ComplianceLegalFinanceTax & AccountingAugust 26, 2020

Capitalizing on the ‘green rush’: 6 things to consider before starting a cannabis business

It took decades of lobbying to pass the state laws that now allow for legal use and sale of cannabis. And each year, more states are legalizing it, with 29 states (plus D.C.) that have legalized medical cannabis and 9 (plus D.C.) that have legalized recreational use and sales.

If you plan to take advantage of this new business opportunity, you’re on an exciting track. Colorado, one of the first states to legalize, is already seeing an economic upswing to the tune of $35 million in positive net impact—and that number is expected to reach $100 million by 2021.

With the January 2018 legalization referendum passing in California, the state became the largest regulated cannabis market in the world—and it’s growing just as fast as Colorado’s. The California market is already worth an estimated $8.5 billion, which is greater than the three largest agricultural markets in the state right now, including milk and cream ($6.1 billion), grapes ($5.6 billion), and almonds ($5.2 billion).

There’s a lot to be excited about, but that doesn’t mean it will be easy to start selling cannabis. Those who are ready to capitalize on this “green rush” must adhere to strict regulations—and remember, it’s not yet legal at the federal level. Here’s what you need to know if you’re ready to turn these green plants into green revenue.

1. Complex and varying laws & regulations

There are numerous states that have legalized the recreational use of cannabis, but each one has its own unique set of laws and regulations that sellers must follow. Some states are handing out a significant number of licenses. Other states are being more restrictive, with requirements to provide proof of a large sum of capital. A criminal record could also keep you from becoming a cannabis business owner.

Your best bet is to start with your state’s laws, as well as local city and county laws, to determine whether you qualify and what next steps you should take. You may even want to join NCIA (National Cannabis Industry Association) or other cannabis industry groups. Be sure to speak with an attorney as well, specifically someone focused on the cannabis market. They should be familiar with the most recent legal changes and updates.

Ultimately, you should be aware that the federal government has not legalized the use or sale of cannabis. That means whether federal cannabis laws are enforced is up to the Justice Department, not your state government.

2. Finding your niche

Like any other business, you need to find your niche to set yourself apart from competitors. This is especially important in the cannabis industry, which is growing at a tremendous rate. There will also be specific regulations that dictate what you can and can’t do within your specific niche, whether that’s growing, selling, manufacturing or starting an ancillary business. Here are a few niches to think about.

Cultivation: If you have a green thumb, you may want to start a growing business. In this niche, you can experiment with different strains—and name them based on smell, affect, taste and more. This area of the cannabis industry is highly regulated, meaning you may need to make a significant financial investment and prove your horticultural knowledge. You’ll also need to purchase all of the equipment and find a place to grow your product, which is another expensive up-front cost.

Retail sales: Dispensaries or collectives are the most common names for retail stores that sell cannabis-based products. However, not anyone can walk in and buy. Customers need to be eligible, based on age or the ownership of a medical marijuana card. In terms of business, profitability in this niche is very attractive.

Still, you’ll need to meet all regulations and requirements, and you may need to deal with different challenges than a standard business. For example, it’s hard to advertise your cannabis business—even where it’s legal—and you can’t promote on social media or most other online platforms. It would be wise to explore partnerships (for example with a delivery service) to help promote your business.

Marijuana-infused product manufacturing: With the legalization of recreational cannabis came an entirely new industry: edibles. Not only are they discreet, but they can be consumed anywhere, anytime. This is ideal for a wide range of people, including those who don’t prefer to smoke.

However, edible-marijuana entrepreneurs face major challenges that most food businesses do not. As a manufacturer, you need to handle controlling of doses within the product, while masking the flavor of the cannabis. The unpredictability of the law is always a concern.

Ancillary businesses: If you don’t want to grow, sell, or create cannabis products, this would be the best area for you to explore. Starting a business that works with those within the industry is a smart way to get involved in this burgeoning market, without dealing with the same level of risk. For example, you could become a cannabis attorney or cannabis app developer.

3. Choose a business type

In starting any business, a key decision is whether to own the business yourself (a sole proprietorship if one owner, partnership if more than one) or to form a separate business entity such as a corporation or LLC). Questions of liability, taxation, control, and the raising of capital are a few of the issues to be considered. 

