Cannabis Business Entity Formation
With the regulations for cannabis usage being rewritten around the U.S., there has been a rush to form new cannabis business entities in many states in recent years.
These are exciting times for the cannabis industry—and considerable opportunities are available for business owners to make good profits doing what they love.
The most successful entities will be those that are structured correctly from the start, stay across the rapidly changing regulatory landscape, and are flexible enough to change with the times.
Operating a cannabis business imposes significant legal and regulatory requirements on business owners and attempting to meet these without cannabis industry know-how is challenging at best.
Our qualified and experienced cannabis business attorneys can help you form your entity to navigate the licensing and operational difficulties that lie ahead.
We will help you:
- Structure and ready your new business to meet the regulatory requirements of the licensing process by executing corporate documents, leases, and other documentation, such as:
- Articles of incorporation
- Corporate bylaws
- Partnership agreements
- Certificates of good standing
- Obtain your cannabis business license from the state to begin operations: this process is often challenging and competitive, so it helps to have an experienced guiding hand from professionals who have met the needs of many new cannabis businesses in recent years.
What types of cannabis businesses can I start?
Depending on where you intend to operate and the local laws in play there, the cannabis industry may now offer opportunities for business licenses from growing cannabis to selling or distributing it.
Growing cannabis attracts many cultivators looking for a license and this receives a great deal of attention. However, this area of the business involves considerable expertise and extensive startup costs.
You may be able to gain entry into the cannabis market by considering one of the many other types of cannabis business licenses or ancillary service licenses available in your state. For instance:
- Cannabis consumption area license (e.g., smoking lounges)
- Courier and transporter license (delivering cannabis to patients, caregivers, laboratories, producers, manufacturers, retailers, etc.)
- Manufacturing license
- Production (grower or wholesaler) license
- Research lab license
- Retailer license
- Server license
- Testing lab license
- Cannabis training and education program license
- Cannabis microbusiness license
Some states allow “vertically integrated businesses” with multiple roles, such as manufacturing, transporting, and retailing cannabis.
Regardless of the cannabis business type that you intend to start and your location, you can be sure that the licensing requirements will be stringent. Startup costs vary depending on the type of business entity. They can be especially high for growing and retailing and much lower for transporting, for instance.
It is generally best to seek advice from seasoned cannabis industry professionals before embarking on your journey.
Why use an LLC for cannabis businesses?
For most aspiring cannabis business owners, there is a simple choice of how to structure the business:
- Form an LLC or Limited Liability Company
- Form a corporation
As with any business, the decision of which is best must be made after considering all of the relevant factors relating to your specific circumstances, the number of business owners/investors, your business goals, tax requirements, and so on.
Most cannabis business owners choose to form an LLC. These entities have owners rather than shareholders and generally involve fewer formalities than corporations, as well as being more flexible.
The main advantages of forming an LLC over a corporation include:
- Protection from personal liability from creditors
- Fewer formalities than with a corporation
- No board of directors, stockholders or annual meetings are necessary
- Less paperwork to complete
- No restrictions on the number of owners allowed
- Greater decision-making flexibility
- More operational flexibility (how to structure company management, etc.)
When should you consider forming a corporation?
Many cannabis business owners do not even consider forming a corporation unless investors request it. However, it remains an option largely because of the tax advantages associated with these business entities.
However, federal government regulations mean that only some cannabis corporations (C-Corps) can deduct ordinary or necessary business expenses like other businesses, meaning that owners and shareholders of LLCs and other corporations (S-Corps) may face a significant personal tax liability.
What is the main difference between S-Corp and C-Corp?
The main difference between an S-Corporation and a C-Corporation is how they are taxed by the Internal Revenue Service (IRS).
Currently, only C-Corporation status protects against personal tax liability. So, an LLC or an S-Corporation’s tax debt passes to the owners/shareholders and must be reported on personal tax returns, remaining until it is paid even if the business is dissolved.
Generally, when you form a corporation anywhere in the U.S., it will exist as a C-Corporation with a distinct legal and tax “life” that is separate from its shareholders.
An entity-level tax must be paid by the company and individual tax is paid on salaries and dividends for the owners, even though some income taxes have already been paid at the corporation level.
S-Corporations avoid this type of “double taxation”. To become an S-Corporation, you need to file Form 2553 with the IRS. The corporation continues to be recognized by the law as an individual entity (separate from shareholders)—just like a C-Corporation—but it does not itself pay any income taxes.
The company’s income (and the taxes owed by the company) “passes through” to the owners, who file the tax returns. This prevents the “double taxation” problem associated with C-Corps but increases the liability risk for the business owners.
Getting reliable upfront advice on your business entity formation is crucial to the financial status of your business and can save you from crippling personal tax liability.
Trusted cannabis business formation services
Regardless of the type of cannabis business that you are planning to form, structuring it correctly and preparing it for licensing is a crucial element of a long-term success strategy.
Our cannabis business license lawyers can help you with the following:
- Entity selection and registration: limited liability company, corporation, or other structure.
- Preparing documentation for regulatory requirements and licensing: ensuring you comply with what’s needed by federal, state and local government.
- Financing and capital contribution negotiations: improving the financial strength of your business.
- Corporate governance and business operations: outlining how your business will be run and overseen.
- Commercial contracts and corporate transactions: helping you draft the agreements that safeguard your business.
- Employment contracts: implementing the employment agreements that look after your most important asset—your people.
- Intellectual property protection: helping you protect the ideas, products, and ingenuity that keeps you ahead of the rest.
We can help you navigate the inevitable issues that come up during the business formation phase, applying our experience of past scenarios to prepare you to meet future business goals.
Get help with forming your cannabis business entity
Whether you are looking to start a growing, manufacturing, retail, or other cannabis business, you need the right advice from the start.
Our cannabis business attorneys can help you get off on the right footing. Call 866-329-0729 for a consultation with a knowledgeable cannabis attorney at Cannabis Law Solutions.