How to Start a Cannabis Company [From a Financial Standpoint]

How to Start a Cannabis Company [From a Financial Standpoint]

While attending a business school may help with starting your own company, learning how to start a cannabis company specifically may require further insight.

The cannabis sector is budding. Since it’s a developing market, it’s safe to say that while some business courses will relate to these operations, this niche’s specialized nature demands more research. 

Here’s what we’re covering in this guide:

  • Cannabis startup costs and what to expect
  • How to write a business plan for a cannabis business
  • How to get financing for a cannabis company
  • How to start a cannabis business (step-by-step)

Looking for additional guidance to budget and plan for your new cannabis operation? Contact us today to learn how we can help.

How to Determine Initial Cannabis Startup Costs

Cannabis business startup costs are essential to consider before investing time, energy, and resources into starting a cannabis business. Thus, it’s crucial to look over the potential initial startup costs.

Cannabis endeavors are usually more capital-intensive than other operations. Here’s what you should expect to pay for your initial cannabis startup costs:

Cannabis Licensing Fees

Cannabis licensing fees aren’t cheap. These costs vary at the state level, as well as the municipality.

For instance, cannabis licensing regulation in California has non-fundable fees between $1,000 and $5,000 per application. These fees can range in price depending on which license you’ll need, as well as which jurisdiction(s) you operate. For all local licensing or permit fees, you can expect the licensing fees to range from $10,000 to $12,000.

Cannabis Consultant Fees

Hiring a cannabis consultant is equally essential for new entrants to the industry. Cannabis consultants offer expert advice that facilitates structuring and operations.

Between licensing, company structuring, compliance, security, accounting, and other cannabis-specific needs, it’s crucial to have a trustworthy cannabis consultant on-hand.

While cannabis consulting companies exist, in some cases, it’s best to shop around for the best option for you. Whether you’re worried about excessive consulting rates or wondering about cannabis consultant pay, feel free to contact us at any time for a free consultation. 

Cannabis Insurance Cost

Every business has insurance needs per state demands. There’s a short list of cannabis insurance carriers, and they tend to charge a premium on account of the industry’s Federal status. However, a quick check of a cannabis insurance directory can be helpful.

Two cannabis insurance directories, Cannabis Business Executive and Ganjapreneur, are the go-to’s for canna-business operators. Each site offers a cannabis insurance directory where you can find the best cannabis insurance carriers and, hopefully, one that will fit your needs.

Cannabis insurance for supplemental purposes isn’t always an option. For instance, in California, canna-businesses must have at least $2,000,000 in commercial general liability insurance. The monthly premiums for insurance like this are usually from $1,2000 to $2,200.

Cannabis Business Operating Costs

Cannabis business operating costs can add up quickly. Between rent, security, marketing, interior, equipment, salaries, and other expenses, it’s best to know what to expect.

Your operating expenses will depend on what type of canna-business you’re starting. These could include:

Cannabis Real Estate Rental Costs

Cannabis real estate rentals, also known as green zone properties, are usually charged by the square footage. The price per square foot depends on the location and size of the cannabis facility. If you’re renting cannabis real estate in a less populated area, the expense drops significantly. But if you’re looking for a green zone rental in a city with high competition for these kinds of spaces, you should expect to pay exorbitant fees.

Green-zoned real estate is somewhat limited. With this being the case, many landlords charge premium rental fees for cannabis endeavors.

If you’re planning to open a dispensary in a large city like Los Angeles, the rent will likely cost between $7,000 and $9,000 per month. However, you can expect to pay more if you’re looking for a specialized location, such as a property on a well-known street.

Cannabis cultivation facility rentals tend to be even more expensive due to the additional square footage. For instance, if you’re looking for a 25,000 square foot facility in a city that’s close to a metropolitan area, you can expect to pay between $15,000 and $20,000 per month.

Cannabis manufacturing facility rentals don’t demand as much square footage. Since these are typically only allowed to operate in cities located away from densely-populated cities. With this in mind, you can expect rent to cost significantly less–likely between $3,000 and $5,000 per month.

Cannabis Staff Salaries

Cannabis staff salaries are essential to keep the business operating fully. Each canna-business requires specific skills depending on the operations. Some staff might need a GED and some certifications. But other positions could require Bachelor’s degrees or a Ph.D. With this being the case, salaries for cannabis staff usually fall into these ranges:

  • Bud Tenders: Bud Tenders usually earn just above minimum wage, ranging from $12 to $14 per hour.
  • Dispensary Managers: Dispensary Manager salaries generally have them earning between $50,000 and $60,000 annually.
  • Master Extractors: Master Extractors can usually demand between $60,000 and $70,000 per year.

