Summary
In this article we discuss the different options for California medical marijuana entities. Clarity will be provided on the differences between non-profits, not-for-profits and 501c3 organizations.
California MMJ Collectives/Dispensaries – Non Profits, Not-For-Profits, and 501(C)3 Organizations
Look around you will find a number of different entities providing medical marijuana in California. Most people don’t know the difference between the various “non-profit” entities. Non Profit and Not-for Profit can basically be used interchangeably, the real differences arise when an organization receives tax-exempt status. When most people think “non-profits” they are referring to 501(c)3 tax exempt organizations. These entities are funded primarily with charitable contributions. For example, the operations of the American Cancer Society, Operation Smile or the Red Cross are paid through contributions. 501(c)3 organizations are tax-exempt, nonprofit corporation or associations that meet specific guidelines and are granted exemption with the IRS. There are other tax exempt organizations recognized by the IRS but 501(c)3 is the most common. There is no legal distinction between non-profit and not-for-profit; both can qualify as a tax exempt organization under the US Tax Code. Another difference between tax-exempt and non tax-exempt is their business models and sources of operating funds.
A medical marijuana collective typically does not qualify as 501(c)3 (tax exempt organization) and should not seek that status. 501(c)s have more complicated tax and regulatory requirements that would be difficult to comply with. However, a properly run marijuana Collective won’t owe taxes anyway since it doesn’t make a profit (and runs at a break-even or slight deficit). Again, the 501(c)3 federal designation isn’t advised for medical marijuana entities.A non-profit or Not-for-profit collective derive their funding by operating a business. It provides a service (in this case, producing and providing herbal medicine) as a charity and charge just enough to cover operating expenses. Very commonly, these businesses offer a sliding scale, with those less able to pay being charged less than cost and those able to pay more making up the difference. You can also vary the cost to members based on the number of members that use the service (i.e. prices go down as memberships increase).
The main issue for both types of Not-for-profit entities is that no profits or dividends are removed from the organization. If the entity makes a profit during any period,(realistically 1 year), this excess must be returned to members or put back into the organization. This could be capital improvements, charitable donations, or free medical marijuana based on the will of the members. The best way to determine this would be by vote. As long as management/officer’s wages remain “reasonable” they can be increased by the Board. Document the rationale for any raises and bonuses given. Please pay special attention to this. Your local ordinance might restrict the use of bonuses. (i.e. The city of Santa Barbara medical marijuana ordinance #5526 states “The payment of a bonus shall not be considered reasonable compensation” and is thus not allowed.)