Creating a cannabis company can be thrilling, but the first thing that has to happen before you get your license and actually begin selling cannabis is selecting the appropriate cannabis business structure.
The type of business structure you have will determine how you are taxed, what happens to your personal assets, how you will have access to funds to grow your company, and manage your business.
Therefore, regardless of whether you are an owner of a dispensary, a grower, a manufacturer, or another type of cannabis business, selecting the appropriate type of business structure can assist in preventing you from creating problems down the road.
Here, we will examine some of the most popular types of cannabis business structures and how to select the best type for you.
Why Your Business Structure Matters
Many people who start a cannabis business spend most of their time thinking about products, branding, and how to sell the product. However, while these are important factors, it’s equally important to think about your legal structure.
If you have the correct marijuana business structure, you will be able to:
- Protect your personal assets from loss if things go wrong
- Manage your taxes better
- Comply with state licensing
- Attract potential investors and partners, and
- Grow your business in the future
Because of the high level of regulation in the marijuana industry, having the right legal structure in place from day one will save you time, money, and headaches in the future.
Also read: Is Your Cannabis Business Truly Compliant? Most Aren’t — Here’s Why That Matters
Common Business Structures for Cannabis Companies
Sole Proprietorship
A sole proprietorship is the easiest way to create a business. The law sees the owner and business as one entity.
Advantages:
- Simple to Establish
- Minimal Initial Investment
- Total Authority Over Business
Disadvantages:
- No Limited Liability
- The Owner is at Risk of Losing Personal Property Due to Litigation or Debt
- Challenging to Secure Funding from Investors
Due to the greater legal and regulatory risks associated with cannabis businesses, this option is often not recommended.
Partnership
A partnership is described as two or more individuals owning a company.
Advantages:
- Less complicated than incorporating
- Each Partner has a Different Role to Play
- Many sources of capital available to a Partner
Disadvantages:
- Each Partner is liable for the Debts of the Company
- Permission from partners may be an issue.
- Making decisions mutually may be difficult.
When creating a Partnership, it is necessary to have an entire agreement between partners that defines the Partners’ obligations and Participating Interest in the Business.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a very common option used when forming a cannabis company. An LLC provides great protection with flexibility.
Advantages:
- Protects personal property from claims arising from business activities
- Flexible management structure
- Management is less complex than a corporation
- Will work well for many smaller and mid-size cannabis businesses
Disadvantages:
- There could be filing and annual fees involved with forming an LLC
- State laws are different in each state
For a majority of entrepreneurs who are setting up a cannabis business, an LLC is the first choice because of the liability protection offered by an LLC, without adding a lot of complexity.
Corporation
Corporations are separate and distinct legal entities from their owners. Corporations are typically selected either by businesses in the marijuana industry that anticipate attracting investment capital or by larger cannabis operations.
Pros
- A higher level of liability protection
- Increased ability to stimulate interest from investors
- Promotes long-term development
- Ability to issue shares to investors
Cons
- More extensive paperwork and compliance requirements
- Higher startup and maintenance costs
- More complicated management structures
If you anticipate expanding into more than one location or seeking outside sources of funding, you may want to consider establishing your business as a corporation.
Factors to Consider Before Choosing a Structure
Choosing the right cannabis business structure can be confusing because every business is different, but here are some important factors to consider before making a final decision.
Liability Protection
Cannabis businesses are governed by a heavily regulated environment where numerous legal issues can arise. Therefore, establishing a structure that isolates your personal assets from your business will afford you considerable protection.
Taxes
Each type of business structure has its own unique tax rules. Cannabis businesses already face an array of unique tax issues, so it is important to understand how your chosen structure will impact your tax obligations.
Future Growth
Are you planning to remain local or expand your business in the future? A corporation is probably a better structure for those businesses that are pursuing rapid growth and seeking investors. However, if a simpler business structure better meets your needs, consider forming an LLC.
Ownership
How many owners will the business have? How will decisions be made? One structure will be better suited for businesses with multiple owners than another.
State Regulations
Each state has different legal requirements that govern the cannabis industry, including specific requirements related to ownership and licensing. Ensure that your cannabis business structure is in compliance with local regulations before proceeding.
You may also like: Do You Need a Lawyer to Start a Cannabis Business? Here’s Why You Should
Which Structure Is Best for a Cannabis Business?
As a cannabis entrepreneur, whether an LLC is the best option for your business will depend on what type of protection you are looking for, how you want to operate your business, how much money you can afford to invest in the business, and what your ownership plans are.
The choice between forming a corporation or an LLC will ultimately depend on your short-term and long-term goals for your business, as well as the amount of capital you have available to invest in your company.
If you need help determining which type of business structure is right for you as a cannabis entrepreneur, consider consulting with a cannabis attorney or business advisor.
Final Thoughts
When establishing a cannabis company, selecting which type of structure to use is among the earliest, most impactful, and most critical decisions a founder can make. The selected structure will determine how the business is taxed, how much liability the entity, its owners, and employees will face, what the operational guidelines will be, and what growth potential the company may experience.
Whether you are just getting started constructing your cannabis entity or are constructing a complete cannabis business, by taking the time to establish the proper structure, you will build a more sound basis for long-term success.
You will be more prepared to build a cannabis business that is compliant, profitable, and sustainable by educating yourself with the various structures available to you and planning correctly in advance of incorporation.
