Financial Considerations in Cannabis
Are you considering a business in cannabis that contains THC? It is very tempting and can be quite lucrative – provided you have thoroughly planned for some of the financial burdens of getting into this industry. Below are some areas that you need to consider:
Business structure: I cannot stress how important this area is. Are you planning on being a sole proprietor, S-Corp, C-Corp, LLC, partnership, LLP, etc. You should speak with a professional who can tell you the pros and cons of each structure – not just legally, but also the tax ramifications. Each type of entity has a list of pros and cons. You should understand all of it before deciding which type of structure to choose.
Side notes on LLC structures:
- They are created under state law and are not recognized by the IRS.
- They are relatively new, and the liability has not yet been tested in the courts.
- When filing federal taxes, you must decide if you want to file as a sole proprietor (if you are the a single-member LLC), as a partnership, or as a corporation. Be sure to discuss this with a tax professional.
Banking: Until congress decides to make changes in either banking laws, de-scheduling THC, or some combination of both, banking will continue to be an issue. What are your plans if you cannot get banking? Do you have a safe place to store your cash? What procedures will you put in place to minimize theft? Do you know how to run a cash business? How will you handle payroll as a cash only business?
Security: Due to the amount of cash that will be in your business, have you planned for the level of security you will need in your business? Many states that have legalized the sale of THC products have strict security requirements. Be sure to understand, and financially prepare for, those costs.
Accounting systems: Due to Internal Revenue Code section 280E, you need to work with an accountant who understands 280E of the tax code as well as a solid understanding of cost accounting as it is a requirement to minimize the tax consequences of 280E.
Before you jump into this industry, be sure you talk with professionals who are well versed in all areas of the industry – especially the financial component.