How to Start a Cannabusiness
The cannabis industry is red hot, with the US market alone expected to reach $75 billion by 2030 and the global market projected to cross the $90 billion mark in just four short years.
But fast growth doesn’t always indicate smooth sailing ahead. The cannabis industry for startups is rich with regulatory red lines and limitations seemingly everywhere you look. But for those committed, there are alternative solutions available, like angel investors, instead of bank lending or using cannabis industry attorneys to confirm tricky licensing requirements.
Here’s what to know as a founder to start your cannabusiness, including some of the most common steps (and challenges) you may encounter along the way:
Decide What Kind Of Cannabusiness To Start
Traditionally, cannabusinesses are thought of as companies involved in the selling of cannabis or cannabis-based products. But cannabusinesses are also involved in production, manufacturing, distribution, testing, or other auxiliary services.
When forming your cannabusiness, decide which direction you want to take it and in what capacity you want to be involved.
The most common types of cannabusinesses include:
- Manufacturers – Manufacturers, or producers, are those involved in the original production of the cannabis product. Growers are the foundation of the industry, turning seeds into plants that are ready to harvest and then into cured dried flower. They may also extract concentrates to create consumer goods.
- Distributors – Distributors purchase cannabis products, such as concentrates or dried and prepared flower, in wholesale quantities and then sell these products to retailers.
- Retailers – Some states require medical marijuana dispensaries to produce and process their own cannabis products, others typically purchase inventory from distributors or growers directly and sell to consumers either online or in-store.
- Others – Lab testing is another common kind of cannabusiness, which tests and assures the safety of cannabis products. Since labs are cannabis-touching, even though they aren’t involved in the buying or selling of the product, they are required to be licensed by their state and are subject to state industry regulations. Others include marketing, packaging, growing/cultivation supply retailers, and other vendors such as marijuana insurance and industry technology.
Create a Business Plan
Once you’ve chosen a type of business, begin formulating your business plan. Just as with any other business, you’ll need to think through your entire business idea, including the startup costs, product-market fit, marketing strategy, and industry research. But with cannabusinesses, you also have to take into account the additional federal and state regulations.
Ensure your business plan follows every law in your state. The laws and regulations are constantly changing, so your business plan will likely need to change along with them.
As you draft your original business plan, include the following:
- Executive Summary: Who you are, what you do, and the problem you solve.
- Market Opportunity: Target market, business model, competition, unique value proposition.
- Marketing: How you plan to attract customers, buyer personas, price, and promotion strategy.
- Operations: Facilities, technology, equipment, and staffing needs.
- Compliance: Current regulations, standard operating procedures (SOPs) to address changing regulations, and legal counsel.
- Company/Team: Leadership, investors/board, employees, and vendors.
- Finances: Current situation, future needs, investment goals, cash needed for business costs, and when you plan to turn a profit.
Register Your Entity & Obtaining Licensing
With internal decisions made such as the type of business and business plan, take your cannabusiness to the next level by officially registering your entity with your state, choosing a business name, and obtaining necessary licensing.
Before you officially register, select a business name by first conducting a business name search in your state to make sure the one you want is available. If it’s available, you’ll pay a small fee to your state to reserve the name for a certain period. Once you have confirmed this information, you can use it to register your entity.
The decision you make when registering your entity will impact the level of risk you take on as a business owner as well as the taxes you’ll pay. Cannabusinesses commonly lead toward the limited liability company (LLC) or corporation entities due to the personal liability protection they provide. The options to choose from include:
- Sole proprietorship: A sole proprietorship is the simplest as far as setup and admin go. Most states don’t require you to formally file any documents, but you will still need to follow all state and local regulations and requirements to operate the business legally. With this entity, all liabilities and assets are held by the owner and business profits will be taxed as your personal income. The downside here is being personally liable both financially and legally for the business, leaving personal assets at risk if the company is sued or is unable to pay debts.
- General Partnership (GP): A general partnership is like a sole proprietorship except it has more than one owner. In this case, owners share all responsibility (financial, legal, management) for the business. Profits are taxed as personal income split between the two partners. Filing state paperwork to register the business is often optional.
- Limited Partnership (LP): A limited partnership limits the liability of certain partners. One partner is considered the general partner while the other has less involvement as well as less liability. General partners of an LP assume personal liability for the business’s legal and financial obligations.
- LLC: Limited liability companies provide small business owners with some protection from personal liability and greater flexibility to manage their company. Profits are taxed as personal income passed through LLC members.