Cannabis Business Marketing Costs

All successful endeavors have marketing costs, and cannabis is no different. In fact, many cities demand an outline of your cannabis branding and marketing plan when you submit your cannabis business license application.

Cannabis business marketing budgets ultimately depend on your business. If you have a smaller company, you might spend around $2,500 or more per month. However, larger cannabis business marketing budgets can demand millions of dollars.

Regardless of what you allocate towards your marketing budget, it’s crucial to remember that these expenses aren’t tax-deductible. We can thank Section 280E for that.

Cannabis Business Equipment Costs

The cost of your cannabis business interiors and equipment depends on the business you operate. For example, the costs of the equipment used for a massive indoor cannabis cultivation operation will be significantly higher than the price one would pay to build-out a dispensary. Extraction equipment can also be rather expensive. Ultimately, the price you’ll pay for your cannabis equipment will depend on two factors: what your operation does and it’s size.

Cannabis Business Security Costs

Cannabis business security costs should be considered too. All cannabis businesses are required to have security watching over the operation. This industry operates primarily on a cash-basis.

With this in mind, the amount of cash that’s dealt with on-site means it’s ideal to invest in security. This means your operation should have a plethora of security equipment (including but not limited to video cameras and safes) and a security team on-site.

For a specialized security agency, you can expect to pay between $20,000 and $30,000. But this could increase if you have special needs or a massive operation.

Community Outreach Costs

Community outreach is a crucial part of operating a cannabis company. This is how you can make your organization stand out from the rest.

While many canna-business operators tend to overlook outreach, states and localities usually prefer organizations that make it their initiative to improve the community. This means if you have plans to help the community, your organization is more likely to receive the appropriate licensing.

Consider creating a budget for local law enforcement programs and endowments, community programs, schools, and other community initiatives to show your organization is worth supporting.

Emergency Funds

All businesses should have emergency funds on-hand for unexpected expenses. This is especially the case for cannabis operations as an emergency could cost hundreds of thousands of dollars. 

How to Write a Business Plan for Cannabis Company Financing

Should you know how to write a business plan for a cannabis company? Only if you plan to start one.

But a cannabis business plan does more than keep your company on-track to succeed. It can be used to find funding for your operation, helping to cover the expenses we just discussed.

As you begin writing your cannabis business plan, keep these considerations in mind:

1. Provide Evidence You’ll Fulfill Your Cannabis Business Plan’s Claims.

Investors and anyone reviewing your cannabis license application will have to believe that you will fulfill your business plan claims. With this in mind, your plan should include proof. Include quantifiable evidence with verifiable data showing it’s legitimate. Conduct research, collect data, and communicate its relevance in your business plan.

2. Instill Trust in Your Cannabis Business Plan.

Establishing trust is a vital component of a marijuana business plan. The people reviewing your plan will have to trust that your canna-business is a solid investment. With this being the case, provide a clear explanation of what makes you the right person to operate this business and what will contribute to its success.

3. Incorporate Visuals in Your Marijuana Business Plan.

Visuals enhance a cannabis business plan by captivating peoples’ attention. This is how you should tell your story and get them interested in learning more. Include graphs, images, tables, and other visuals in your presentation.

4. Exhibit Professionalism as You Craft Your Cannabis Business Plan.

Regardless of the industry, investors expect a certain level of professionalism. Investors care about business and money, both of which are serious matters. Write and design your business plan to appeal to your audience with the professionalism they expect.

5. Make Promises You’ll Keep

Your cannabis license application reviewers and potential investors don’t want to see claims you can’t deliver. All of your promises in your cannabis business plan should be realistic. Between your goals, milestones, projections, and request for funding, everything should be substantiated by giving proof that you achieve goals and keep promises.

Cannabis business plans should include the following:

Executive Summary

Your executive summary should outline the contents of your business plan. Keep this section short, and make sure to highlight the key points that will matter most to your audience.

Problem-Solution Statement

Your problem-solution statement will explain what problem your business aims to solve and how. This will offer insight into the unmet or under-met needs in the market that your company plans to fill.

Market Opportunity Statement

Your market opportunity statement should include data showing the market size, growth potential, target customer segments, trends, competitors, and regulatory landscape. This section should also provide proof of the marketplace opportunity that will ensure your business grows and thrives.

Strategic Execution Statement

Your strategic execution statement will provide detailed plans for how you plan to take advantage of the opportunities you’ve already described. This should include timelines, milestones, and the metrics you plan to use to show your success in relation to your goals.

Marketing Plan

Here’s what your cannabis business marketing plan should cover:

  • Position: What makes your brand different from and preferable to the competition?
  • Product: What will you offer to solve the needs and problems mentioned earlier?
  • Price: How much will you charge for these products to dominate the market?
  • Promotion: How do you plan to promote your business to generate sales and revenue?
  • Place: Where will you sell your products and services?

