Business Structuring & Finance

Determining a corporate structure has important legal and financial implications as it affects the entity’s tax obligations and the extent of the owner’s personal liability. This is particularly true in the cannabis industry because of its federal illegality. You may choose to register your company as a Sole Proprietorship, Partnership, C-Corporation, S-Corporation or an LLC/LLP. Pros and cons are associated with each option.

Sole Proprietorship. This structure means you run the business by yourself. It is easy to set up and your income is reported on your personal income tax return. You assume all liability, which puts your personal as well as business assets in jeopardy. Investors hesitate to invest in sole proprietorships.

Partnership. More than one person owns the business and the owners share the responsibility for business obligations. Income and loss are passed through to the partners, eliminating double taxation. Fundraising options are more numerous vs. a sole proprietorship.

C-Corporation. A C-Corp is owned by shareholders who are not personally liable for the company’s obligations. Money may be raised through stocks and investments. The business is taxed on income at the corporate level and the owners are taxed again on their personal tax returns, resulting in double taxation. This means that C-Corps have the highest total tax liability of all the business structure options.

S-Corporation. An S-Corp is created at the state level and can have up to 100 shareholders (investors) and a single class of stock. An S-Corp is a pass-through entity, meaning that all income taxes are paid via the owners’ income taxes, thus avoiding double taxation. S-Corps generally have higher tax service and legal costs.

LLC/LLP. A limited liability company (LLC) and limited liability partnership (LLP) must be registered with the state. Obeying state regulations protects members from personal liability. Fewer regulations are in place vs. an S-Corp or C-Corp, but members are required to pay a self-employment tax for Social Security and Medicare.

Cannabis CPA’s cannabis corporate structure consulting helps our clients sort through pros and cons of the various business structures. Here are a few of the factors we consider when helping cannabis businesses make this important decision:

Personal Liability: While pass-through entities are appealing when it comes to taxation, some cannabis business owners prefer to register as C-Corps to minimize their personal liability, especially in light of tax code § 280E.

Bank Account Access: Some cannabis businesses elect to set up another entity just to open a bank account legally. An experienced attorney should be involved if you choose this route; you don’t want to be accused of money laundering.

State Requirements: Some states require medical cannabis dispensaries to operate as non-profit organizations. However, federal non-profit status is not possible, which means that C-Corp status may be a better option for such organizations.

Business goals, the need for funding, the owner’s aversion to risk, taxation preferences and other circumstances differ from one cannabis company to another. Therefore, choosing how to structure a cannabis business is a decision that can be made only on a case-by-case basis. The professionals at Cannabis CPA are knowledgeable and experienced in all financial and taxation aspects of running a cannabis company. Isn’t it high time you scheduled your free consultation with us?