When it comes to legal marijuana and setting up the legal entity for a new medical marijuana business, entrepreneurs need to first focus on what is allowed by their respective state. Some states allow traditional LLC or corporate structures while others require a non-profit or “not-for profit” collective or a cooperative, as you can see from the California non-profit collective collective form. Entrepreneurs should also be careful to follow other small details in the guidelines for marijuana related businesses.
No matter which entity you choose, most lawyers recommend some form of incorporate, largely to protect yourself from personal liability for business debts and lawsuits. Yes, you can go it alone as a sole proprietor or run your business as a partnership. But it places additional obstacles in your way. Please also remember that the liability protection of a corporation or LLC does not extend to criminal activities. As such, you are still subject to arrest (particular from a Federal standpoint) although these prosecutions appear to be decreasing.
There are the questions of whether to take on a traditional incorporation or a limited liability company (or LLC). This question is more difficult to answer – both are useful in particular circumstances. Then there is the issue of whether to become a non-profit or a for-profit company. These rules vary by state, sometimes with fairly dramatic differences and other times with only subtle distinctions. It’s best to find the appropriate code section for your state, typically organized under the Secretary of State’s office.
As an example of the strange discrepancies across state lines, consider Washington state versus California. In Washington state, a non-profit corporation can make a profit (although they cannot distribute those profits to the organization’s members, directors or officers). In California, however, there have been instances where regulators have raided dispensaries’ records, to prove they are not being run as a for-profit business.
It’s also vital for an entrepreneur to not assume that the legal phrases used in one state are identical in meaning to your own state. A mutual benefit corporation, in California, is one of at least three types of ways that a dispensary organized as a “collective” can incorporate. In Washington state, the most similar legal entity to California’s mutual benefit corporation is called a mutual benefit organization. But a mutual benefit organization is not identical in structure to California’s mutual benefit corporation, and Washington also has a similar entity called a public benefit organization.
The collective-versus-cooperative question is one that most medical-marijuana entrepreneurs should take time to consider thoroughly. The collective concept, based on California law, refers to a group of entities that work on, or share, a similar project or set of interests.
A cooperative, in contrast, is a union of individuals that forms to conduct some productive enterprise, and to share the profits in accordance with the capital or labor that each participant contributes. Cooperatives can incorporate under the LLC banner, or as an S-Corp or C-Corp, although none of those forms is required.
A potential medical-marijuana business owner should also review the ordinances of the municipality or county government in which he or she wants to open the business. A local government may have enacted rules that restrict where a marijuana dispensary can be located; some require a minimum distance from a school or church, for example. Some cities, even those located in states that have legalized medical marijuana, have enacted their own total bans on dispensaries.
Another consideration for entrepreneurs (in a medical marijuana state) is the option of working as a primary caregiver. This option, in virtually all states that allow it, will drastically limit your ability to grow an extensive business. But for those who are looking to make some extra cash on the side, or who are trying to take care of a family member or friend and want legal protections, it’s worthwhile to study your state’s rules for primary caregivers.
As with the questions of cooperative-or-collective, and non-profit versus for-profit, states also vary when it comes to how primary caregivers are regulated. Some states, even those that have legalized medicinal marijuana dispensaries, including Minnesota and New York state, have not legalized primary caregivers. For states that have approved primary caregivers, there are slight variations of the rules by jurisdiction. Most, however, require the patient to designate the primary caregiver and most also require the primary caregiver to be at least 18 years of age. Some place prohibitions on those persons with a criminal background, such as a past felony charge. California, and some other states, place the additional burden on primary caregivers that they must have already been giving care to the patient for an extended period of time before the patient was prescribed marijuana. Also, California says a primary caregiver cannot just deliver the marijuana, he or she must also be responsible for the patient’s housing, health and safety.
The marijuana lobbying organization NORML has compiled a summary of the basic laws for each state that has approved the dispensing of medical marijuana. The summaries for the 10 largest states that have approved laws can be found here:
California; New York; Illinois; Michigan; New Jersey; Washington; Arizona; Massachusetts; Minnesota; Colorado
Finally, don’t forget about taxes. As a law-abiding business owner, a marijuana dispensary operator or grower must ensure he or she is compliant with all taxes laws, which includes the requirement of levying sales taxes on your retail sales and, in some cases, local taxes. Additionally, when establishing the legal entity for your business, review the requirements for application and registration fees and include those costs in your business plan. The fees can vary extremely widely. Arizona, Connecticut and Illinois, for example, are among the states that charge $5,000 to apply for a dispensary license. Colorado, on the other hand, charges between $7,000 and $15,000 for the same license. The registration fee for a cultivator is typically far more expenses. Illinois, for example, charges a whopping $200,000 for a cultivation center license (and $2M in an escrow account) making it out of reach from most.