Operations Outline

Your operations outline should offer insight to your facilities, technology, security, sales, distribution, staff, and equipment. You’ll explain the business’s physical space necessities to operate, including the specific property address if you’ve already obtained it.

Compliance Fulfillment for the Cannabis Industry

The compliance fulfillment section will outline how your business will remain compliant to operate legally in the cannabis sector. This segment must show you understand the regulations and explain how you will use proper standard operating procedures and staffing to remain compliant.

Company & Team Biographies

A winning team contributes to the success of a canna-company. With this being the case, this section should include all of the people who will participate in the business’s daily operations. List the biographies of your owners, team leaders, advisors, and key team members contributing to the expertise you need for successful execution.

Financial Plan

Since this plan might be used to secure financing, this is likely the most important section. Outline a detailed financial plan to include revenue forecasts, sources of capital, operating costs, budgets, projected balance sheets, projected cash flow statement, break-even analysis, and projected profit and loss statement.

Appendices

Your appendix should include more detailed spreadsheets and charts to cover additional financial information.

How to Get Financing for a Cannabis Business

Need help getting financing for a cannabis business? Contact us today to learn more about how we can help.

 

Where to Find Real Estate for a Cannabis Business

Where to Find Real Estate for a Cannabis Business

You’re looking for real estate for a cannabis business. But with so much competition, it can be a real challenge to find the perfect property.

You likely have several questions. Here’s what we’ll answer here and now:

  • What is green zone real estate?
  • What should you know before you find green zone real estate for a canna-business?
  • How do you lock in cannabis real estate?
  • What property do I need for my cannabis business?

Looking for a green zone property to host your cannabis business’s operations? Contact us today to learn more about how we can help.

If you’re considering starting a cannabis operation, submitting a strong cannabis permit application can ensure your application succeeds. The likelihood of approval is significantly higher if you have a solid lease or property acquisition recorded.

Let’s talk about how you can find real estate for your cannabis business and increase your chances of becoming licensed.

What is Green Zone Real Estate?

Green zone real estate is property located in an area that allows the establishment of cannabis-related businesses. These operations can set up shop and serve the surrounding community, making the properties highly sought-after.

But what makes a “green zone” a “green zone?” Several factors come into play here. Primarily, state law.

For instance, the state law could highlight the idea that cannabis retail establishments aren’t permitted in areas that have been zoned exclusively for residential purposes. Or perhaps the operations must be at least 1,000 feet away from schools for grades K-12.

However, in some cases, local municipalities might reduce this distance requirement. The local municipalities can also impose additional location requirements if they deem them necessary. Some municipalities have even chosen to restrict or ban cannabis retail operations in their jurisdiction entirely.

Essential Real Estate for Cannabis Business Considerations

Most of the time, licenses to grow, process, or sell cannabis are connected to specific real property locations. Thus, it’s quite crucial to find the right property before conducting business in an area–most of the time.

Here are some of the most crucial considerations we outline for our clients regarding green zone real estate:

Green Zone Real Estate Location

Like with any other business, finding the right real estate for a cannabis business means acquiring property in an excellent location. This is also one of the critical factors that come into play for success operating a brick and mortar cannabis operation.

The location should be suitable for your operation as well as state-and-local-law-compliant. While this can be difficult to find as many states, cities, and counties place limitations on cannabis business real estate. This is why canna-business operators reach out to us to act as their cannabis real estate consultants.

Here’s what you can do before spending money renting or purchasing real estate for a cannabis business:

  1. Check the city’s website, meeting agendas, and meeting calendar for insight regarding if and when the city will release cannabis business permit applications.
  2. Check city ordinances to ensure you know where the green zones for cannabis real estate are located.
  3. Check the price of cannabis real estate in the area. Sometimes, cannabis-friendly properties increase their rates by two or three times what the typical business should pay in rent.

The zoning laws can also get rather complicated. So when it comes time to scour through green zone listings, it’s best practice to get advice from experts who understand the law.

Green Zone Real Estate Landlords

The perfect landlord isn’t always easy to come by; most commercial landlords refuse to offer leasing options to cannabis businesses. This is because cannabis is still prohibited federally, meaning landlords could face arrest as they’re violating the federal Controlled Substances Act. They also risk losing their property by way of civil asset forfeiture.

For example, the Harborside case is just one of the horror stories landlords might hear.

With this in mind, the landlord should know about the nature of your operation and the risk associated with renting to you. Without this knowledge, your landlord-tenant relationship could feel the stress. Thus, it’s crucial to find the best green zone real estate landlord who understands what’s at risk.

