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Legal Compliance Framework — Lantern ​

Effective Date: 2026-01-09
Status: Constitutional Document (requires 75% employee vote to amend)

Purpose ​

This document identifies legal requirements and compliance obligations for Lantern's employee-owned governance structure. It serves as a checklist for working with legal counsel to formalize the cooperative.

⚠️ DISCLAIMER: This is NOT legal advice. Consult qualified legal counsel in your jurisdiction before implementing any governance structure.

Lantern's governance must comply with applicable laws while protecting employee-ownership and mission.

Key principle: Our governance documents add protections above legal minimums. We never violate law to achieve our goals.

1. Corporate Structure & Formation ​

  • [ ] Choose legal entity type (see options below)
  • [ ] File articles of incorporation with state/jurisdiction
  • [ ] Draft and adopt bylaws compliant with entity type
  • [ ] Obtain EIN (Employer Identification Number) from IRS (US) or equivalent
  • [ ] Register with state agencies (Secretary of State, labor department, tax authorities)
  • [ ] Open business bank account (requires articles, EIN, bylaws)

Entity Type Options (US) ​

Option 1: Worker Cooperative Corporation

  • Legal structure: Corporation owned and controlled by worker-members
  • Pros: Designed for employee ownership; democratic governance built-in; mission protection
  • Cons: Not available in all states; may require specialized attorney
  • States with coop statutes: California, Colorado, Massachusetts, New York, Oregon, Vermont, Washington, Wisconsin
  • Governance: One-member-one-vote; profit sharing to members; mission protection
  • Tax: Can elect C-corp or S-corp taxation

Option 2: LLC with Cooperative Structure

  • Legal structure: Limited Liability Company with custom operating agreement
  • Pros: Available in all states; flexible structure; simpler than corp
  • Cons: Requires careful drafting of operating agreement to ensure coop principles
  • Governance: Defined in operating agreement (one-member-one-vote, equal profit sharing)
  • Tax: Pass-through taxation (members pay tax on profit share)

Option 3: Benefit Corporation (B-Corp) with Employee Ownership

  • Legal structure: For-profit corporation with mission accountability
  • Pros: Mission protection built into law; investor-friendly if needed
  • Cons: Less clear employee-ownership structure; may need ESOP or equity plan
  • Governance: Board of directors; must consider stakeholders (employees, mission, community)
  • Tax: C-corp taxation; can elect S-corp if eligible

Option 4: Traditional Corporation + ESOP

  • Legal structure: C-corp or S-corp with Employee Stock Ownership Plan
  • Pros: Well-established; tax benefits for ESOP; investor-compatible
  • Cons: ESOP complex and expensive to administer; less direct democratic control
  • Governance: Board of directors; ESOP trustee votes on behalf of employees
  • Tax: ESOP contributions tax-deductible; potential tax-free status if 100% ESOP-owned

Recommended for Lantern: Worker Cooperative Corporation (if available in state) or LLC with Cooperative Structure (if not).

2. Employment Law Compliance ​

Employee Classification (Critical) ​

  • [ ] Properly classify workers as employees vs. contractors (see Contractor Pathway)
  • [ ] Apply IRS tests for employee vs. contractor (behavioral, financial, relationship)
  • [ ] Review contractor relationships quarterly to prevent misclassification
  • [ ] Consult attorney if uncertain about classification

Misclassification penalties:

  • Back payroll taxes (employer portion)
  • Back wages, overtime, benefits
  • Federal and state fines
  • Lawsuits from misclassified workers

IRS Form: SS-8 (Determination of Worker Status) if classification is unclear

Wage & Hour Laws ​

  • [ ] Comply with minimum wage (federal, state, local—use highest)
  • [ ] Pay overtime for non-exempt employees (1.5× for hours >40/week in US)
  • [ ] Maintain timekeeping records (hours worked, breaks, overtime)
  • [ ] Exempt vs. non-exempt classification (salaried employees may still be non-exempt)
  • [ ] Equal pay laws (no discrimination based on gender, race, etc.)

Lantern commitment: Living wage minimum (75,000/year) exceeds legal minimums; 4-day week (32 hours standard) with overtime pay for 33+ hours.

