Sales of recreational marijuana began in the Commonwealth of Massachusetts in 2018. Since then, we have had many clients interested in getting involved in the cannabis industry, whether growing, dispensing, or otherwise. Setting up a cannabis business properly from the very beginning is essential, especially with the multitude of differences among state and federal laws. Our clients often have many of the same questions, the first of which is always: “Where do I start?”. That is where we come in.
Entity Selection and Registration
The immediate first step for new businesses, cannabis or not, is picking the proper entity type.
A corporate entity is legally required for all new cannabis businesses for licensing, banking, and tax purposes. Additionally, a corporate entity is used to protect you, as the owner of the new business, from putting your personal assets at stake from litigation or tax audits. When deciding what entity type is right for your business, there are many factors to take into consideration including taxes and number of owners. There are three types of entities: the two types of Corporations, C-Corp and S-Corp, and the Limited Liability Company (LLC).
C-Corp: The more traditional model, C-Corps are owned by shareholders and must have a board of directors. When business decisions need to be made, the shareholders vote and the board of directors make the final decision. C-Corps do the job of protecting their shareholders and board members from financial liability; however, they have very stringent reporting requirements which they must follow in order to maintain their corporate status. Additionally, the entity itself is taxed on its profits, as are the shareholders when profits are paid out in the form of dividends. This results in double taxation, which, although can be mitigated, can be harmful to new businesses and their owners. C-Corps are the only model that makes sense for taking a company public. However, this is usually very far down the line for most companies, and not a factor that should be considered for smaller startups.
S-Corp: S-Corps are functionally similar to a C-Corp, with the added advantage of no double taxation. In the case of an S-Corp, shareholders split the income among themselves and pay the taxes individually, usually at a somewhat higher rate. However, S-Corps can have no more than 100 shareholders, a factor not great for ultimate growth. Additionally, S-Corp status is a voluntary tax election, therefore a company can be formed as an LLC and elect into S-Corp status should the need arise.
Limited Liability Company (LLC): LLC’s are typically easier to form while offering similar protections to their members as corporations. Unlike the corporations, an LLC is owned by one or more members. These members take on all of the decision making but have much less formal requirements when it comes to record keeping and reporting. Important decisions can usually be made by the members simply agreeing to them. LLC’s Individual members are protected within the business so long as they are registered and follow all state regulations and, in this case, any cannabis specific regulations. Tax liability, however, flows onto the members of the LLC, therefore, an audit could result in personal liability to the members. Unfortunately, after the passage of IRC 280E, a tax law that prevents businesses involved in the sale of illegal drugs (which currently includes marijuana) from deducting expenses on their taxes, audits are much more likely for those in the cannabis industry.
Drafting of Formation Documents
The next step is getting detailed and personalized formation documents drafted for your entity. This may be the biggest mistake we see new business owners make. They think they can save a few bucks by getting plug-and-play Operating Agreements from online sources thinking standard language will be sufficient. The cannabis industry is anything but standard. Remember it is still federally illegal! These cookie cutter documents do not take your business’ specific needs into account and in the end may end up costing more to either re-do or put your company, or even your own finances, at risk when inevitably something goes wrong. These documents should be drafted and reviewed by an attorney who understands both your specific business operations and the cannabis industry as a whole.
Obtaining a License in Massachusetts
Every type of cannabis company operating in the Commonwealth of Massachusetts is required to obtain a license to do so. These licenses are issued and regulated by the Cannabis Control Commission (CCC).
The type of license a company applies for will depend on the type of operation they intend to run. Each license type has its own pros, cons, requirements, and limitations. Additionally, each has limits on the number of licenses an individual or entity can possess, and other restrictions.
For example, for cultivation, there are four different options depending on whether you want to operate in the adult- or medical-use market and how everyday operations of the business will be run. Overall, there are 13 different types of licenses:
- Medical Marijuana Treatment Center (MTC);
- Marijuana Cultivator;
- Craft Marijuana Cooperative;
- Marijuana Product Manufacturer;
- Marijuana Retailer;
- Existing Licensee Transporter;
- Third-party Transporter;
- Marijuana Research Facility;
- Independent Testing Laboratory (ITL);
- Standards Testing Laboratory;
- Delivery-Only Licensee; and
- Social Consumption Establishment
Application fees vary greatly based on type of license and size of cultivation operation and range from $100 to $1,500. Annual license fees range from $1,000 to $25,000. It is pertinent for you to understand the needs of the company prior to beginning the application process. The application process itself has three-steps: application of intent, background check, and management and operations profile. Although a three-step process sounds easy enough, there a lot of requirements that can be difficult to manage including disclosures of in and out-of-state interests, capital requirements, property identification and interest documentation, community outreach and disproportionately harmed people plan, and proof of compliance with and plans on how to remain compliant with local ordinances. Because a cannabis company is legally unable to operate in the Commonwealth without these licenses, missteps and mistakes at this step can cost a company a ton of time and money, therefore, it’s always best to consult with experts when attempting to navigate the licensing process.
Along with real estate, physical product, and in some instances, the people, a company’s brand is one of the most valuable assets it has. Therefore, it needs to be properly protected. A very common mistake business owners make is investing too much, too early in a name or logo that is unavailable, descriptive, or otherwise unprotectable. This ends up costing way more down the line to change or modify it than it would have had it been done correctly up-front. Hiring a group of lawyers who know the law, how to properly search the Trademark database, and navigate the United States Patent and Trademark Office is a must when in the early stages of deciding on a name and logo that consumers will use to identify your company and products for years to come.
Larson Law Can Help
For years, Larson Law has been working with clients to grow their cannabis brands from planting the seeds of formation to flowering, thriving operations. Contact us at 617-932-6369 for a free consultation regarding your cannabis company.