Boilerplate Lease Agreements vs. Commercial Cannabis Leases

Boilerplate lease agreements can work for some businesses, but if you’re operating in cannabis, they’re best avoided. For instance, common Commercial Broker’s Association leases state that illegal activity occurring on the property constitutes a lease default. As you can see, this wouldn’t work for a business operating in the cannabis sector.

Commercial cannabis leases must offer more details. The lease should solely forbid actions that would violate state law with the exception of the federal Controlled Substances Act. This is something we always include in commercial cannabis leases–and it’s essential!

A commercial cannabis lease should also include a provision that governs the activities allowed on the leased property. For instance, if the tenant has a cannabis retail operation, the permitted use provision should outline that the retail sale of cannabis is allowed. If the permitted use provision is too vague, you’re increasing your chance of being found in breach of the lease for merely operating your cannabis business.

Check the Green Zone Real Estate Property

Performing due diligence is a pivotal component of any business transaction. But before you get too far into the deal, have a cannabis real estate lawyer check it over on your behalf. More often than not, our cannabis real estate lawyers come in to examine the deal, only to have to explain that both sides will require significant changes for the deal to work.

Before you start negotiating, we recommend getting a real property report. This report will outline essential information, including:

  • Ownership history
  • Encumbrances on the property
  • Easements or other restrictions on how you can use the property

For instance, if the land has an unpaid mortgage, the mortgage holder can foreclose the property. This could happen even though the current owner isn’t the person who’d entered the transaction. Even as a tenant renting the property, you should know the property’s history and risks that could come as a result.

How to Acquire Cannabis Real Estate

While the cannabis sector is experiencing rapid growth, we’re seeing many cities still working on their cannabis ordinances. Since it takes some time to pass an ordinance, make sure to keep an eye on city council activity. Budget a minimum of six to eight months to find the right cannabis real estate for your business.

Once the ordinances are released, it’s typically a three-step process. This could take up to three readings before the final regulation passes. The first ordinance should outline zones, rules, neighborhoods, and restrictions regarding cannabis leasing and property ownership.

After the first reading, you should begin searching for your property. Once the final vote happens and the ordinances pass, you should have your property ready to go.

Finding Real Estate for Your Canna-Business

Interested in having our cannabis real estate consultants weigh-in on a green zone property you’re considering? Contact us today for expert assistance.

 

Can a Cannabis Business File for Bankruptcy? No, but You Have Some Options

Can a Cannabis Business File for Bankruptcy? No, but You Have Some Options

Can a cannabis business file for bankruptcy? Unfortunately, even after paying millions of dollars in tax revenue to the states, these legitimate businesses still don’t have support from the federal government.

The government’s response to the COVID-19 pandemic has offered assistance to companies across a plethora of industries and individual taxpayers. However, the state legalized cannabis industry has been excluded.

Considering filing for cannabis company bankruptcy? Contact us today to discuss your cannabis debt and the options available to you.

Even though the cannabis industry is quite lucrative, some businesses have failed for one reason or another. But unlike companies operating in other sectors, when cannabis businesses aren’t successful, they don’t have the option to file for bankruptcy.

Why Do People File for Bankruptcy?

If this is your first time being in this situation, you might be wondering, “Why do people file for bankruptcy?” Understanding bankruptcy is easier when you know the definition.

According to Investopedia, business bankruptcy is a legal proceeding for a person or business that cannot pay back their outstanding debts. The process starts with a petition the debtor–usually, the business owner–files with the federal government.

In essence, the business owner requests aid from the federal court to eliminate and repay their debt. Business bankruptcy also involves protection and guidance from a bankruptcy court.

Most businesses can file for bankruptcy under three types. But this depends on the business’s structure. The following are the standard options for business bankruptcy:

  • Chapter 7: Business Bankruptcy or Liquidation – This is when the business’s debts are excessive to the point that it’s not economically possible to restructure them. Most of the time, the business is dissolved.
  • Chapter 11: Business Reorganization – This is when the company is restructured and winds down its operations under a court-appointed trustee. After creating a plan to outline how the business will recover, it’s filed to the creditors and put to a vote as to whether or not the plan is acceptable.
  • Chapter 13: Personal Bankruptcy – Sole proprietors can file for Chapter 13. This involves filing a repayment plan with the bankruptcy court.

Most legal experts in the cannabis sector agree that cannabis business operators are ineligible to file for these bankruptcies. So far, courts have mostly ruled that debtors working in cannabis or extracting significant income from cannabis-related activities (both directly or indirectly) aren’t permitted to use bankruptcy.

However, this could change in the future as the cannabis sector continues to progress.

Cannabis and Bankruptcy: Current Options for Cannabis Companies

Typically, if a business fails, it can file for bankruptcy protection. This is when a company can eliminate debt and facilitate restructuring with minimal financial pressure.