Leave & Benefits (US) ​

  • [ ] Family and Medical Leave Act (FMLA): 12 weeks unpaid leave (50+ employees)
  • [ ] State paid leave: Varies by state (CA, NY, WA, etc. have paid family leave)
  • [ ] Sick leave: Required in many states/cities (e.g., CA, NYC)
  • [ ] Health insurance: ACA requires offer to full-time employees (50+ employees)
  • [ ] Workers' compensation insurance: Required in all states
  • [ ] Unemployment insurance: Required; pay state/federal unemployment taxes

Lantern commitment: Exceeds legal minimums (unlimited PTO, 26 weeks paid parental leave, etc.)

Anti-Discrimination & Harassment ​

  • [ ] Comply with Title VII (federal): No discrimination based on race, color, religion, sex, national origin
  • [ ] Comply with ADA (Americans with Disabilities Act): Reasonable accommodations for disabilities
  • [ ] Comply with ADEA (Age Discrimination in Employment Act): No age discrimination (40+)
  • [ ] Comply with state/local laws: Many states add protections (sexual orientation, gender identity, etc.)
  • [ ] Implement anti-harassment policy and training
  • [ ] Provide reporting mechanism (anonymous option)
  • [ ] Investigate complaints promptly and take corrective action

Lantern commitment: Zero tolerance for discrimination/harassment (see Employee Rights Charter)

3. Tax Law Compliance ​

Federal Taxes (US) ​

  • [ ] Employer payroll taxes (Social Security, Medicare—7.65% employer share)
  • [ ] Federal unemployment tax (FUTA)
  • [ ] Income tax withholding for employees (W-4 forms)
  • [ ] Quarterly tax filings (Form 941 for payroll taxes)
  • [ ] Annual tax return (Form 1120 for C-corp, 1120-S for S-corp, 1065 for partnership/LLC)
  • [ ] 1099 forms for contractors (1099-NEC by Jan 31)
  • [ ] W-2 forms for employees (by Jan 31)

State/Local Taxes ​

  • [ ] State income tax (if applicable)
  • [ ] State unemployment tax (SUTA)
  • [ ] Local business taxes (city, county)
  • [ ] Sales tax (if applicable to business model)

Cooperative Tax Considerations ​

  • [ ] Cooperative tax election (IRC Section 521 or Subchapter T for coops)
  • [ ] Patronage dividends (profit distributions to members may be deductible for coop)
  • [ ] Consult tax attorney for optimal structure (coop tax law is specialized)

Lantern commitment: Maintain 6-month cash reserves to ensure tax payments never missed.

4. Governance & Corporate Law ​

Articles of Incorporation (Must Include) ​

  • [ ] Company name and purpose
  • [ ] Registered agent and address
  • [ ] Ownership structure (employee-owned; no outside equity)
  • [ ] Voting rights (one-member-one-vote)
  • [ ] Mission statement (privacy-first, no data sales)
  • [ ] Stewardship Board powers and composition
  • [ ] Amendment process (supermajority requirements)
  • [ ] Dissolution clause (what happens if company closes)

Bylaws (Must Include) ​

  • [ ] Membership criteria (employee-owners)
  • [ ] Voting procedures (quorum, thresholds, proxy rules)
  • [ ] Board structure (if applicable; or employee-managed)
  • [ ] Officer roles (CEO, CFO, Secretary, etc.) and selection process
  • [ ] Profit distribution formula (equal sharing among members)
  • [ ] Transfer restrictions (cannot sell shares to non-employees)
  • [ ] Buyback procedures (when employee leaves)
  • [ ] Meeting requirements (annual member meetings, notice procedures)

Fiduciary Duties ​

  • [ ] Duty of care: Directors/officers must act with reasonable care
  • [ ] Duty of loyalty: No self-dealing; act in company's best interest
  • [ ] Duty of good faith: Honest, ethical conduct
  • [ ] Business judgment rule: Protects directors from liability for good-faith decisions

For coops/B-corps: May have expanded fiduciary duties (consider members, mission, community—not just profit).

Annual Compliance ​

  • [ ] Annual report to state (filing fee, updated info)
  • [ ] Annual member meeting (required by bylaws)
  • [ ] Board elections (if applicable)
  • [ ] Meeting minutes (document all major decisions)

5. Securities Law (If Offering Ownership Interests) ​

Securities Compliance (Critical) ​

  • [ ] Determine if ownership interests are securities (likely yes for equity; maybe for coop membership)
  • [ ] Federal securities laws: SEC registration or exemption (e.g., Rule 701 for employee equity)
  • [ ] State securities laws ("Blue Sky Laws"): May require registration or notice filing
  • [ ] Consult securities attorney before offering equity to employees

Common exemptions for employee ownership:

  • Rule 701: Employee benefit plans (stock options, ESOP)
  • Intrastate exemption: Offer limited to residents of one state
  • Reg D (506(b)): Private placement to accredited investors (less relevant for employee ownership)

For coops: Membership shares may not be securities if:

  • Cannot be transferred (or very restricted transfer)
  • No expectation of profit from others' efforts
  • Governance rights only (voting, not investment)

Consult attorney: Securities law violations can result in rescission rights, fines, and criminal penalties.

