It's 2018 and California has finally rolled out its long anticipated cannabis regulations. Well kind of that is. Many laws are still being contemplated, unveiled and then again revised. Businesses can certainly expect the laws to evolve for several months to come as the State and local jurisdictions determine the best ways to regulate the cannabis industry.
Nonetheless, you are eager to garner your entrepreneurial spirit and take your talents into the cannabis industry. That's fantastic! The only trouble is you don't know where or how to get started and launch your business and do so LEGALLY. Don't fret. With a bit of guidance and direction you will be well on your way. Importantly, you need to have a plan and realistic expectations of what is needed to get started.
Whether you want to cultivate, start a dispensary, a delivery service, or manufacture, it is imperative that you know the essential considerations of starting a cannabis business. Here are our top five considerations for every aspiring cannabis entrepreneur.
# 1 - Location, Location, Location
The State of California may permit the commercialization of cannabis businesses but that doesn't mean it is legal everywhere within the State. The first step is to check the city and county you want to do business in and determine if they allow cannabis businesses or not. If your locality is not permitting cannabis businesses, make sure to check back often as cities and counties are evolving and changing their stance as consensus builds statewide.
Second, even if your locality allows cannabis businesses, you need to assess the local landscape for available real estate. You should assess whether it is more advantageous to buy or lease space and whether available spaces exists in your jurisdictions cannabis "green zones".
Third, consider the taxes imposed by the locality you wish to do business in. For instance, the City of Sacramento imposes a 4% tax on the gross receipts of all cannabis businesses. The City of Davis imposes a 10% tax on most non-medical cannabis businesses. For some types of businesses, Sonoma County does not impose any local taxes at all. As one can see, local taxes can play an important role in your businesses bottom line depending on where you choose to set up shop.
# 2 - Licensing
All businesses conducting commercial cannabis activities must be licensed. And, you must obtain licensing from both your local jurisdiction and the State of California.
Local licensing is anything but uniform and may vary widely from locality to locality. It is important to know the ins and outs of each jurisdiction's requirements to best position yourself for success. From permit types, operational requirements, and application costs and renewal fees, you must assess the local ordinances of your jurisdiction and the costs to get up and running. When applying for a local license, you should be expected to have a location secured, the landlord's consent in writing if you will be renting space, business entity information, know which individuals within the business qualify as an "interested party" which varies by jurisdiction, detailed planning information including business plans, site plans, operating plans, and security plans, and commercial insurance among other requirements.
At the state level, licensing requirements depend on the type of business you wish to operate. The Bureau of Cannabis Control governs testing laboratories, distributors, and micro-businesses. The Department of Food & Agriculture regulates cultivators while the Department of Public Health oversees manufacturers. Each agency has their own unique, in-depth regulations which must be strictly complied with.
# 3 - Set Up a Corporate Structure
Just like any other business enterprise, your cannabis business should be held in some form of a corporate structure. Whether it's a non-profit, a corporation, or an LLC, a multitude of factors should be considered when determining the best corporate form such as:
- the type of business venture;
- how you wish to operate your business;
- tax consequences;
- individual liability; and
- transferring assets and interests.
One should consult with a tax and legal professional to determine the best corporate structure that makes since with your desired goals.
# 4 - Get It In Writing!
This may be the most important consideration of all. Most cannabis businesses are not started alone and are the result of two or more people coming together with different backgrounds, experiences, and resources to offer to the business. In many scenarios, one party will have cannabis product related knowledge while the other party brings the financial resources to get the business up and running.
Both parties are eager to start a new business, spend long hours getting licensed and operational, yet never prepare any formal written agreements outlining the terms of their agreement. Inevitably, after months of hard work, one side feels it is contributing more than the other as to what was agreed to and acrimony ensues. Without any written agreement, the parties are left with their recollections of what was agreed to which almost never coincides. Quickly, the parties find themselves staring down the barrel of a costly and time consuming lawsuit.
The solution: Consult with your legal counsel and get a well thought out written agreement beforehand detailing the parties' terms as well as having contingency plans to deal with disputes that may arise later. Many clients find out the hard way that had they spent the time and money up front to solidify their agreements in advance with counsel, they likely could have avoided protracted litigation. Among many considerations, agreements should at least define the parties': (1) interests and contributions; (2) responsibilities and obligations; (3) authority and decision making; (4) and how disputes are to be handled.
By having an agreement that clearly defines the parties' rights and obligations up front, the parties are more likely to achieve certainty in what is expected, transparency and confidence in their business partners, and less likely to resort to costly litigation.
# 5 - Risk
One cannot forget that cannabis remains illegal under federal law as a Schedule One narcotic under the Controlled Substances Act. While California has legalized the commercialization of cannabis and set up a comprehensive regulatory structure, the federal government still possesses the authority to shut down cannabis operations that conflict with federal laws.
Recently, Attorney General Jeff Sessions issued a memorandum on January 4, 2018 to U.S. Attorneys across the county rescinding an Obama-era directive that allowed for state compliant cannabis businesses to operate. Attorney General Sessions' Memorandum undoubtedly creates unnecessary risk as to whether federal authorities will crack down on cannabis businesses within a respective district. Although state official expressed that California will defend its cannabis laws against possible federal enforcement, cannabis business owners must still appreciate the fact that their business could be shut down at any time and subject to civil and criminal repercussions.
The takeaway: find a locality that you're able to operate in, plan ahead, and brace yourself for what is expected to be an evolving regulatory landscape during California's maiden voyage into the commercial cannabis marketplace.
Scott Radcliffe chairs the firm's cannabis practice and is a member of the National Cannabis Bar Association of attorneys. Scott routinely advises cannabis businesses on issues of state and local regulatory compliance as well as aggressively representing clients in complex cannabis disputes. Scott is based in the firm's Sacramento office and can be contacted at 916-333-3375 or [email protected]. For more information on the firm's cannabis practice, visit us at www.alvesradcliffe.com.