Unfortunately, cannabis and bankruptcy don’t go hand-in-hand; there’s no cannabis business bankruptcy protection available. While one might expect some bankruptcy protection for cannabis companies, as long as cannabis is a controlled substance, canna-companies will not receive bankruptcy protection from the state.

Even with the states collecting tax revenue from cannabis businesses, federal law still governs cannabis and bankruptcy in the U.S. With this being the case, the U.S. Bankruptcy Trustee cannot administer or control assets deemed illegal without violating the law. Thus, bankruptcy protection for cannabis businesses is not available.

The lack of protection is disadvantageous for investors in the cannabis sector. However, the following options are available:

Assignments for Benefit of Creditors

Like Chapter 7 bankruptcy, some canna-business operators find they can use an assignment for benefit of creditors. This is commonly referred to as an “ABC.”

An ABC lets a business assign its assets to a third party. This third party can then decrease the company’s affairs without stopping its operators all at once.

Since ABCs are part of state law, in some instances, it can be a viable option for a business operating under state law. This can even be the case if the company is violating federal law in a way that makes it ineligible for bankruptcy protection.

Receiverships

In some cases, appointing a receiver over the canna-company is an option. If a creditor decides to litigate, one remedy for cannabis business operators is to request the court appoint a receiver to run the company.

Even though this takes control of the company out of the hands of current management and puts it into a receiver’s hands, this could be beneficial in some scenarios. This could allow the company to negotiate to ensure favorable provisions in the receivership order.

Favorable provisions could include allowing the receiver to sell off the company’s assets or the entire company. In turn, the company can realize proceeds beyond the debt it owes.

Workouts

One of the best alternatives to filing bankruptcy in cannabis is to engage in workout negotiations with the company’s creditors. This should occur before litigation or ABC. Since workouts are conducted outside of the court system, they depend on all parties coming to a mutually acceptable solution.

The workout process usually involves simple negotiations. It can also include mediation for multi-party disputes.

Can a Cannabis Business File for Bankruptcy? Fortunately, We Still Have Options!

So can a cannabis company file for bankruptcy? While most cannabis businesses cannot file for bankruptcy, we have options available.

Though it’s unfair to the cannabis industry, we can expect bankruptcy filing to become a safety net available for all businesses as it progresses. This, of course, includes the businesses that sell cannabis.

We’re still seeing progress happening each day throughout the industry. For instance, in the Garvin v. Cook case, the court highlighted that the Bankruptcy Code doesn’t mandate that courts manage the provisions of a bankruptcy plan.

As long as the overall bankruptcy plan isn’t violating federal law, it’s a valid plan that can continue onward. The court’s duty is to determine whether the plan has been proposed in an unlawful way. But that’s the gist of it.

However, we’ve seen other cases that only complicate things. For example, the Way to Grow, Inc. case involved a creditor moving to dismiss the company’s bankruptcy claim. The credit claimed that Way to Grow was violating the Federal Controlled Substances Act (CSA), despite the company not directly growing or distributing cannabis.

Since the business model depends on the income from cannabis sales, Way to Grow could not restructure its business profitably without selling to cannabis businesses. This resulted in the bankruptcy court ruling against Way to Grow. However, the ruling is under appeal.

Interested in learning what options are available for your cannabis business? Contact us today for expert assistance.

Cannabis Business ROI: What Should You Expect?

Cannabis Business ROI: What Should You Expect?

Every investment comes with some risk. But in the cannabis sector, the heightened risk of the operations means it’s even more crucial to understand how to safeguard your cannabis business ROI.

Here are a few quick tips to guide your cannabis investments:

  • Conduct your due diligence for a full view of all risks and potential ROI on your investments.
  • Research the competition and consider how the market will evolve in the future.
  • Analyze the types of shares you’re purchasing and consider how dilution can impact them.

Considering investing in cannabis? Contact us today for an evaluation of your cannabis investment.

The cannabis industry is expanding like no other. As the potential for impressive cannabis business ROI increases, so does the number of people willing to invest. The types of return on investment available–whether interest, dividends, or capital gains–are tempting potential investors.

Investment opportunities in the cannabis sector are vast–and they’re multiplying. Experts claim that by 2022, the global cannabis market might be worth up to $32 billion.

The North Bay Business Journal also reported that global spending is on track to reach $57 billion by 2025. But how does this translate into giving you a solid cannabis business ROI?

At this point, the cannabis sector still has exponential potential for growth and impressive revenue. However, it isn’t very easy to evaluate investment options, especially if you’re just getting started investing.

While you might be able to gain some broad insight from a business ROI calculator, it’s always a smart move to look at the market trends for additional insight. By checking how the market is fluctuating, you should be able to get a good idea of the volatility of the cannabis sector.

