Congratulations on taking the first step towards your new cannabis business!
Being in the cannabis business is, well, a business and that means you have to have a legal entity in place to operate it. So which type do you choose? As always, that depends.
The lawyers make us say… Weeds. is not a law firm and we are not lawyers. This information is not intended to provide legal or tax advice. It is, however, intended to help you understand the basic questions every cannabis business owner has to answer and guide these conversations with your team and attorney. You should always seek the advice and assistance of an experienced cannabis business attorney and accountant when starting your business.
Liability.
Even though the IRS still requires you to obtain a federal tax identification number for your business, your business is still illegal at the federal level. That adds an extra level of risk for anyone and any business even remotely touching cannabis.
While it is possible to apply for a cannabis license in New Mexico as an individual, most entrepreneurs choose to set up a company with legal protections to keep their business and personal assets separate.
Most cannabis companies are set up as Limited Liability Companies or traditional Corporations to protect owners or shareholders from personal liability. Talk to an experienced attorney to understand the different options and protections offered by LLCs, C-Corps, LLLPs and more business organization structures.
Going it alone or building the dream team?
Although the cost and time to start a cannabis business is often several multiples larger than in a non-regulated industry, solo entrepreneurs are becoming more common, particularly for those seeking microbusiness licenses on a budget. For these operators, an attorney can help you set up a simple single member LLC or set you up as the sole shareholder/owner of a corporation depending on your tax situation.
When multiple individuals team up, the issues become more complicated. Often some members contribute cash, equipment or buildings, while others put in time and effort (aka “sweat equity”). Who gets credit for what and when? If someone contributes a building or cash, are they first in line for profits before others? Should anyone take a salary to work on/in the business?
No matter how many owners you have, start a conversation (led by an experienced attorney and tax professional) to think about these issues:
- Everyone who is an owner of your cannabis business must pass a background check and can be identified in public records (even if you set up your LLC in a state that shield’s owers from disclosure).
- Contributors to your business don’t always have to be owners. Sometimes, for example, they can provide loans to be paid back from future profits. Talk with your tax and legal pros about options for raising funds without giving up equity.
- Not all owners have to be decision makers. Usually every owner gets a voting share equal to their ownership interest, but not always. Sometimes a group only allows owners with large shares to make decisions, or sometimes the decisions requiring all owners are only big ones (like whether to sell the company or bring on another member).
- How will profits (and losses) be allocated? Who gets paid back first and how much do you keep in the company vs. paying out to owners?
- Is there a mechanism to bring on future investors if you need them?
- What happens if an owner dies or if the law changes and an owner is no longer allowed to participate in cannabis (an important consideration for persons with security clearances or if your bank disallows cannabis income to pay your mortgage or loans).
Can my cannabis company be registered out-of-state?
Yes. Your company can be registered in any state but you must still provide the same information in your New Mexico application, even if your registering state shields that information from public record. For example, a corporation in Delaware may not be required to list all owners and the principal business address. But once that company applies for a New Mexico cannabis license those details will be made public by New Mexico regulators.
Should I set up different businesses for each cannabis activity in my vertically integrated license?
Maybe, but probably not. If you are pursuing multiple activities (production, manufacturing, retail) we recommend you consider a vertically integrated license to make licensing, compliance and operations simpler. Plus, you likely get tax advantages as a vertically integrated business (consult your tax advisor).
Can I use another company I already own for my cannabis business?
Technically, yes – but we don’t recommend it. Because of the conflicts between federal and state law cannabis companies must have more stringent (and expensive) banking and regulatory requirements than non-regulated businesses. Combining your cannabis business and other business’ activities could open your existing business up to additional tax and legal risks. You should consult experienced cannabis tax accountants and attorneys for specific information relating to your plans (we can help you find those if needed!)
As you can see, there are a lot of questions to answer before jumping in and starting your new company.
If you need help identifying experienced tax or legal professionals to guide you through this process, let’s talk. We work with some of the best and we’re happy to make referrals based on your needs.
Read more…
Need more information? Start here:
- “The most commonly asked questions about cannabis startup,” Weeds.team blog
- “The Buzz-killing Cost of Getting into Cannabis,” Seth Gardenswartz, Blackgarden Law, in The Paper at abq.news.
Questions? Ask us.
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