How Smart Formation adds to your bottom line and reduces your risk.
Starting a cannabis business involves a complex maze of forms and regulatory compliance rules. From company formation to land use approval to state and local licensing, the process takes several months. Additional weeks and months can be lost if forms are completed incorrectly or the business structure was set up incorrectly. Time is money and I have heard from many cannabis entrepreneurs that have run into trouble for not budgeting for the delays. To help cannabis entrepreneurs I will be blogging about each step in getting a cannabis business from idea to operation over the coming weeks. Today I am going to cover Smart Formation.
Getting your business structure right up front can save you time and money, not just during startup but also after you are up and running. A best practice to follow for Smart Formation is to create multiple business entities. Why add the overhead of different business entities? Investing upfront in a multiple entity strategy will yield meaningful increase in your bottom line through tax savings. The reasoning behind this is due to an IRS Rule called 280E. In a nutshell, 280E says that a cannabis business can deduct costs for goods sold (all the costs that are involved in actual plant production). However, 280e also says that a cannabis business cannot deduct operating expenses.
By creating a separate business entities for each “cannabis company” – the ones that need to be licensed and a company to hold property (and associated development costs of the facility), you can recover over 90% of the otherwise disallowed operating costs. In some case it may also make sense to have a separate company for your brand as a means to further recover operating costs.
Another value from the Smart Formation strategy is that you can reduce legal and business risk by having each license in a separate company. For example, if you have three retail locations and have a liability issue at one location (customer trips and breaks their leg in your store), the other two retail locations are sheltered from liability.
I look forward engaging with readers on this and future blog posts. Together we can bring this exciting new industry into the mainstream by developing mature processes and practices.
Disclaimer: I am not an attorney or an accountant. My advice above is from one entrepreneur (me) to budding cannabis entrepreneurs based on several years of consulting in the cannabis industry. As a cannabis business owner, you need to retain and consult an attorney and CPA for your business.
Covered360 was founded by leaders serving the cannabis industry through providing professional legal, accounting, strategy and operations advice to cannabis businesses.