At this point, there’s not much data on past trends and company track records because the industry is still immature. With this in mind, how can you tell if you’ll get a solid cannabis business ROI?

In this guide, we cover how to analyze the risk associated with investing in emerging sectors, as well as how to minimize your risk. Here’s what you should know about cannabis investing and the return on investment you should expect.

ROI in the Cannabis Sector

ROI in the cannabis industry is comparable to investing anywhere else; the higher your potential return on investment, the more risk you’re taking on. But just because you’re willing to take on more risk doesn’t mean you’re sure to receive a higher return. However, the risks involved are still more.

Determining the viability of your investment means performing due diligence. This is how you’ll fully understand your investment, what you have to gain or lose, and the company’s reliability.

Consider the following as you’re performing your due diligence:

  • The problem they solve. Does anyone actually need this business? What true customer pain point does the company solve?
  • The company’s team. Look at who is involved in the company’s activities to get a better idea of what you can expect. How skilled is the team in cannabis? Does the team have experience? What can the team handle? Does the team have a solid list of connections?
  • The company’s competitive advantage. Does the company’s team do or have something that gives them a competitive edge?
  • The company’s traction. How long has the company been in operation? Does it have customers or sales?
  • The company’s capital table. Who is on the company’s capital table, and what’s the split? Whoever is on the capital table will likely remain a part of the company long-term until there’s enough liquidity to make an exit.

Cannabis Business Investment Risks to Consider

As with any investment, investing in cannabis doesn’t come without a set of risks. A return on investment analysis is essential to improve your chances of obtaining the returns you crave. 

With this in mind, potential investors should consider the following as they evaluate investment opportunities in the cannabis sector:

Regardless of how good the investment looks, a positive return on investment isn’t guaranteed.

‘Rags to riches’ and overnight success stories fuel cannabis investments. But many cannabis companies are risking their success to achieve profit and sales in the future. Your return on investment analysis should take this into account.

With this being the case, many times, investors tend to focus on the appeal of profitability in the future. Thus, it’s crucial to keep in mind that while the company might say it’ll generate profit or increase its stock’s value, there’s simply no guarantee.

Analyze the business model and how external factors can impact it. This, of course, includes how regulation might affect its operations favorably or negatively.

Even though some states have made cannabis legal in one way or another, federal prohibition still plagues the industry.

While some states have made using and selling cannabis for medicinal and/or recreational purposes legal, it’s still prohibited federally. Since it’s still illegal on the federal level, the federal government can seize a cannabis business’ assets without hesitation. If a cannabis business has its assets seized, the investments are nearly impossible to recover.

Look over the investment’s legal strategy and all future plans. This should give you a good idea of how the company plans to evolve with new legislation. The safest investments are the companies that focus heavily on compliance.

While the company might seem on a fast-track to success, competition could become an issue down the line.

As the industry matures, so do the markets. New companies will continue entering the market, and this translates to additional competition for existing businesses.

With increased competition comes the potential that existing companies will need to shift their current business model and product prices to remain competitive. This can have a direct impact on the value of an investment.

Consider what your potential investment has to offer. Think about the competitive advantage that’s securing its market position. If there’s a high barrier to entry to compete on the company’s level, this could be a good sign.

Keep in mind that a price difference isn’t a long-term competitive advantage. Your return on investment analysis should take intellectual property, technology, and proprietary processes into consideration.

What Else Should You Consider?

While you might be tempted to invest in canna-businesses directly working with cannabis, many companies offer support services to the industry. Looking into the pharma and biotech companies producing cannabinoid-based drugs can prove fruitful. Also, many service and product providers previously operating outside of the cannabis sector are diving in since legalization.

Need assistance investing for the best cannabis business ROI? Contact us today for expert assistance.

Your Guide to Cannabis Partnerships, Operating Agreements, and Taxes

Your Guide to Cannabis Partnerships, Operating Agreements, and Taxes

The days of forming a partnership on a handshake are long gone for most; the sad fact of the matter is that–without a formal cannabis partnership agreement in place to protect your business interest–a cannabis partnership can be a dangerous thing.

Formal cannabis partnership agreements protect business interests–for all parties involved. They ensure your taxes are allocated equitably, as well.

But what else goes into an ‘elevated’ partnership agreement?

Here’s a basic rundown of what your cannabis business partnership agreement should cover:

  • Ownership, profit and loss distribution, how long the partnership will remain in-tact, and each partner’s roles and responsibilities.
  • Potential liabilities or issues and resolutions.
  • How to handle taxes.

Need some expert help in creating your cannabis operating agreement? Contact us today for assistance.

