How to Start a Cannabis Business in California

October 13, 2021 Uncategorized

As the United States embraces the cannabis industry, the golden state of California takes the lead.

The passage of Proposition 64 in 2016 made recreational use legal for adults over 21, and the state is projected to generate billions of dollars for its economy. That should make it fertile ground for new businesses. But there are many complexities involved in opening up shop in this burgeoning industry.

Let this post serve as a guide for anyone wondering how to start a cannabis business in California.

how to start a cannabis business in California regulations and safety act

The Medical Marijuana Regulation and Safety Act (MMRSA)

The MMRSA started the legal cannabis industry in California. In the past, legacy operators ran this space without laws and regulations to protect the space. But these days, the MMRSA implements a series of laws regarding applications and licensing.

While you’re likely looking for the best cannabis business ROI possible, you’ll have some regulatory and legislative hoops to jump through. Here’s more about how this works in California.

Setting the Legislative and Regulatory Framework

California created a regulatory framework for medical cannabis cultivation, distribution, transportation, testing, retail, and processing. But the legislation did not take into account the applications and license issuances until January 1, 2018.

With this in mind, for several years, California cannabis businesses struggled to navigate the state’s laws. These include the 1996 Compassionate Use Act, the 2003 Medical Marijuana Program Act, the 2008 Attorney General Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use, and all relevant case law. But there are also restrictions for licensing, zoning, and permitting that must be adhered to in order to maintain compliance.

California Cannabis Compliance Insight

Collective Cultivators and Distributors

It’s essential for cannabis businesses to form business entities. This helps by doing the following:

  • Offering an effective affirmative defense during times they might face criminal prosecution
  • Allowing them to run the operation in California with compliance leading the way

Collectives can take various different corporate forms. However, there’s only one that the 2008 Attorney General Guidelines lists: the California Cooperative Corporation.

Cooperatives offer a flexible structure, along with some specific tax benefits. Each corporate form has its own set of pros and cons, so it’s essential to discuss your needs with an expert specializing in this field before determining which corporate form is right for your cannabis business.

Operating a Not-for-Profit

California’s medical marijuana laws can be a bit confusing. The Medical Marijuana Program Act of 2003 outlines that cultivation and distribution of marijuana cannot be for profit. However, there’s a difference between not operating for profit and forming your operation as a non-profit corporation.

Forming a non-profit corporation offers favorable federal tax benefits. But these don’t necessarily apply to the cannabis space. Even though the name “non-profit” might be helpful if you’re ever forced to present a defense, it can cause legal issues for cannabusinesses in the future as they distribute assets or take on investment capital.

If you decide on a collective corporation, you’ll need to operate without earning a profit. But member reimbursement is allowed for the services they provide to the collective, as well as for other professional aid from providers who aren’t responsible for cultivating or distributing marijuana.

This is where properly structuring a cannabis business is essential for success. The right structure will set your operation up to pay its members properly.

Using a Closed-Loop Collective Model for Cannabis

California’s cannabis law also demands a “closed-loop” collective model. This model bans medical cannabis patients in California from distributing cannabis or cannabis products to anyone outside of their collective.

Through the closed-loop collective model, business-to-business transactions or distribution were not allowed under California law. Compliant structuring and accounting measures offer solutions to these problems. However, expert assistance with this is crucial as there are still several points of exposure that must be handled accordingly.

How to Start a Cannabis Business in California

Between tight regulations and California’s cannabis laws restricting certain activities, compliance is a must. As you start your cannabis endeavor in Cali, here are some considerations that can set your operation up for success:

Your Core Competencies

Think about your core strengths and how you can apply them to the legal cannabis marketplace. To succeed, you’ll want to offer the highest quality products or services. These should align with your strengths in order to form a sustainable business. Honestly identify your strengths during your assessment and determine how they might mesh with the cannabis space.

Your Team

You might have a great idea, but you’ll need an incredible team to bring it to fruition. Skilled and passionate team members will maximize your chances of success. You’ll want to create a dynamic group with expertise in all the necessary areas, such as finance, legal, quality control, etc. Other specialized skills might be required for specific types of cannabis businesses (i.e., running a testing lab).

The Competitive Landscape

Look at the competition and identify their strengths and weaknesses. You’ll want to avoid replicating a model that’s already in use or creating a product or service that’s easily copied. Look at the big picture, including your competition’s overall branding strategy and marketing techniques. Some experts even suggest looking outside of the cannabis industry for successful business models you might be able to apply to your new enterprise.


California’s cannabis space comes from criminal prohibition. Even with the end drawing closer at the federal level, avoiding criminal liability is one of the most important aspects of getting involved in the legal sector. Stay up to date on all regulations as they are often in flux.

If you need assistance, don’t hesitate to reach out for professional advice from the experts at Northstar. We’re always eager to help new ganjapreneurs entering the space!