6. Contract Law (Agreements & Policies) ​

Required Written Agreements ​

  • [ ] Employee offer letters (role, salary, benefits, start date)
  • [ ] Employee-owner agreements (ownership stake, voting rights, profit sharing, buyback terms)
  • [ ] Contractor agreements (scope of work, payment, IP assignment, classification justification)
  • [ ] Lender agreements (loan terms, interest, repayment, no voting rights clause)
  • [ ] Advisor agreements (scope, compensation, confidentiality, no decision-making power)
  • [ ] Vendor/supplier contracts (services, SLAs, payment terms)

Required Policies (Handbook) ​

  • [ ] Anti-discrimination and harassment policy
  • [ ] Workplace safety policy
  • [ ] Leave policies (PTO, sick leave, parental leave, FMLA)
  • [ ] Compensation and benefits (salary bands, profit sharing, equity vesting)
  • [ ] Code of conduct (ethics, conflicts of interest)
  • [ ] Confidentiality and IP assignment (company owns work product)
  • [ ] Termination and resignation procedures
  • [ ] Dispute resolution (mediation, arbitration)

Employees must acknowledge receipt of handbook (signed acknowledgment).

7. Intellectual Property ​

IP Ownership ​

  • [ ] Assign IP to company in employee and contractor agreements
  • [ ] "Work for hire" clause: All work created during employment owned by company
  • [ ] Trademark registration: Protect company name and logo (USPTO)
  • [ ] Copyright registration: Protect original works (code, content, designs)
  • [ ] Patent consideration: If applicable (likely not for Lantern)

Open Source & Licensing ​

  • [ ] Review open source dependencies (GPL, MIT, Apache licenses)
  • [ ] Comply with license terms (attribution, copyleft requirements)
  • [ ] Publish license for own code (if open-sourcing any components)

8. Privacy & Data Protection ​

US Privacy Laws ​

  • [ ] CCPA (California Consumer Privacy Act): If have CA users
    • Right to know what data is collected
    • Right to delete data
    • Right to opt out of data sales (Lantern doesn't sell data—compliant by default)
    • Privacy policy required
  • [ ] COPPA (Children's Online Privacy Protection Act): If app used by children <13
    • Parental consent required
    • Restrictions on data collection
    • Lantern: Age-restricted (21+ for venues serving alcohol)—COPPA likely not applicable
  • [ ] State privacy laws: VA, CO, CT, UT have privacy laws similar to CCPA

International Privacy Laws (If Operating Globally) ​

  • [ ] GDPR (General Data Protection Regulation): EU users
    • Consent for data collection
    • Right to access, delete, portability
    • Data protection officer (if processing at scale)
    • Breach notification (72 hours)
    • Fines: up to 4% of global revenue
  • [ ] UK GDPR: Post-Brexit UK version
  • [ ] Other jurisdictions: Brazil (LGPD), Canada (PIPEDA), Australia (Privacy Act)

Lantern commitment: Zero-knowledge encryption (we can't decrypt user data) makes compliance easier.

Privacy Policy (Required) ​

  • [ ] Publish privacy policy accessible to all users
  • [ ] Describe data collection: What data, why, how used
  • [ ] Describe data sharing: Third parties (if any)
  • [ ] Describe user rights: Access, deletion, opt-out
  • [ ] Update annually or when practices change

9. Lender & Investor Compliance ​

Lending Regulations ​

  • [ ] Usury laws: Maximum interest rates (varies by state; federal ~20%+)
  • [ ] Loan documentation: Written agreement with clear terms
  • [ ] Truth in Lending Act (TILA): Disclosures for consumer loans (likely not applicable for business loans)
  • [ ] Fair Debt Collection Practices Act: If loan goes to collections

If Accepting Investment (Avoid if Possible) ​

  • [ ] Securities compliance: See Section 5 above
  • [ ] Accredited investor verification (if using Reg D exemption)
  • [ ] Anti-fraud rules: Accurate disclosures; no misleading statements
  • [ ] Filing requirements: Form D with SEC (Reg D), state filings

Lantern commitment: Avoid equity investment; use loans only (lenders are creditors, not investors).

