Many California cannabis non-profits are ruing the day they went the non-profit route so they could start supplying medical marijuana. The devil is in the detail of California codes for Nonprofit Corporation Law, for such an entity is for the benefit of its members, and a separate entity from its founders and managers. Thus:
- Even though you established the non-profit initially, you cannot sell it to a larger company because you never owned it in the first place
- Even if the non-profit made a surplus, you cannot take the money out. The assets belong to the Collective and distribution is only legal on dissolution.
If you did all the hard work, this can be extremely frustrating. Fortunately, there is a way out. You can replace the non-profit with a for-profit, instead of dissolving it and claiming the founding member’s part-share.
The Legal Hoops You Have to Go Through:
Everyone who wants to start a marijuana business in California has to make application to the Secretary of State Alex Padilla. If you are in an existing non-profit situation, you can join the merry throng on 1 January 2018. After that, you can start negotiating licenses with other state and local authorities. Here’s a guide to better understand your entity options. Traditionally many attorneys recommend becoming either an LLC or S-corporation.
Your choice of business entity depends on your particular situation. But be careful how you go about this, because your decision will affect how you operate your business, the licenses you need, your obligations under tax law, and your freedom to moved assets in and out the business. The process for registering is then as follows:
- File your application per your chosen entity and pay the fee applicable
- Register a name for your new business. You can register a trading one later
- Unfortunately, you may not trade until you have state, county, and city licenses
- Apply for your employer identification to determine your employer tax duties
- Register your trademark (s) with the Secretary of State Office (SOS)
You now have the bare bones of a legal for-profit business. After you move your marijuana business activities across, all that’s left is to dissolve the non-profit and distribute the assets among the members.
The Legal Hoops You Have to Go Through
- Obtain consent from the majority of members
- If there are no members have a vote by the directors
- File intention to wind up and dissolve with the SOS and AG
- Inform creditors, claimants, and non-approving members
- Wind up the non-profit and distribute the proceeds
- File a certificate of final dissolution with the SOS
- Submit the dissolution package to the AG
- Make the necessary depositions to the IRS
That is quite a mouthful. We are available to advise and assist further, so you can finally start turning your marijuana business into a profit center.