- Corporation: A corporation is a completely separate legal entity that limits its shareholders (owners) liability. The corporation pays taxes on its profits and shareholders often pay personal income tax on dividends they receive. This is where the term “double taxation” is often used. They also face more extensive compliance requirements. However, corporations protect owners and offer more deductions than other types of entities.
As for licensing, it depends on the state where you’re registering your business. Each state has its own laws surrounding cannabis businesses, so many types of licenses may be available.
The first thing to do is find the appropriate regulatory bodies to report to. Most can get licenses through government agencies such as the Department of Consumer Affairs, the Department of Food and Agriculture, or the State Department of Public Health (like in California).
You can find helpful information on licenses and permits through FindLaw’s directory or a cannabis industry attorney. There are many kinds of licenses specific to the type of cannabusiness you’re operating, such as distributor licenses, manufacturer licenses, and retail licenses.
For example, in California, they have 12 types of licenses. These include licenses for:
- Manufacturer: Manufacturer 1 (Non-Volatile), Manufacturer 2 (Volatile Solvents), Specialty Small Cultivation, Small Cultivation, Nursery Cultivation, or Medium Cultivation
- Distributor: Distribution or Transporter
- Retail: Non-storefront Retailer or Storefront Retailer
- Other: Testing Laboratory
This is not an exhaustive list of California cannabis licenses. There are also subcategories within each type, such as indoor or outdoor cultivation.
In addition to marijuana-specific licensing, you will also need your general business license.
Designating a Registered Agent
In some cases, you may need to designate a registered agent, which is someone who can receive important business-related paperwork, such as:
- Corporate filing notices
- Lawsuit notices
- IRS notices
- Court summons
Your business will also need to register to pay taxes, but the details of how to go about it depend on your state. But before you get to that, first register for an employer identification number, or EIN, which serves as your business tax ID. To do this, go to the IRS online and apply for a near-instant approval. And, it’s free.
You’ll need an EIN during tax season to take care of income and payroll taxes as well as in the case you decide to open a credit card or bank account for your business or apply for funding.
The Cost of Starting a Cannabusiness Startup
The costs of starting a cannabusiness from the ground up go beyond just licenses and registration. Other fees to look out for include:
- Licensing and Registration Fees – cost to apply for cannabis license, register, and renew registration annually
- Real Estate – high rent prices and cost to renovate
- Security and Surveillance – necessary for cannabis cash businesses
- Banking fees – banking access is limited, and private marijuana banks or credit unions can charge hefty holding fees
- Taxes – Can’t deduct business expenses a federally legal business can
- Business Equipment
- Professional Services
What would this look like for a real business? In California, your startup costs for a cannabis dispensary might look like this:
- $1000 to apply for a dispensary license
- $4000-12000 licensing fee if approved, based on the value of the operation
- $50k-100k annually for real estate startup costs
- $30-40k annually for budtender salaries
- Total up-front investment of $80-250k and ongoing operating costs around $30k-70k per month
Getting Your Cannabusiness Funded
Faced with the reality of these startup costs, marijuana businesses need funding to cover their initial and ongoing expenses. While it’s harder for cannabusinesses to find small business loans and traditional loans from banking institutions, it’s possible to find alternative lenders that aim to fill the funding gaps for cannabis startup founders. Still, your cannabis funding options will be limited.
Equity funding involves selling an investor (commonly an angel investor) a stake of ownership in the company. Funds don’t need to be repaid; the investor can cash out their stake of ownership when the company gets acquired or goes public.
With debt funding, a founder takes out a loan that needs to be repaid with interest. Debt loans can include private loans, real estate loans, cash advances, or equipment leasing. Debt funding is hard to come by and is determined by lending viability indicators such as credit score and cash flow.
Cannabis-specific angel investors, like Steve MacDonald, fund startups they believe in with personal funding. They are often more closely involved in operations, offering advice, valuable experience, and capital in exchange for equity in the company.
Learn more on Cannabusiness Banking: Solutions for Your Financial Needs
How MacDonald Ventures Can Help You Get Started
Given the nuances and complications of starting a cannabusiness, it’s critical to find solid funding that can cover the steep initial and ongoing costs to operate a cannabis business. The simplest funding solution outside of the minefield of limitations imposed on typical bank funding for cannabusinesses is a private angel investor.
As a cannabis angel investor, Steve MacDonald offers his own private capital along with his expertise to help marijuana startups overcome regulatory obstacles and find success in the burgeoning market, even despite the additional challenges of the pandemic. His other cannabis investments include Kush, an online marketplace for cannabusinesses.
Take your cannabusiness to the next level with angel investor funding. Reach out to Steve MacDonald of MacDonald Ventures.