10. Dissolution & Exit Planning ​

Dissolution Procedures ​

  • [ ] Bylaws specify dissolution process (employee vote, asset distribution)
  • [ ] Pay creditors first (including lenders)
  • [ ] Distribute remaining assets per articles/bylaws (typically to employees or mission-aligned nonprofit)
  • [ ] File dissolution paperwork with state
  • [ ] Final tax returns (federal, state)
  • [ ] Close bank accounts and wind down operations

Asset Distribution (Typical for Coops) ​

  1. Pay all debts and liabilities (lenders, vendors, taxes)
  2. Refund member capital contributions (if any)
  3. Distribute remaining assets:
    • To members (equal distribution among employee-owners), OR
    • To mission-aligned nonprofit (if articles specify), OR
    • Combination (partial distribution to members, remainder to nonprofit)

Lantern commitment: Dissolution requires 75% employee vote; assets distributed to employees or donated to privacy/worker cooperative nonprofits.

Jurisdiction-Specific Considerations ​

United States ​

  • Federal employment law: FLSA, Title VII, ADA, ADEA, FMLA
  • State variations: CA, NY, WA have strongest worker protections
  • Local ordinances: Minimum wage, sick leave (e.g., San Diego has local sick leave ordinance)

California-Specific (San Diego) ​

  • [ ] CA Labor Code: Strong wage/hour protections; meal/rest break requirements
  • [ ] CA Fair Employment and Housing Act (FEHA): Broader than federal anti-discrimination
  • [ ] CA Paid Family Leave: 8 weeks paid leave (state-funded)
  • [ ] CA Privacy Laws: CCPA compliance required
  • [ ] CA Cooperative Corporation Law: Enables worker coop structure

International Expansion ​

  • [ ] Each jurisdiction: Different labor, tax, corporate, privacy laws
  • [ ] Options:
    • Employer of Record (EOR) service (e.g., Deel, Remote.com)
    • Local subsidiary (for multiple employees in country)
    • Remote employee classification (if legally allowed)
  • [ ] Compliance: Must follow local employment laws (benefits, leave, termination)

When to Hire Attorneys ​

Corporate/Cooperative Attorney (Priority 1)

  • [ ] Formation and entity selection
  • [ ] Articles of incorporation and bylaws
  • [ ] Employee-owner agreements and equity structure
  • [ ] Annual compliance review

Employment Attorney (Priority 2)

  • [ ] Employee vs. contractor classification
  • [ ] Employee handbook and policies
  • [ ] Termination procedures
  • [ ] Discrimination/harassment investigations

Tax Attorney/CPA (Priority 3)

  • [ ] Tax structure optimization (coop election, S-corp, etc.)
  • [ ] Annual tax filings
  • [ ] Payroll tax compliance
  • [ ] Multi-state tax issues

Securities Attorney (If Offering Equity)

  • [ ] Securities compliance (Rule 701, exemptions)
  • [ ] State filings (Blue Sky compliance)
  • [ ] Investment agreements (if ever accepting outside capital)

Privacy/Data Attorney (If Scaling)

  • [ ] GDPR/CCPA compliance
  • [ ] Privacy policy drafting
  • [ ] Data breach response plan
ServiceEstimated Cost
Entity formation (coop/LLC)$2,000–$5,000
Articles + bylaws drafting$3,000–$10,000
Employee agreements (templates)$1,000–$3,000
Employment handbook$2,000–$5,000
Tax structure consultation$1,500–$3,000
Securities compliance (if needed)$5,000–$15,000
Annual legal review$1,000–$3,000/year

Total startup legal: $10,000–$30,000 depending on complexity

Ongoing annual: $2,000–$5,000 for compliance and updates

Compliance Checklist (Year 1) ​

Before Hiring First Employee ​

  • [ ] Choose and register legal entity (coop, LLC, corp)
  • [ ] Obtain EIN from IRS
  • [ ] Draft and adopt articles + bylaws
  • [ ] Open business bank account
  • [ ] Register with state tax and labor agencies
  • [ ] Obtain workers' comp insurance
  • [ ] Set up payroll system (or use service like Gusto, Rippling)

