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Cannabis Legalization Means Opportunities for Small Businesses
The legal use of cannabis—be it for medical or recreational purposes—is the rule, as opposed to the exception, throughout the U.S. And with cannabis in all its forms, including CBD, taking the country by storm, the sky’s the limit for companies entering or already operating within the legal marketplace.
Recent estimates suggest that the size of the global legal cannabis market will climb to $84 billion by 2028. This is a staggering number that spells opportunity for budding cannabusiness entrepreneurs in the U.S.
No doubt about it, with more and more states like New Mexico, New Jersey, New York and Virginia recently hopping on the legal cannabis bandwagon—and it looks to be just a matter of time before Connecticut turns green and fully legalizes weed—there’s certainly room for additional players in the legitimate cannabis space. But before any would-be cannabis operators open their doors for business, a broad range of legal issues must be considered.
For those ready to jump into the legalized cannabis business, step one is obtaining the proper license. That may be easier said than done. With a patchwork of licensing laws that are ever-changing and dependent upon jurisdiction, the licensing application process can be complex, time intensive and expensive to say the least. To pave the way for a streamlined licensing journey and achieve the best results possible, it can be very helpful to align with experienced consultants and professional service providers.
It bears repeating, cannabis licensing requirements vary from state-to-state. In any event and no matter the location, those wanting to launch a cannabusiness can expect to be asked for at least some, if not all, of the following in conjunction with a license application:
- a non-refundable application fee;
- 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.
A word to the wise: to expedite the cannabis licensing process, these items should be prepared well in advance and as soon applicants become aware of their application mandates.
Corporate, Banking and Tax Concerns
Anyone dipping a toe or jumping head first into the legal cannabis industry will want to create a corporation or limited liability company as an umbrella for operations. Doing so will help limit personal liability and protect personal assets in the event debts or legal judgments are claimed against a cannabusiness.
In terms of entity selection and formation, legal counsel can provide guidance based upon state-specific and financial considerations (including those related to taxation). Whatever type of entity is chosen, a legal cannabis business must abide by all applicable formalities and operate within the parameters of any by-laws or operating agreements to ensure that stakeholders can avoid any potential personal exposure in the event of litigation.
Conflicts between federal and state laws should also be on the radar screen of every cannabis entrepreneur. Despite the legal status of cannabis throughout the country, the possession, cultivation and distribution of medical or recreational cannabis remains illegal under the federal Controlled Substances Act (CSA). Consequently, there are difficult banking and tax issues that every cannabusiness must face.
As of this writing, federal banking laws severely restrict access to financial services for companies selling cannabis-related products. Translation: banks can’t do business with cannabis companies, which is problematic for so many reasons, not least of which is that those in the sector must maintain large amounts of cash on hand for payment of expenses, including inventory and employee salaries. This unfortunate reality makes legal cannabis outfits the targets of crime.
The good news is that relief could be on the horizon. The SAFE Banking Act of 2021, which would provide a safe harbor for banking institutions providing services to cannabis clients, was passed in the U.S. House of Representatives and referred to committee. Whether the legislation passes in its current form is anyone’s guess, though our federal legislature does seem to be inching closer to relaxing existing cannabis restrictions.
Until the federal law changes, taxes will also continue to be an area of concern for cannabis operators. This is because the IRS currently doesn’t allow for the deduction of 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 cannabis). What this means is that without the ability to take advantage of the typical deductions and credits leveraged by other businesses, those in the cannabis biz must pay taxes on gross income.
A lease on commercial space will be in the cards for anyone opening a consumer-facing, retail-oriented cannabusiness, such as a dispensary. Those looking to lease space for their cannabis operations should consider these key lease provisions:
- 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-related use 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 commercial lease related to cannabis 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.
Anyone starting a cannabusiness should engage an insurance agent or broker with specific cannabis industry experience who can obtain all necessary coverages. When procuring insurance policies, applicants must be honest, transparent and forthcoming about their operations. Misrepresenting the nature of a cannabis company to an insurance producer or omitting material facts can set an insured up for rejection of claims and fraudulent procurement issues.
Management in the legal cannabis industry is subject to the same employment-related issues facing counterparts in other businesses. These include wage and hour, benefits and compensation, equal pay, employee hiring, and discipline and termination issues, along with privacy, disability, and harassment and discrimination concerns. Regarding the latter, comprehensive anti-harassment and anti-discrimination policies should be drafted and consistently enforced.
Another major employment law issue facing business owners today is marijuana use in the workplace. It’s rather ironic given the nature of a cannabusiness, but cannabis operators must decide whether to allow (or if they’re obligated to allow by way of workplace accommodations) the use of medical or recreational marijuana on the job. Clear policies on this topic are crucial.
With Opportunity Come Potential Pitfalls
Without question, the legal cannabis industry is still in its relative infancy and poised for exponential growth. And while this may translate to real upside for those wading into the legalized cannabis waters, the associated legal issues (this article presents just a sampling of them) are significant and shouldn’t be ignored.
This post has been adapted from a piece written by Bryan Johnson and previously published in Cannabis Business Executive titled, “5 Key Considerations When Starting Your Cannabusiness.”
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.