The best advice for starting a cannabis business

Consumers continue to drive an ever-growing marijuana industry, with new opportunities emerging at every turn. Even when the market is hectic, there are still ways to make money and start a successful business. Public opinion is in favor of legalization, and it is only a matter of time before the government changes its plans to ensure more growth. If you're thinking about it, here's the best advice for starting a cannabis business.

Lonnie Rosenwald is a partner in Zuber Lawler's cannabis practice and provides valuable insight into starting a business. In the rapidly growing cannabis industry, small business owners face a variety of challenges, ranging from the typical complexities of business structures and investments to navigating the unique intricacies of cannabis contracts, banking and real estate. Building a successful cannabis business requires careful consideration of these areas of law to ensure compliance, mitigate risk and promote growth. Here is a quick guide for small cannabis business owners on five key areas to focus on: legal entities, investments, contracts, banking and real estate.

Photo by Luis Llerena via Unsplash

1. Legal entities

Choosing the right legal entity is crucial for cannabis businesses. Each state's cannabis program is different than every other state's, and the legal entity you need may be required in your state's program. In addition, each structure has advantages and disadvantages. Sole proprietorships, partnerships, limited liability companies (LLCs), and corporations all offer unique advantages. For example, LLCs are popular structures for new cannabis businesses due to the liability protection they offer their owners (“members”), along with management flexibility and favorable tax treatment. Some sophisticated investors prefer companies. A sole proprietorship is not a corporation, but it is simpler than the other business structures because only you control the business but have no liability protection. Partnerships are just that: several partners work together or invest together in the company. A joint venture is a type of partnership in which the partners are committed to a common goal; General partners cannot be protected from liability; These are usually limited partners. In the case of corporations, there is limited liability towards shareholders and employees. A decision regarding the structure of your business entity should be made with the advice of your attorneys and tax professionals who are familiar with cannabis and other applicable laws and regulations. Your company may also be required to comply with the U.S. Corporate Transparency Act when it comes to reporting certain beneficial ownership information about your company to the Financial Crimes Enforcement Network (FinCEN) (effective January 1, 2024). You should discuss with your lawyer whether you are required to report.

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2. Investments:

Due to the significant costs of real estate, equipment, and employees, securing financing through private capital raises, loans from financial institutions, and/or commitments from friends and family is often a critical step in a small cannabis business's growth journey. Investors, whether individuals or venture capital firms, are attracted to companies with a solid legal foundation, clear growth strategies, and compliance with laws and industry regulations. Entrepreneurs should be prepared to present comprehensive business plans to potential investors and lenders that demonstrate not only the financial viability of the venture but also a deep understanding of the legal and regulatory landscape. U.S. and federal securities laws generally apply to securities offerings by cannabis companies, even though your state may have a cannabis program and cannabis is illegal at the federal level. Because these laws are particularly complex, you should consult with an attorney with securities expertise before issuing shares or equity interests to members or partners in your cannabis business. Companies should have an attorney review all investor materials to avoid problems later.

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3. Contracts:

Clear and comprehensive contracts are the foundation of every successful company. In the cannabis industry, contracts play a critical role in clarifying and documenting relationships with suppliers, distributors, employees, investors, lenders and partners. Ensuring that contracts comply with state cannabis regulations (as well as other applicable laws and regulations) is critical to avoid the possibility that the contract is unenforceable or, worse, illegal. We often see clients looking to buy or sell a cannabis business, obtain loans or investments, and those entering into complex contracts for real estate or equipment leasing, cultivation, manufacturing, transportation, marketing services agreements and partnership agreements. Many of these contracts are lengthy and, of course, use legal language that you may not understand. Some involve complex rights and obligations, as well as the way in which the parties calculate various fees and expenses associated with the contract. It is advisable to seek legal advice during the contract drafting and negotiation phase.

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4. Banking:

Access to banking services remains a significant challenge for many cannabis businesses as the sale and consumption of cannabis remains illegal under federal law and most financial institutions (banks) are regulated by the United States and must follow certain regulations governing their operations. While some banks are cannabis-friendly, business owners need to build relationships with banks that have experience in the cannabis industry and understand and comply with state-specific cannabis regulations. It is essential to maintain careful financial records. Exploring alternative financial service providers such as credit unions or specialized cannabis banking services can help businesses navigate the financial landscape. Financial institutions such as banks will want to see what collateral your business has, such as ownership of real estate (leasing usually doesn't work here), to secure your promises to repay a loan. Most banks will not lend to plant-related cannabis businesses (including those with real estate assets), nor will they process your deposits, debits, or credits. Ask cannabis leaders in your state for cannabis bank recommendations; Be careful, most banks that do business with cannabis companies don't make this fact public!

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5. Property:

Cannabis businesses must carefully consider real estate considerations, including zoning, building, health and safety codes and other applicable laws and regulations, lease and loan agreements, and compliance with federal, state and local property laws and homeowner association regulations. Zoning regulations can have a significant impact on the location of cannabis operations. Therefore, it is critical to select properties where cannabis activities are permitted under local ordinances. Cannabis business compliance with local zoning regulations often requires a lengthy and time-consuming review process involving a significant amount of documents, plans, specifications and other costly information, as well as public hearings and numerous conferences with planning staff. Lease agreements should explicitly address cannabis-related activities by including cannabis use (for cultivation, extraction, retail, etc.) in the permitted use provision, allowing the landlord (and its lenders) limited access to the facility allow and, in the event of early termination, allow early termination, amend the Cannabis Act prohibiting cannabis use, and the like, while also ensuring alignment with both state and local regulations. Working with real estate professionals and attorneys who are familiar with the intricacies of the cannabis industry can streamline the process of finding and exploiting suitable properties.

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Small cannabis business owners must be thoughtful and proactive in selecting appropriate legal entities, negotiating enforceable contracts, accessing banking and investments, and purchasing real estate. Navigating the complex regulatory landscape requires working with legal and financial experts who specialize in the cannabis industry. By building a solid foundation in these five key areas, small cannabis businesses can position themselves for sustainable growth and success in this dynamic and challenging industry.

Lonnie Rosenwald is a partner in Zuber Lawler's cannabis practice GGroup. Ms. Rosenwald located in Seattle, WA. These comments are general in nature and do not apply specifically to your specific company or business situation. These comments do not constitute legal advice, Ms. Rosenwald or her company do not represent you either. We encourage you to look for it qualified Legal advice representing you or your company, particularly in relation to cannabis (touch or not) Business.