Cannabis Business Formation Attorney
There are many steps necessary to form a legal marijuana or cannabis business in California. Once the company is formed, there are ongoing taxation and reporting requirements that vary depending upon the nature of the business. The seasoned cannabis business licensing attorneys at McReynolds Vardanyan, LLP I Glendale assist entrepreneurs in Los Angeles and throughout Southern California in setting up a recreational or medicinal marijuana business.
Below is an overview of the steps required to form a valid cannabis business entity in California. Our lawyers provide legal advice and technical assistance at every step to get your business up and running smoothly and efficiently.
Pick the Right Corporate Structure
The corporate structure of your business determines how your business is internally organized and registered with the California and federal governments. Different structures have different rules about formation, ownership, transferring ownership, dissolution, liability for owners, and taxation.
When establishing your cannabis business, you’ll choose between four options: Sole proprietorship; partnership; corporation; and limited liability company. Here’s a brief overview of some of the key elements of each type of structure:
A sole proprietorship means that you are the sole proprietor of the business. Your business income will be taxed as personal income, and you are directly open to liability–meaning if someone sues your business, you will be personally liable. With few formal requirements, this is the easiest approach to starting a business, but it also leaves you the most open to liability and is thus quite risky.
A partnership is a business including at least two owners. Each partner will pay taxes on their share of the business profits, like a sole proprietorship, rather than the partnership being taxed separately. A traditional partnership does not shield the partners from liabilities incurred by the business. You can choose, however, to form a limited partnership (LP) or limited liability partnership (LLP) which includes more formalities but protects some or all of the partners from direct liability, much like a corporation.
A corporation is a legal entity that is separate from its owners, investors, and managers. Business debts belong to the corporation, not to the individuals, and if the business is sued the plaintiffs cannot recover damages from the owners’ personal assets. The corporation can be taxed like a partnership, or it can be taxed on corporate profits, depending upon the election of the owners and the nature of the corporation. Corporations involve more formation and reporting requirements and formalities.
Finally, a limited liability company (LLC) is the newest type of business entity to be created. An LLC is something of a hybrid entity, offering its members the tax benefits of a partnership with the liability protection of a corporation.
The best entity for you will depend upon your business and your desires. Most small businesses, however, choose to incorporate as an S corporation, which is a corporation that utilizes the partnership-like “pass-through” taxation. Unfortunately, a major part of the tax benefits of the S corporation is not available for cannabis businesses; because cannabis is still considered a controlled substance under federal law, cannabis corporations cannot claim business deductions on their federal tax returns. Talk to a business formation attorney about your plans to discuss the best option for you.
Register Your Company
Depending on your corporate structure, you’ll need to go through the appropriate steps to register your business with the California Secretary of State. Corporations, LLCs, LLPs, and LPs must register, while general partnerships and sole proprietorships are not required to do so. A cannabis business attorney can walk you through the requirements for formation and registration depending on the type of business entity you are forming.
Obtain the Proper State and Local Licenses
California has a dual-licensing arrangement under which you will need to obtain both a state license to operate your marijuana business as well as a separate license under city or county law. The type of license you need to obtain will depend upon the nature of your marijuana business–distribution, manufacturing, cultivation, retail, testing, etc.
Many cities and counties either have a limited number of licenses available for certain activities (such as only allowing two retail cannabis licenses at a time) or outright prohibit cannabis businesses. Make sure you know where you want to establish your business and that the city or county allows that type of business. You’ll need to get your local license first in order to get your state license.
Obtain a Seller’s Permit Cannabis Tax Permit from the California Department of Tax and Fee Administration
If you sell cannabis or cannabis products, you need to register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit. Distributors of cannabis and cannabis products must also obtain a tax permit.
If you have employees, you’ll need to register your business as an employer and obtain a federal Employer Identification Number (EIN). You’ll also need to comply with various federal and state laws about payroll taxation, wage withholding, insurance requirements, workplace safety and health requirements, and other regulations.
Get Help Forming Your Cannabis Business from a Knowledgeable California Cannabis Business Lawyer
If you are interested in setting up a cannabis business or are dealing with regulatory, tax, licensing, or other legal issues with your hemp, CBD, or cannabis business in Los Angeles or elsewhere in Southern California, call McReynolds Vardanyan, LLP, in Glendale at 818-855-2115. Our California cannabis business lawyers will work with you to get your budding business off the ground efficiently, effectively, and legally.