Cannabis Businesses: Where to Start and How to Structure

January 7, 2020by John Reints0

It’s a great time to get into the cannabis market. The industry is expected to see more than 18% overall growth in the next seven years and North America holds the biggest market share at 88%. In the US alone, more and more states are making recreational cannabis use legal, and that means more business opportunities than ever.

That said, starting any business is a big commitment and the process can be especially difficult in the cannabis industry. You’ll be selling a substance that’s legal at the state level but still illegal federally, which means dealing with special tax considerations and financial questions that other businesses don’t have to worry about.

Getting Started in the Cannabis Industry

Your first decision should be your business type. Do you want to grow the plant? Start a dispensary? Take some time to research the laws in your state and find out what you’ll need to do depending on which business type you choose.

Alternatively, you could start an ancillary cannabis business, supporting the industry in other ways than growing or selling cannabis products. There are lots of options in this category, from media and advertising for dispensaries to the manufacture of smoking and vaping accessories.

Ancillary businesses often have an advantage from a legal and financial standpoint. Because those businesses never touch the product, owners don’t have to worry about special rules or restrictions on things like banking, credit, and taxes.

Tax Issues for Cannabis Business Owners

Paying taxes is complicated when you’re dealing with a federally controlled substance. One of the biggest challenges is that by law, you’re only allowed to deduct expenses related to your cost of goods sold (COGS).

If you have a dispensary, that means you can deduct the purchase of the product, but you can’t deduct things like payroll and marketing. You can deduct more as a manufacturer because most of your costs are related to production, but you still can’t deduct delivery. That’s still considered trafficking in a controlled substance, even if you’re in a legal state.

The tax ramifications may contribute to your decision about what type of business to start. Some aspiring entrepreneurs choose more tax-advantaged business types, while others structure more than one entity.

The Multi-Company Model

Having more than one cannabis business means that you have more opportunities to control costs. If you have both a dispensary and a cultivation business, for example, you may be able to have the dispensary cover transportation of the goods, in which case it’s deductible as COGS.

The legality of this setup varies from state to state. It’s important to check in with an experienced accounting firm like My Cannabis Accountant to understand what you’re allowed to do in your state.

Capital Structure

Like any business owner, you’ll also have to figure out how you’re going to finance your company.

Getting a loan for a cannabis business can be difficult, largely because banks don’t always want to get involved with controlled substances. Private investors will likely be more open to your idea, but you’ll have to have a solid business plan and be able to explain how you’ll pay them back.

As you plan out the logistics of your cannabis business, you’re likely to have a lot of questions. Don’t put your business at risk—talk to the experts at My Cannabis Accountant to figure out what path is right for you.

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