As you begin researching options for structuring your new cannabis business, you’ll likely notice that a lot of cannabis companies decide to become “C-corps.” That’s because a C-corp gives you more opportunities to separate your personal and business finances.
State and Federal Cannabis Laws
As of 2020, it’s legal in 11 states for adults over 21 to use cannabis for recreational purposes. When you add in states where cannabis is legal medicinally, the number goes up to 33.
At the federal level, though, cannabis is still a “controlled substance.” Under federal law, it’s still illegal to grow, transport, and use any cannabis product.
That doesn’t mean that the feds are going to come in and raid your dispensary—as long as you’re operating in a state where it’s legal, you’re allowed to sell your product. But it does mean that a cannabis business has more financial liability than other types of businesses.
It’s Not Personal, It’s Business
The safest way to deal with the liability of owning a cannabis business is to keep your personal and business finances separate. That means you don’t want to have a business type that will require you to file a Schedule K-1.
A Schedule K-1 is a tax form that you have to fill out if you own a company that passes through taxes to owners. “Passing through” means that the profits from your business don’t stay on the company’s books, where they’d be subject to income tax. Instead, they move directly through to the owners’ or members’ personal accounts.
Pass-through entities include sole proprietorships, limited liability companies, and S-corporations. The differences mostly have to do with whether the company, the owners, or both are subject to income taxes.
It’s perfectly legal to have a cannabis business as a Schedule K-1 company, but then you’ve got cannabis income on your personal record. That’s not illegal either (again, assuming you’re doing business legally with the right licensing). However, there’s still some stigma surrounding cannabis in the banking world.
Many banks and lenders don’t like to get involved with money made through selling cannabis. You might have difficulty getting credit or a loan if the income from your business is on your personal books. It’s much easier to have a C-corp and pay yourself through that company.
What Is the Benefit of Having a C-Corp?
When you have a C-corp, the company pays corporate taxes and you pay yourself as a separate transaction. You still have to pay taxes on your income, even though the company has already paid taxes on its income. This is called double taxation, and it’s the reason why business owners in other, less regulated industries sometimes choose to avoid C-corps.
In the cannabis world, however, C-corps are the safest and most secure way of structuring. It forms a legal barrier between your personal assets and those of the business, so you don’t have cannabis revenue on your books.
The structure of a C-corp is more complex than you’d have with an S-corp, LLC, or sole proprietorship and you’ll want to consult with a lawyer or accountant to decide if it’s right for you. My Cannabis Accountant has been working with cannabis business owners since 2015. To learn more about why and how you form a cannabis C-corp, get in touch today.