280E & Tax · From the archive

Why So Many Cannabis Businesses Are Set Up as C-Corporations

The pass-through trap that drives the choice

In an LLC or S-corp, income flows to the owners' personal returns — including income inflated by 280E's disallowed deductions. Owners pay personal tax on money the business genuinely spent but could not deduct: phantom income, at personal rates, often without cash distributions to cover it.

A C-corporation contains that distortion at the entity level. The corporation pays the 280E-inflated tax at the corporate rate, and owners are taxed only on what is actually distributed. For many operators, that containment alone justifies the structure.

What the C-corp costs you

Double taxation on distributed profits, less flexibility in pulling money out, and a harder exit in some sale structures. In a normal business these costs often outweigh the benefits. Under 280E, the math frequently flips — but not always, and not identically across license types.

How the analysis actually runs

The variables: your capitalizable-cost profile (cultivators fare differently than retailers), planned distributions, growth versus harvest posture, exit horizon, and state tax treatment. There is no universal answer — there is a modeled answer for your specific numbers, and it is worth modeling before formation rather than after. Restructuring is possible; starting right is cheaper.

This article is general information, not tax advice.