Before Offering Equity/Ownership ​

  • [ ] Consult securities attorney (if offering equity shares)
  • [ ] Draft employee-owner agreements
  • [ ] Establish vesting schedule (if applicable)
  • [ ] Determine buyback procedures for departing employees

Before Hiring Contractor ​

  • [ ] Review IRS classification tests
  • [ ] Draft contractor agreement (scope, payment, IP, no voting rights)
  • [ ] Set up 1099 tracking

Before Taking Loan ​

  • [ ] Consult corporate attorney
  • [ ] Draft lender agreement (interest, repayment, no voting rights clause)
  • [ ] Employee vote to approve loan (if >$100K or >2× revenue)
  • [ ] Stewardship Board review (if applicable)

Ongoing (Monthly/Quarterly/Annually) ​

  • [ ] Monthly: Payroll processing and tax deposits
  • [ ] Quarterly: Payroll tax filings (Form 941), estimated tax payments
  • [ ] Quarterly: Review contractor relationships for misclassification risk
  • [ ] Quarterly: Financial reports to employees
  • [ ] Annually: W-2s to employees (by Jan 31)
  • [ ] Annually: 1099s to contractors (by Jan 31)
  • [ ] Annually: Tax returns (Form 1120/1120-S/1065)
  • [ ] Annually: State annual report filing
  • [ ] Annually: Annual member meeting
  • [ ] Annually: Governance review (bylaws, policies, compliance)

Watch for these and consult attorney immediately:

🚩 Contractor treated like employee (exclusive work, set hours, company equipment)
🚩 Employee classified as exempt but paid <$684/week (US overtime threshold)
🚩 Non-employee given voting rights (securities law violation)
🚩 Loan agreement includes equity conversion without securities compliance
🚩 Privacy policy not updated after changing data practices
🚩 No written employment contracts or handbook
🚩 Misclassifying international workers (employee vs. contractor)
🚩 Not withholding payroll taxes for employees

Resources ​

Government Agencies (US) ​

  • IRS: Tax compliance, EIN, forms (irs.gov)
  • DOL (Dept. of Labor): Wage/hour, FMLA, OSHA (dol.gov)
  • EEOC: Anti-discrimination (eeoc.gov)
  • SEC: Securities compliance (sec.gov)
  • State Secretary of State: Business registration
  • State Labor Department: Unemployment, workers' comp

Professional Organizations ​

  • U.S. Federation of Worker Cooperatives: Resources, model bylaws (usworker.coop)
  • Democracy at Work Institute: Coop formation guides (institute.coop)
  • National Cooperative Business Association (NCBA): Advocacy, resources (ncba.coop)
  • Cooley GO: Startup legal docs (cooleygo.com)
  • Rocket Lawyer / LegalZoom: Basic templates (not coop-specific)
  • USFWC Model Bylaws: Worker coop templates (usworker.coop)

FAQs ​

Q: Can we start without a lawyer?
A: Not recommended. Formation documents must be legally sound. Use attorney for articles/bylaws; you can handle routine filings yourself after setup.

Q: Which legal entity is best for Lantern?
A: Likely worker cooperative corporation (if in CA or other coop-friendly state) or LLC with cooperative operating agreement. Consult attorney for your jurisdiction.

Q: Do we need a Stewardship Board legally?
A: Not required by law, but highly recommended for mission protection. Can be established in articles/bylaws.

Q: How much does legal compliance cost annually?
A: Estimated $2,000–$5,000/year for legal review + $2,000–$10,000 for accounting/tax + ongoing filing fees (~$500–$1,000). Total: $5,000–$15,000/year.

Q: What happens if we violate employment law?
A: Penalties vary: back wages, fines, lawsuits, criminal charges (for egregious violations). Prevention is far cheaper than remediation.

Q: Can employees be board members?
A: Yes! In worker coops, employees often ARE the board (or elect board from membership). This is legal and encouraged.

Amendment Process ​

This framework is a constitutional document:

  • Requires 75% employee-owner vote to amend
  • Annual review for legal updates
  • Consult legal counsel before implementing changes

Final Note ​

Legal compliance is not optional. Violating employment, tax, securities, or privacy laws can result in:

  • Fines and penalties
  • Lawsuits and liability
  • Criminal prosecution (in extreme cases)
  • Dissolution of company

Invest in proper legal setup from day one. It's far cheaper to do it right than to fix violations later.

This document is a starting point, not legal advice. Always consult qualified legal counsel in your jurisdiction before making legal decisions.

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