations may not operate for the benefit of private individuals. For example, earnings may not be distributed to private shareholders and individuals. While an individual fisherman would not be able to establish his CSF as a non-profit (because it would be operating for private benefit), fishermen can team up with a non-profit organization that runs a CSF as one of its many programs to educate and engage the public about programs its charitable work is centered around. For example, a nonprofit might establish a CSF to enhance its work on economic development for fishermen, public education about locally caught seafood, or preserving the character of the community. Basically, the overall purpose of the nonprofit has to remain charitable. Cape Ann Fresh Catch is run by the Gloucester Fishermen s Wives Association, a 501(c)(3) organization. Every business structure has its unique set of requirements. In selecting a business structure that is appropriate for a CSF, it is important to consider the tax implications of the structure and the extent to which it matches the social and economic objectives of the business.

26 8 Operate Legally In addition to properly registering the business and complying with relevant record-keeping and tax requirements, CSFs must also comply with applicable federal, state, and local fisheries and health and safety regulations. Fortunately, many resources exist to help small businesses navigate these requirements and often community business associations offer networking and logistical workshops to help new businesses get off the ground. Below is a list of things to keep in mind to operate legally. Fishermen considering starting a CSF should consult with relevant state agencies to determine what permits or licenses are necessary. Permits and Licenses: In addition to having the proper state and federal permits to harvest and land their catch, fishermen must obtain a federal permit to report all the fish that is sold to the market. In addition to the federal dealer s permit, fishermen selling their catch directly to shareholders through a CSF may need to secure additional state permits and licenses. Licensing requirements vary by state, but a dealer or wholesaler license is often required to sell seafood directly to retail consumers. Because CSF shares are pre-measured and sales are made in advance, most states do not require a weights and measures license at the point of distribution. Health and Safety: Fishermen selling their catch directly to shareholders (as opposed to through a processor) must also adhere to state and local public health laws and regulations. State and local boards of health often oversee seafood safety, inspection of seafood processors, inspection of retail and food service establishments, and inspection of food transportation trucks. A CSF should consult with state and local health departments to determine if any licenses or approvals must be obtained in addition to the fisheries permits. For example, a state department of health might require a mobile vendor s license to sell and/or distribute shares of seafood from the dock or a truck at a farmers market.

27 9 HACCP: HACCP stands for Hazard Analysis and Critical Control Points, a system of food safety that identifies the risk points as seafood moves from the vessel to the consumer and sets limits that will prevent, eliminate or reduce the food safety risks at those control points. FDA regulations require wholesale processors of fish and fishery products to develop and implement HACCP systems for their operations. The FDA s definition of processing is extremely broad and includes: handling, storing, preparing, heading, eviscerating, shucking, freezing, changing into different market forms, manufacturing, preserving, packing, labeling, dockside unloading, or holding. However, the HACCP regulations do not apply to (1) the harvesting or transportation of fish, (2) practices such as heading, eviscerating, or fishing intended solely to prepare a fish for holding on board a harvest vessel, and (3) the operation of a retail establishment. Whether federal regulations require a CSF to develop and implement a HACCP plan, therefore, depends on whether the fishermen processes the catch with the intent to sell it at wholesale. By federal law, fishermen may process their catch and sell it at retail (directly to the consumer) without triggering the HACCP requirements. However, state or local departments of health may still require a CSF to develop HACCP plans. Additional information about the FDA regulations and HACCP plans is available at ryinformation/guidancedocuments/seafood/fishandfis heriesproductshazardsandcontrolsguide/default.htm. Regardless of whether HACCP plans are required by law, the development of such plans is an important means of identifying food safety hazards that are likely to occur and procedures that can be implemented to avoid those hazards. Labeling: The major selling point of a CSF to the consumer is knowing how, where and when their fish was caught, and who caught it. A CSF may choose not to label its products, but any labels that are used should include this basic information for the CSF members benefit. CSFs must also adhere to federal and state labeling laws if labels are used on packaging. The U.S. Food and Drug Administration (FDA) oversees the proper labeling and packaging of food. FDA guidance regarding the labeling and sale of seafood is available at Federal law, for instance, sets forth

