Critical Considerations When Starting a Cannabis Business
Complying with state laws when operating a Cannabis business or related ancillary business requires a team of Cannabis-friendly service providers.
By Crystal Huish, CPA, CGMA
Count Cannabis, Colorado
Whether you’re in the planning stages of starting a new Cannabis business or already opened your doors months ago, proper financial planning is essential for anyone hoping for success in this industry. Here are a few things to consider.
Cannabusiness or Ancillary Business?
Do you plan to “touch the plant,” or are you providing “ancillary” services? Don’t take this too literally. Touch the plant is a common phrase in this business, and it’s generally meant to imply that a business is selling Cannabis, be it wholesale, retail, flowers, extracts, or pastries—anyone selling Cannabis. The phrase is not intended to describe businesses that physically touch the plant, like a delivery service or testing facility, but do not sell the plant.
If you are thinking of providing products or services to the Cannabis industry but are not selling Cannabis, then you are considered ancillary. Some examples include operating grow and dispensary cleaning services, creating/ selling lights for grows, and providing consulting services to Cannabis-related businesses. Ancillary services, while usually not in any violation of state or federal law, should still proceed with caution when considering doing business in the Cannabis industry. If your business or profession is licensed or registered through a state regulatory agency, check in with that agency to make sure that providing products or services to businesses in the Cannabis industry is not going to be considered a discreditable act.
Even if Cannabis is legal in your state and the licensing regulatory agency has indicated your license will not be revoked if you provide products or services to the Cannabis industry, there are still considerations you should make before finalizing any transactions. The 1970 Racketeer Influenced and Corrupt Organizations (RICO) Act allows for criminal penalties and civil lawsuits to be brought against any person or business found to be aiding and abetting a
criminal enterprise. In other words, your business could be at risk, even if you aren’t selling Cannabis, if you are involved with or the prime target of a racketeering claim. This can include landlords, accountants—the list goes on and on. Just recently, 420Intel and Marijuana News published an article about this very concern.
If your business does sell Cannabis, then you should be aware of, and at least to some extent prepared for, potential legal and/or IRS scrutiny. For this reason, it is important to find an experienced lawyer and accountant in the Cannabis industry. This is critical. Even if you’re an ancillary business, it’s important to have knowledgeable representation. The main point I want to emphasize in this first installment of my financial management column is the importance of hiring a team of professionals to help manage your business.
This industry changes every day, and it’s difficult to keep up, even in your own vocation, let alone complex practices like law, accounting, marketing, advertising, and real estate. If you’re not educated and experienced in those areas, save yourself some time and money and hire professionals. The price you pay for these services may induce sticker shock,but the price you might pay for not having professional assistance to guide you may dwarf any $5,000 legal bill. This is not a do-it-yourself industry. There are too many unknowns and too many changes occurring. And let’s not forget—Cannabis is still illegal at the federal level. Professional help is mandatory.
Once you do have professionals to guide you through the unknown, have them help you establish your business in a way that will give you, as an individual, and your other stakeholders or business owners, the most protection possible, while still providing the flexibility your business needs.
In most cases, I recommend businesses in the Cannabis industry set up as a C-corp to allow for the most protection. However, I have set up businesses as S-corps, or even LLCs, and that’s okay—doing so made sense for those businesses. There isn’t one right answer in this industry, or even a five-step simple blueprint for all to follow. Save yourself the headache of trying to learn all the intricacies and locate professional help, preferably a local professional who is familiar with the state laws and regulations of the state in which you do business. Stay tuned to Cannabis Product News and this column for regular information about accounting, finance, and compliance.
If you have a Cannabis-related financial management question for Crystal, please email her at email@example.com.