  • Sole proprietorships and partnerships are less expensive to operate, but as the owner, you’re personally liable for the business’ debts, liabilities and obligations
  • A separate entity, such as a corporation or LLC, is liable for the business debts; the corporation’s shareholders and LLC’s members are not personally liable. Forming a corporation or LLC requires filing a formation document with the state’s business entity filing office and paying a fee. The corporation or LLC will then be required to appoint and maintain a registered agent and registered office, file an information report (usually annually) and pay a franchise tax. If the corporation or LLC wants to do business in another state, it will have to register and obtain a certificate of authority in those states
  • Tax-wise you will have to decide whether you want pass-through income taxation, where the owner and not the entity pays taxes, like with an S corporation or LLC, or to have a separate taxable entity, such as a C corporation.

Note: As a cannabis business, some states (such as New Mexico, for example) may require that you’re set up as a nonprofit.

Ultimately, the choice of entity will also affect you if you plan to look for private equity or venture capital, or are thinking of an IPO.

4. Choosing a name

Choosing a name for your cannabis business is another necessary step that will have a significant impact on your success. Your name reflects your brand, what you offer and what sets you apart from others. As such, consider some important details when determining potential options. Ask yourself,

  • Does the name represent what my company is about accurately?
  • Is the name timeless? It is limiting or not serious enough?
  • Will this name potentially alienate a segment of my customer base? 
  • Is this name memorable? Unique?
  • Is it infringing on any current trademarks?

Don’t forget about the stigma the industry still faces. Amanda Ostrowitz, Co-Founder of CannaRegs and an attorney who specializes in cannabis regulations, told Green Entrepreneur that this has been an issue for her. She explained that a number of law firms were scared to do monthly payments with her company because they were worried about losing their banking provider if “canna” showed up on their statement.

Different business names

There are several different kinds of names that a business can have.

  • There is the legal name – which in the case of a sole proprietorship or partnership is the name of the owner or owners. 
  • In the case of a statutory entity like a corporation or LLC, it’s the name on that appears on the formation document. 
  • There is also an assumed name or DBA (doing business as), which is any name business is conducted under other than the legal name. A brand name is not the same as the legal or dba name.

So when it comes to your business’ legal name (the one filed with the state), you may want to reconsider using “cannabis”, “canna” and “mary”.

5. Financing

As with any business, one of your first hurdles is raising capital, and in this industry, operations will likely be expensive. For example, you need licenses to sell medical marijuana at a dispensary. In states where medical marijuana is already legal, you may need to pay a $5,000 non-refundable application fee for starting the business—and that fee varies greatly from state to state. In Louisiana, the fee is only $150 to apply, but in New Jersey, it’s $20,000.

Another financing challenge you may come up against is funding. Many of the banks known for working with small businesses are tied to the federal government, making it nearly impossible to secure funding through this avenue. Luckily, there are a variety of alternative funding options to explore, including specialized groups who invest in cannabis businesses, business accelerators and incubators, and crowdfunding.

6. Keeping up with compliance

Compliance doesn’t end once you’ve obtained your local and state cannabis permits, and it’s vital in maintaining your cannabis license. This list should not act as a substitute for obtaining proper legal representation but it will give you an idea of what’s needed for compliance:

  • Maintain licenses and permits
  • Make sure your location is zoned for the activity
  • Inventory tracking
  • Security and surveillance
  • Record keeping and document requirements
  • Packaging and labeling requirements
  • Entity-level compliance for corporations/LLCs—filing annual reports and paying franchise taxes in the formation state and states where it is registered to do business

Know what regulatory agencies you’ll need to work with such as the Bureau of Cannabis Control and the Department of Public Health.

Depending on the size of your business, you may benefit from having a compliance officer or team who regularly meets with employees.

Start your cannabis business

New rules and regulations are being enacted throughout each year. If you want to take advantage of the “green rush,” plan for the risks and the rewards. Think through each detail, even more so than you would within a more traditional industry. If you want to be successful, you need to have a solid foundation to build from, and getting these details right will help to make that happen.

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