Incorporating your cannabis business could mean a lot of green...and by green, we mean money. The cannabis industry has blown up and new players are entering this market every day. However, there are also a lot of unknowns and challenges.
The cannabis industry is heavily regulated, and licensing can be particularly complicated. That all leads to the question, can or should cannabis companies (growers, wholesalers, warehouses, research firms, dispensaries, etc.) incorporate as an LLC or a corporation? Are there any unique requirements for this?
Once you understand the requirements and sort out all the nuances of starting a marijuana business, you could be rolling...in the dough.
How to Start a Cannabis Business
How do you even go about starting a cannabis business? Well, step number one is to ensure that your state currently permits medicinal or recreational cannabis if you plan on selling or growing marijuana.
Cannabis is recreationally legal in several states but remains federally illegal as of this post. Not all 50 states currently permit and some states only currently permit medicinal. States have been adapting and expanding their cannabis laws regularly, so you’ll want to stay up to date on the industry and where it is heading.
After you confirm that your state has one or both types of cannabis legalized, decide what type of cannabis products you want to sell. The main types of marijuana businesses can be broken into three general categories:
Cultivation: Growing marijuana
Infused Product Manufacturing: Edibles
Retail Sales: Dispensaries or collectives selling products to customers
Other marijuana businesses include testing facilities, delivery services, devices for cannabis consumption and software or online services.
After you decide which type of cannabis business is right for you, you'll need an understanding of the basic legal requirements of forming a business:
Tax ID number
General business license
Doing Business As (DBA) filing
Sales tax permit
Other applicable permits (if necessary)
On top of that, the cannabis industry requires other restrictions to incorporating your own cannabis business. This entails licensing for all marijuana retail, cultivation, research and distribution businesses before being allowed to operate legally.
Most businesses may need additional licensing to comply with mandates for specific business activity, safety and taxation. For example, businesses such as food establishments, dispensaries and hydroponic facilities require additional licensing.
Business Entity Structure in the Cannabis Industry
Owning and operating a cannabis business comes with plenty of risks, including costs, residency, scrutiny, laws, etc. Since there are various risks involved, incorporating your cannabis business may be a strategic move.
Choosing the right type of business entity type is key: limited liability company (LLC), S Corporation C Corporation. The business entity type you choose should make sense for the nature of your business. Here are the quick differences between the three:
Limited Liability Company: An LLC is a combination of a corporation and a partnership. With fewer requirements and more flexible ownership options than the other entities, LLCs provide business owners protection by keeping company assets owned by the LLC and separate from the personal assets of the LLC owner(s).
S Corporation: S Corps do have more operating requirements and ownership restrictions than an LLC, but they also have significant advantages. One advantage of the S Corporation is that like the LLC it receives pass-through taxation, which means federal income tax is not assessed at the entity level; profits are distributed in the form of dividends and flow through to the individual tax returns of the shareholders. The IRS taxes the shareholders at their individual income tax rate and not at the entity or corporation level.
C Corporation: A C Corp is often just referred to as a corporation. It is one of the oldest and most common business entities. A C Corp is a completely separate tax and legal entity from its owners. While all business entities can provide fringe benefits to its owners and/or employees, the C Corp allows for a greater range of fringe benefits.
Oftentimes in the cannabis industry businesses set up a second entity, independent of the primary one, solely to acquire a bank account. This separate entity may provide services, such as management, banking, and even lease assets to cannabis retailers.
A two-entity structure may also be desirable when a cannabis grower or retailer produces edibles, oils, vaporizers, etc. It allows the brand to operate separately and distinctly from the cannabis retailer and would either sell or license its goods.
Incorporate Your Cannabis Business Today!
Eager to dive into this growing industry and form your cannabis business? Get started today with Incfile’s help! Incfile can help you form your business entity quickly and easily. You can form your business today for $0 + state fees, and you'll get a Registered Agent free for the first year. No contracts. No hidden fees. And Incfile is there to also assist you with any nuances of owning and operating a cannabis business. Want to know more? Reach out to us!
Lisa Crocco is a marketer for an international food manufacturer by day and a freelance writer/marketer for startups and small businesses by night. She's written for outlets like USA Today College, Career Contessa, CloudPeeps and Fairygodboss.