Structuring Your Cannabis Business for Success
The first step to starting a cannabis business is establishing a corporate structure that best fits your needs. However, selecting a structure and outlining its tax implications can be challenging and confusing. This article aims to mitigate these difficulties by providing a working knowledge of potential options in order to help you make an informed decision that best suits you and your business.
Worth noting is that there is no single best strategy; each company has distinct needs, resulting in differing solutions. Please consult with an attorney and accountant before making any decisions.
There are three major options to consider, which will be outlined below alongside its potential positives and negatives.
Limited Liability Company (LLC)
An LLC is a popular corporate structure because of it’s flexibility and status as a pass-through entity, which means that the company itself does not pay any income tax. Instead, the profit and losses are passed through proportionately to its members. For example, if 2 people each own ½ of a company that makes $1 million, they each pay taxes on $250,000. The major benefit of pass-through entities is that employees can avoid double taxation, when income gets taxed on both the corporate and personal levels. Another benefit of LLCs is that members can be anyone: individuals, corporations, or even other LLCs. This structure is best for small businesses – such as holders of cannabis micro-business licenses – because they are simple to operate and provide protections for employees.
S-Corps are similar to LLCs, specifically because they are both pass-through entities. Their additional benefits include slightly more legal protection for owners, and the fact that the tax code is more accommodating for corporations, making it much easier for S-Corps to cross state and national boundaries. However, its major drawbacks pertain to decreased flexibility; for example, all shareholders must be individuals, and there is a requirement that a “reasonable” salary be paid to owners. This structure is most suitable for businesses who prioritise pass-through entities but are planning on scaling either nationally or internationally.
Since C-Corps are also corporations, they are similarly beneficial for businesses looking to cross state and national boundaries. However, they are less common because they are not a pass-through entity, meaning that the corporation itself is responsible for paying income taxes. The major benefit of this is that business owners are protected against potential downfalls if they have difficulty paying their portion of taxes; however, this structure is less tax efficient because individuals are double-taxed. In general, C-Corps are the least risky option but also the least flexible, making them a good option for small businesses that do not mind missing out on flexibility.
Although there are other potential structures, such as sole proprietorships, these 3 are widely considered to be the top options. Still, regardless of the entity, the priority should be to make a written agreement that lists out the duties and obligations of each shareholder, such as the sharing of profits, voting rights, and management of the business. Throughout the process of creating a successful business, Opus Consulting is here to help: please contact our team for any assistance.