If you’re starting a Cannabis business, you’ve probably at least considered forming an LLC. The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well. Read on to learn more.
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The top reason to form an LLC for a marijuana retailer is to gain access to the personal asset protection provided by this business structure. Whether you operate a medicinal dispensary or a recreational retail shop with a wide variety of products, you need the limited liability protections that an LLC can provide.
As an example, let’s say that a customer slips on a wet spot on your floor, falls over, and injures themselves. If you operate your cannabis store as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that customer decides to sue your business.
On the other hand, if you form an LLC for your marijuana retail store, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a cannabis retailer. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Of course, it’s important to note that marijuana businesses in some states have some industry-specific taxation guidelines to follow, which can change the landscape a bit compared to most other business types. Still, there are some distinct advantages to be gained from the way an LLC gives entrepreneurs a choice when it comes to taxation models.
Your marijuana LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your cannabis store itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your pot shop to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most marijuana vendors have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your cannabis shop save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership pot shop, the S corp taxation model can save you quite a bit of cash that you can use to buy expensive equipment upgrades and make other improvements to your store, rather than writing a big check to Uncle Sam.
However, we will note that there is some confusion regarding which business expenses can and cannot be deducted for marijuana businesses, due to the substance’s legal status on the federal level. It is a certainty that at least the cost of products distributed as part of your company’s total sales can be deducted from your gross business income.
Beyond that, the fact that marijuana remains a controlled substance on the federal level brings into question the deductions available on distributions from this business type. For more information, we recommend that you contact an attorney or accountant.
Finally, an LLC structure can enhance the credibility of your cannabis business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a marijuana dispensary.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another pot shop wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
If you’re ready to officially start your business and protect your assets, let ZenBusiness take care of the paperwork. We have formed over 500,000 businesses and received thousands of positive customer reviews.
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.
Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.
The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.
The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can easily obtain an EIN from the Internal Revenue Service free of charge.
Most states don’t require operating agreements but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.
You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.
Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Cannabis vendors are subject to strict licensing requirements, and each state’s guidelines vary considerably. Make sure that you know exactly what your state expects and follow the rules to the letter to avoid serious legal issues. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.
Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up-to-date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.
There are plenty of online tools and resources for cannabis entrepreneurs, but none are as valuable for getting a marijuana retailer off the ground as Weediom. Their 27-part how-to guide describes everything you need to know to open your pot shop, from startup ideas and business planning resources to information about product providers.
With Marijuana Doctors, you can access resources for physicians, patients/customers, and recreational dispensary owners. You’ll find video tutorials, articles, blogs, case studies, a symptom tracking tool, and much more. Marijuana Doctors isn’t the most regularly updated site out there, but their information is still highly relevant.
The NCIA’s mission statement is “to promote the growth of a responsible and legitimate cannabis industry and work for a favorable social, economic, and legal environment for that industry in the United States.” They do this by advocating for policy updates, hosting trade shows and other events, and providing a wealth of news and resources through their website.
Leafly is an incredible resource for marijuana retailers, as they provide an online portal for vendors to market their products for pickup or delivery, and they also offer a search function for consumers to find the nearest pot shop. In addition, we really appreciate their industry news page, which includes “tips, news, and advice for dispensaries.”
As you may have gathered from their name, THCBIZ is a comprehensive resource and business directory for dispensaries. They feature different cannabis industry businesses each month, and they also offer a wide variety of tools and resources for business services, cultivation, dispensaries, education, legal services, products, software, and more.
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If your business produces cannabis products, you may be subject to product liability lawsuits if you sell defective goods or misrepresent your products. Furthermore, cannabis retailers have liability issues from things like slip-and-fall accidents that can occur in any brick-and-mortar business. In short, marijuana businesses have plenty of potential liability risks and should not be operated as informal business entities.
Everyone’s situation is different, and we are not here to provide legal advice. That said, the limited liability company has some concrete advantages over the corporation that makes it the preferred option for most small businesses.
Corporations tend to have more complex formation and maintenance requirements, and they don’t have the taxation advantages of an LLC. The corporation has some advantages of its own (for example, it’s easier to attract investors to a corporation) that make it worth a look but the LLC is a simpler and more flexible business structure.
You certainly can! Every state allows entrepreneurs to serve as their own registered agents. However, while the role of the registered agent can seem like that of an unnecessary middleman, there is more complexity to this position than some people realize.
For instance, you would need to be present and available at your business location during all standard business hours. In addition, if you serve as your LLC’s registered agent, you may need to make your home address a matter of public record. Not only does this have privacy concerns, but there’s also the matter of unwanted junk mail as well.
The DIY route is always an option for LLC formation. However, LLC services are so affordable that there’s really no good reason not to use one these days. In addition, some of these companies often throw in free bonus features that make them an even better bargain.
Some people like to form their LLCs in states with favorable legal settings. For instance, Delaware is often seen as the most business-friendly state, as it has an entire court system that’s dedicated solely to business matters. As for Wyoming, this state has some of the most generous anonymity laws for LLC ownership.
However, for most people, your best option is to simply form your business in your home state. Forming in a different state can be a tremendous hassle, and it can add some unnecessary complexity to tax issues as well.
The costs of LLC formation can vary quite a bit depending on which state you’re forming one in. For in-depth information about LLC formation costs in your specific state, take a look at our comprehensive guide to state-by-state expenses.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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