What’s a Cannabis Partnership Agreement?

A cannabis partnership agreement is a contract that outlines the terms and conditions agreed upon–by all parties involved–for a business relationship. Here’s what the agreement should highlight:

  • Ownership
  • Profit & Loss Distribution
  • Business Relationship Longevity
  • Outline of Roles & Responsibilities for Each Party
  • Partnership Termination Process
  • How/If Other Party(ies) can Purchase Partnership Share

Before finalizing your contract, a lawyer should analyze it to ensure the terms are enforceable and reasonable. It’s also a good idea to have a CPA specializing in cannabis to look over the agreement’s financial implications to clarify who will handle the taxes.

Types of Cannabis Business Partnerships

In cannabis, two main types of partnerships have become the go-to; the general partnership and limited partnership. General partnerships are comparable to sole proprietorships. But the main difference is that in a general partnership, your business can have multiple owners. Setting up a general partnership is a relatively straightforward process, too; you’ll use your name or set it up under a different name after applying for a DBA certificate.

Limited partnerships are sometimes preferable, especially if investors are involved. This ensures the investors are not responsible for controlling or operating the canna-business while limiting their personal liability. These are easy and inexpensive to set up, have a single tax, and can be owned by multiple partners. But there’s still unlimited personal liability for general partners, the issue that all partners are legally responsible for the actions of the others, and general partners’ interests in the business cannot be sold without all other partners’ consent to keep in mind.

What Protection Does a Cannabis Partnership Agreement Provide?

All parties involved stand to benefit from a partnership agreement. This is one of the most effective ways to safeguard business investments because it offers better management and more protection.

Here’s what your partnership agreement offers:

  • A way to set roles and responsibilities for all parties involved. The agreement should clearly show who is responsible for what. Explain who will take on the role of management and when/if/how the roles and responsibilities change.
  • A safety net to prevent legal and liability problems. The agreement should highlight who is taking on the liability and what occurs to the other partners if one partner has a problem.
  • A place to outline methods for resolving disputes. While we always hope nothing goes awry during a partnership, there’s still the possibility for something to go wrong. Even in the best partnerships, significant disputes can occur–and they must be handled appropriately to ensure the partnership survives. Outline the procedures regarding how you’ll vote on issues and make recommendations for resolutions in case of specific scenarios.
  • A recording of the partnership’s profit distribution methodology. Profits could come from your partnership, and if/when they do, your partnership agreement will demonstrate how the profits will be distributed in a way that all parties have agreed upon. This distribution should also take generally accepted tax principles into consideration.
  • A way to handle tax issues from the beginning. With so many layers of taxes throughout the cannabis supply chain, understanding who is paying what taxes when is essential for a lasting partnership. This is your opportunity to assess who will handle each tax burden to ensure no surprises when it comes to paying these taxes.

In essence, your partnership agreement should handle all potential situations that could cause confusion, change, or disagreement. With so much that could occur, it’s always a smart move to go in-depth while creating your partnership agreement, making them as thorough, mutually beneficial, and specific as possible.

Cannabis Business Operating Agreement vs. Partnership Agreement

Operating agreements differ from partnership agreements. They outline the operations of LLCs, comparable to how the by-laws of corporations show how the business operates. But the main thing these two agreements have in common is that they both set terms and conditions for all parties involved. 

Similar to an LLC operating agreement, partnership agreements are relatively flexible. They show how you and your partner would like to operate the partnership. But these agreements also specify how profits and losses are handled, as well as each partner’s duties and obligations.

The complicated aspect of these agreements is in calculating tax liability. If you have a multi-member LLC, tax liability should be calculated in each member’s personal income. But there’s more to it than that.

For instance, in a case of personal income tax liability, if you’re receiving income from a partnership or LLC on a K-1 and W-2 income from a salaried day job, describing future tax liabilities becomes challenging. This is because if either of those incomes increases, you could find yourself in a new tax bracket.

So what would you do here?

You have a few options.

One option is to provide a rough proxy of tax liability in the partnership agreement. This could involve setting it up to ensure each party will receive what’s equal to the cannabis excise tax amount in addition to their distribution to cover taxes. In Cali, this would be 15%.

You also have the option to outline which partner is liable for certain taxes throughout the cannabis product supply chain. For instance, a cannabis retail operator must be responsible for collecting and remitting cultivation taxes from the cultivation partner.

However, the method that we suggest is to make tax liability for personal income each individual’s responsibility in the partnership. This effectively removes tax responsibilities from the partnership. By outlining this in your cannabis operating agreement, you’re avoiding tax issues that could occur down the line.

But you can further decrease your tax liability in a partnership by charging it to your customers when possible. For instance, California charges a 15% cannabis excise tax that you can add to your customers’ receipts. This strategy covers some of the tax burden. However, you’ll still have to pay more in taxes on your gross receivables.

