Welcome to the members area
General guidelines on starting a business:
The structure of your company is critical. You need to protect yourself from liabilities as well as establish the optimal tax benefits. Some states will dictate which structure you have to take such as non-profit. Below we discuss each type of structure and the advantages and disadvantages
· C corporation – This structure protects the company from liabilities and has numerous benefits: Attractive to investors because the company can issue multiple classes of stock, each class of stock can have different voting rights and the company can issue as many shares to as many people as they want. The disadvantage of a C corporation is that income can be taxed twice. It is common in the cannabis industry for start ups to be funded mainly from loans or stock purchases from friends and family of the owners/founders, a C corporation would mean these investors are taxed twice as income for a C corporation is taxed as income (for the company) and then taxed again when the income is distributed to shareholders
· S corporation – This structure is similar to a C corporation in terms of operational structure but the income is passed through to shareholders and is only taxed once. The disadvantage of this structure is that there are greater paperwork requirements and oversight needed. An S corporation must <insert more>
· Limited Liability Companies (LLC’s) – In this structure the personal assets of the members are protected and the members have control over how any profits are distributed. <look up California LLC – include links>. The disadvantage of this structure is that an LLC has complex financial and tax obligations. Medicare and social security must be paid as well as self-employment taxes
· Partnership – This structure is straightforward to set up and typically involves two or more people going in to business together. The advantage is that the company can be formed quickly and can therefore get to market quickly. This structure is rare in the cannabis industry as almost all companies require a more complex corporate structure. In addition, it is relatively common for partnerships to dissolve after partners fall out. This would be catastrophic in the cannabis industry as permits etc would have to be applied for again.
· Sole proprietorships – This is the easiest structure of all to set up. It can be done in a few hours with a computer. There is one owner and they assume full responsibility for liabilities and profits. Sole proprietors pay taxes at their personal income level. However, the proprietor assumes liability for ALL debts, in addition it is extremely difficult to attract investors to this type of structure. We have never found a cannabis business that is structured as a sole proprietorship
· Nonprofits – Some states require that cannabis business are structured as non-profits, this does NOT mean that they enjoy federal tax benefits. Non-profits are typically created for charities, labor organizations, social clubs etc. If a cannabis business is created as a non-profit they will registered at the state level, not the federal level. Typically cannabis non profits have voting and non voting members. Voting members are typically co founders and critical operational people while non voting members are typically investors. Non profits are run by a board of directors that decide on the CEO. The directors are also financially responsible for labor law violations and any sales tax shortfall that may occur.
· Co-ops –Co-ops are either employee or member owned. The advantage of this structure is that it is an egalitarian way to form a company. Either the employees own the company or the members do and they can make decisions as they see fit. This has the advantage of being very receptive to customer needs and allows the company to move quickly. There are a number of ways they can be organized but typically embers share in profits, appoint executives and receive dividends. The disadvantage of this structure is that the members can disrupt the company. The members may decide to vote out a CEO based on non operational reasons, this makes a co-op structure unattractive to investors.
You will need a team that you trust and that are suitable for their roles. It is common in this industry for people to hire friends or acquaintances that are experienced in the cannabis industry, whether through long term usage or they have worked as a budtender, while this is a reasonable recruitment strategy for entry level positions it is not one we recommend for c suite roles. In our experience it is better for your business to hire experienced people to fill the following roles:
· Chief Operating Officer
· Chief Financial Officer
· Chief Marketing Officer
· If you are not the CEO then include Chief Executive Officer as well
Even if the talent that you secure for these roles is not experienced in the cannabis industry the right professional will learn quickly and you will already be in a better position than most of your competitors
Inevitably at several stages along the way you will need to hire outside services:
· Attorney – This is a crucial decision. Your attorney will guide you through the complex laws and regulations in the cannabis industry as well as guiding you through operational setup, local regulations etc
<list of cannabis friendly attorny’s>
· CPA – The cannabis industry is a complex industry to operate in. Make sure you hire a CPA that understands IRS 280e regulations and is aware of federal and state tax laws. Be aware that CPA’s have the potential to lose their license for doing business with cannabis companies
<list of cannabis friendly CPA’s>
Mission Statement – Why are you doing what you are doing? Cannabis is a substance that brings relief to people that suffer from terrible diseases. Many people get in to the cannabis industry because they are passionate about cannabis, they are passionate about the benefits it has. Capture that passion in your mission statement. Answer the question: Why are we in business?
Who are the customers? Who is your competition?