28 10 acceptable market names for seafood and prohibits sellers of food from making false or misleading claims. Because of the small-scale harvesting methods and local distribution network, seafood sold through a CSF may have a smaller environmental footprint. Fishermen, however, need to be careful about making environmental claims in marketing materials, as seafood eco-labeling is governed by a variety of governmental and non-profit organizations. For more information on eco-labeling, visit the University of Rhode Island s Sustainable Seafood Initiative at ling.html. Anti-Trust: Fishermen operating CSFs should be aware of federal and state antitrust laws that prohibit certain anticompetitive activity, such as competitors agreeing on what price to charge. Competitors can discuss common business issues and develop joint marketing campaigns by working through trade associations or consumer organizations. An additional benefit of the cooperative business model is that, for certain purposes, cooperatives are exempt from some federal and state antitrust laws. For example, the Fishermen s Collective Marketing Act allows members of the fishing industry to act together in associations to catch, process, handle and market their products. Not every activity will qualify for an exemption, however, so CSF operators should seek legal guidance before engaging in collective marketing. In addition, the inclusion of nonfishing industry members, such as processors or dealers, into a trade association may void the anti-trust protections. Paperwork and Taxes: CSFs must maintain good business records, including tax records. Failure to file the required paperwork, including state and federal tax returns, may make it difficult to secure financing or, worse, result in fines and the loss of business licenses. By setting up a good business structure early, an organization is more likely to run efficiently, provide better customer service, and stay out of legal trouble.

29 11 Manage Your Risk All businesses involve risks. Lots of things can affect a business s operations, from small problems (an employee quitting) to large (a fire). In addition to normal small business risks, CSFs come with some unique risks. Harvesting restrictions might prevent a fisherman from fulfilling a customer s share. Bad weather may keep you tied up to the dock, or damage your boat or gear. Shareholders lacking knowledge of proper handling and storage of seafood may fall ill and blame the CSF. CSF operators need to identify the events that might cause business losses, from bad weather to lawsuits, and manage those risks accordingly. Sometimes planning ahead for these types of events can prevent or minimize their occurrence and save a lot of hard work and misunderstanding later on. Here are some things to keep in mind when trying to identify and manage risks. Business Leadership: As illustrated by the previous section, there is a lot to think about when operating a CSF. Someone must spend a lot of time coordinating the CSF marketing the business, signing up shareholders, coordinating deliveries, handling complaints, and managing the paperwork. It s important that the person assigned to this role has some business expertise and enjoys interacting with the public. Some fishermen enjoy running businesses, but some CSFs may need to dedicate funds to hire a business manager or secure professional services (accountants, lawyers, etc.). There are nonprofit organizations, such as SCORE ( that provide these services at reduced rates or on a volunteer basis. HACCP Plans: As noted above, in some cases local public health departments require a CSF to have a HACCP plan in place or work with an entity that does if they want to distribute seafood to consumers. Even if it is not a requirement, it is a good idea for CSFs to implement a HACCP plan to help ensure compliance with food safety practices. If you are working with partners that are handling your offloading, packaging or deliveries it s highly likely they already have a HACCP plan. Many Sea Grant programs have HACCP training programs, such as New York Sea Grant s Seafood HACCP Online Training Course. For more information, visit Intro/index.html. Seafood Inspection Program: NOAA operates a voluntary seafood inspection program on a fee-for-service basis. Under authority in the 1946 Agricultural Marketing Act, the NOAA Seafood Inspection Program provides inspection services to the industry for fish, shellfish, and fishery products. A CSF may wish to take advantage of these services to ensure compliance with food regulations and delivery of quality product, and to reduce liability

30 12 exposure. All types of establishments such as vessels, processing plants, and retail facilities are eligible to receive these services. NOAA maintains a schedule of fees that can be found here: Companies can join the program by contacting their local regional inspection branch for an application. A list of branches can be found here: Insurance: Another key element of any business risk management plan is the purchase of insurance. Insurance coverage is available for almost any business risk, although costs and coverage vary by state and insurance company. CSF operators should discuss options with a local insurance agent. The most common forms of business insurance include general liability insurance to cover costs arising from accidents or injuries and product liability insurance to protect against financial loss if a product the business is selling causes harm. Becoming and Staying Profitable Many new CSFs rely on grants or other funding to start their pilot project if it is more extensive than a single boat operation. Because of the value of the skilled personnel (accountant/bookkeeper, web developer, communicator, director/board, lawyer and others) needed to develop and maintain a CSF, funding needs may extend well beyond start-up. Grants are typically only offered to non-profit organizations, although some are available to businesses. In addition to grants, many organizations such as Slow Money ( offer low or no interest funds for innovative businesses such as CSFs, designed to address the multiple needs of communities, economies, the environment, and food systems. While grants and loans can provide the necessary start-up funds, the CSF must eventually generate enough revenue to cover its operating costs and sustain itself over time. The North Atlantic Marine Alliance has been developing a financial forecasting tool to help CSFs determine, among other things, how many shareholders are needed, what price should be charged for whole fish versus fillets, how many shareholders they need to have, and how often deliveries should be made for the CSF to remain profitable. This tool is available from NAMA upon request and will soon be available online.