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5 Key Considerations When Starting Your Cannabusiness
The estimate is staggering: $30,000,000,000. That’s a lot of zeros and a forecast of annual legal cannabis sales by 2025—this as more and more states legalize marijuana for medical or recreational use. No question, the cannabis business is booming, which is something of a given. Less obvious is what you, as a budding cannabusiness entrepreneur, should consider in making cannabis your business. Toward that end, there’s a broad range of issues to think about.
Step one for the would-be cannabis titan is getting your licensing in order. Indeed, having the appropriate license in place is critical because you can’t operate a legitimate cannabusiness without it. Unfortunately, navigating the license application procedure can be confusing, onerous and expensive. Knowing this in advance, and aligning yourself with experienced consultants and professional service providers who can streamline the process, will go a long way in helping to achieve the best results possible.
The new recreational license application in Illinois—my home state, where legalization of cannabis for recreational use is soon to come online—is instructive. As of this writing, all of the following is required to be included in a compliant license application:
- a non-refundable application fee of $5,000 for general applicants;
- a business entity operating agreement, by-laws, or articles of incorporation;
- an agent training and education certificate;
- a business plan;
- a security plan;
- a proposed floor plan; and
- an inventory monitoring and recordkeeping plan, among other things.
If you have designs on planting your cannabis flag in Illinois, the assumption—and recommendation—is that you’d have these various agreements and plans professionally prepared, which equates to a significant up-front cost. But the initial monetary investment directed at tackling the licensing application—no matter the jurisdiction—will be money well spent to the extent it results in your application being accepted, in which case associated costs can be recouped.
2. Corporate, Banking and Tax Matters
Of note, the licensing requirements listed above include the submission of business entity documentation. But beyond what you may have to provide to any licensing officials, there’s another critical reason to create a corporate entity or limited liability company under which your cannabusiness will operate—the limitation of liability and protection of personal assets in the event debts or legal judgments are claimed against your business. Which begs the question: what type of entity should you settle on? Entity selection and formation must consider and address the complexities resulting from state-specific statutes and conflicts between federal and state law. Legal counsel can help in that regard. Ultimately, whether you decide upon a corporation or LLC, you must govern your business to the letter of the law (and any by-laws or operating agreement) to ensure that all stakeholders maintain their inherent protection in terms of personal liability.
On the topic of federal and state law conflicts—spoiler alert: the possession, cultivation and distribution of medical or recreational cannabis remains illegal under the federal Controlled Substances Act—you must be sensitive to the banking and tax issues your cannabusiness will face. Presently,federal banking laws severely restrict access to financial services (read: bank accounts and loans) for companies, startup or otherwise, selling marijuana. This creates a real challenge for several reasons, not least of which is that if you enter the cannabis sector, you must maintain large amounts of cash on hand for payment of expenses, including inventory, employee salaries and the like.
Taxes present their share of headaches too. That’s because the IRS currently doesn’t allow cannabusiness entrepreneurs to deduct ordinary business expenses from gross income associated with the sale or distribution of Schedule I or Schedule II substances as defined by the CSA—yes, that includes marijuana. Translation: without the ability to leverage the typical deductions and credits taken by other businesses, you’ll be left to pay taxes on gross income, which is something to be pondered before jumping into the cannabis space.
3. Real Estate
Not deterred by any of the foregoing? Still want to open a cannabusiness? If so, you’ll need a storefront (if retail is your game) and, in all likelihood, that means you’ll be leasing commercial space. Here are some of the key lease provisions you should keep top-of-mind:
- Compliance with law: a cannabusiness lease should specifically exclude the requirement that the tenant abide by all federal laws.
- Landlord acknowledgment: the tenant should demand a lease provision stating that the landlord expressly acknowledges and authorizes the tenant’s cannabis-relateduse of the subject property.
- Landlord cooperation: a cannabusiness should demand robust landlord cooperation provisions obligating the landlord to sign any documents and make necessary acknowledgments in furtherance of the tenant’s core cannabis operations.
- Lease termination: the termination provision in any cannabis-centric commercial lease should afford the tenant the right to terminate early in the event of a change in the law or enforcement patterns, nuisance claims or other occurrences that disrupt or hinder the purpose of the lease.
- Contingency:the tenant should negotiate for a contingency provision allowing for early termination in the event it fails to obtain the necessary license or financing contemplated when the lease was executed.
When starting a cannabusiness, you should engage an insurance broker with specific cannabis industry experience. Doing so will educate you as to the significant carriers providing the types and amounts of coverage necessary for your venture, as well as any other policies required by law, including CGL and workers’ compensation insurance (depending, of course, on jurisdiction).
Without question, the insurance coverage you procure should be consistent with the types of risks inherent in your particular business. Which is to say, for example, that dispensaries will be impacted by different risks than will cultivators. Also, it’s critical that you always be honest, transparent and forthcoming about the nature of your cannabusiness when dealing with insurance brokers and carriers. You should never hide the specifics of your operations from your broker or carrier; doing so can set you up for rejection of claims and fraudulent procurement issues.
Your cannabusinesses will be exposed to most, if not all, of the same employment-related issues that companies in other industries face—those having to do with wage and hour laws; benefits and compensation; employee hiring, discipline and termination; employment contracts; privacy rights; and disability, harassment and discrimination claims, to name a few. Regarding the latter, you should adopt well-drafted anti-harassment and anti-discrimination policies, and then consistently enforce them.
There is more. As a cannabusiness entrepreneur, you must understand that the Equal Pay Act applies to all employers regardless of the number of workers employed. In fact, some states have similar employee protections that are even more restrictive than the federal law. No doubt, it’d be wise to consult with legal counsel to be certain you abide by all relevant mandates having to do with your newfound employer status.
And given your core product, what are you to do about marijuana use in the workplace, which is a major employment law issue facing business owners every day? You must decide whether to allow (or if you’re obligated to allow by way of workplace accommodations) medical or recreational marijuana on the job. A clear policy and consistent enforcement are vital.
Finally, before launching a cannabusiness, you should consider including non-compete provisions in your employment contracts. As the cannabis space has blossomed, competition between businesses has increased exponentially. As a result, there’s a significant risk that an employee—especially a key employee—bolts for a competitor or starts a new competing company. Consequently, it makes sense to protect your cannabusiness by way of reasonable non-compete provisions in states where such agreements are enforceable.
Do Your Homework and (Again) Consult Legal Counsel
The list of legal considerations mentioned here isn’t exhaustive, and the legal issues you may confront will vary depending on the type of cannabusiness you open and where it’s located, among other factors. Having said that, a common refrain: consult legal counsel experienced in cannabusiness matters before opening what will hopefully be a successful cannabusiness of your own.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.