Are Operating Agreements Required?

One of the most common questions we get asked is, “Are operating agreements required?” This, of course, depends on which state you reside and your company.

While we recommend always having a partnership agreement in place, here are the states that demand you to create an operating agreement for an LLC:

  • California – California LLCs must have an operating agreement. While the agreement can be written or oral, written agreements–along with any amendments made–have to be included in the company’s records.
  • Delaware – Operating agreements must be created before, during, or following filing LLC formation paperwork. The law is rather lenient, though, and the agreement can either be implied, written, or oral. Regardless, the best practice is to put it in writing to ensure no issues arise at some point in the future.
  • Maine – Similar to Delaware, Maine demands an operating agreement before, after, or during your time of filing for an LLC. This agreement can either be implied, written, or oral too.
  • Missouri – Missouri LLCs also must have an operating agreement. However, it can be written or oral. The agreement should outline the affairs of the LLC, the conduct of the business, and the powers, rights, and duties of members, agents, managers, or staff.
  • New York – LLCs in New York need a written operating agreement. The documentation must include any provisions related to the business and its affairs, as well as the rights, limitations, responsibilities, and preferences of all partners.

State laws in California, Delaware, Maine, Missouri, and New York require you to create an LLC operating agreement. But regardless of where you reside, it’s always best practice to craft a formal agreement between LLC members.

In some instances, you might not share an LLC with your partner(s). Even if this is the case, creating a cannabis operating agreement is something we recommend to minimize the chance for disagreements in the future. 

So what happens if you find a company you want to partner with? Bringing another cannabis operator into your business operations should involve a cannabis business partnership agreement.

Should You Use a Simple Partnership Agreement Template You Found Online?

While a simple partnership agreement template you found online could be better than nothing, you may be opening yourself up to liability by using one. Whether you’re considering a partnership template in Word or are searching the internet for a 50/50 partnership agreement template, there’s usually more involved in creating a small business partnership agreement for operations in the cannabis sector.

Here are the reasons we suggest avoiding a simple partnership agreement template:

1. It’s easy to overlook the opportunity for arbitration.

While free boilerplate contract forms might seem appealing, they don’t always take everything that could go wrong into account. Arbitration is more straightforward and more cost-effective than litigation in a courtroom. Thus, it’s worth considering having an expert draft your agreement. A professional knows the proper partnership agreement format and should understand how to draft a contract that incorporates an arbitration clause following relevant state and federal law. This ensures your contract is enforceable and provides parties with the option to resolve issues outside of court.

2. A simple partnership agreement template doesn’t know your rights.

Contract forms don’t advise the parties of the law and their rights. This is especially important in cannabis as it’s still a maturing industry. While the process of creating a partnership agreement using a template is user-friendly, without knowledge of your rights, it’s challenging to create a contract that takes these rights into account. This can lead to additional expenses participants would otherwise avoid paying.

3. An expert knows how to write a partnership agreement from scratch.

Someone who has studied partnership agreement creation and has experience drafting them will know what you don’t know. This ensures you’re not leaving any money or opportunities on the table, missing an essential clause pertinent to the cannabis sector, or making an unnecessary obligation. Furthermore, it’s necessary to consider that ambiguity in contracts is marked against the person or people who wrote the agreement in a court of law.

4. 50/50 partnership agreement templates can omit crucial language.

Contract templates don’t always include the right language, typically copying information from free-source Internet sources. Amateur contract drafters don’t know this language, so it’s ideal to have an expert create the contract. Drafting the agreement using a template can result in the omittance of information and required language the law demands in the agreement. In most cases, it’s best to hire a lawyer to ensure the paperwork is correctly drafted as the delay the bad documentation causes usually exceeds the cost of hiring someone to create the contract right initially.

5. Templated partnership agreements aren’t tailored to your specific needs.

Free contract forms don’t always address the legal issues unique to the cannabis sector. For instance, if you’re a cultivator working with a retail store, you’ll find it challenging–if not impossible–to find a 50/50 partnership agreement template that fully covers the different complications that could arise while conducting business. You’ll need a series of clauses that address all issues that could push you into court to resolve a dispute should one occur.

6. A partnership agreement PDF will not account for how state laws and regulations differ.

This is especially the case for cannabis operations. Some states have laws demanding specific language for the cannabis industry, and leaving this out of your partnership agreement can result in consequences for all parties involved. An expert knows to check your state’s specific language requirements to ensure they’re drafted with legitimacy in mind, which could save you time and money that would otherwise be spent in a courtroom.

Interested in expert assistance drafting your cannabis partnership operating agreement? Contact us today for expert assistance.