Starting a Cannabis Company: Things to Know

The cannabis industry is complex and competitive, but it is also extremely appealing to young entrepreneurs and investors alike as it continues to shift away from negative stigmas and into a more defined regulatory pathway. The rapid growth of the industry attracts cultivators, extractors, retailers, and more, and like many people entering this complicated space, you may feel overwhelmed with where to begin. Whether you’re considering opening a dispensary business, a CBD business, an ancillary cannabis business, or simply obtaining a hemp license, we’ve put together a guide to starting up a cannabis company to further your understanding of the necessary moving parts and details.

The Cannabis Industry: A Tremendous Opportunity

The enormous potential and consumer interest in marijuana and hemp products continue to drive the legal cannabis industry forward. Research shows that legal cannabis sales could reach almost $30 billion by 2025. Other studies depict a booming hemp and CBD market that could exceed $1.3 billion by 2022. In other words, these industries are growing, and fast. Federal and state law and regulations are playing catch-up. For example, the USDA just recently released its interim final rule governing the domestic hemp production program. Additionally, the Secure and Fair Enforcement Banking Act of 2019 (the “SAFE Banking Act”) is picking up speed in congress, which would provide safe harbor and legal provisions for financial institutions to work with legal cannabis businesses.

Legalities of Hemp, CBD, and Marijuana

This progress in the cannabis industry evokes the tantamount importance of industry-wide compliance for any marijuana, hemp, or CBD business. The industry is in a constant state of legal flux, with a hodgepodge of different hemp and marijuana laws across the country. Federally, marijuana is still considered a Schedule I controlled substance and remains illegal for any purpose. At the state level, however, recreational cannabis is considered legal in 11 states, and another 15 states have decriminalized it. Derivative cannabinoids of the hemp plant, such as CBD, are federally legalized, as long as they comply with the 2018 Farm Bill, USDA rules, and state legislation. What you can or cannot legally say on packaging, labeling, or web copy continues to prove a point of confusion for cannabis companies. As knowledge of the industry improves, states borrow from each other on what works in regards to regulations and what does not, and mandate change regularly.  

If you manufacture and sell hemp products of any kind across the United States, you need to familiarize yourself with all fifty states’ regulations as well as federal regulations that may significantly impact your business. A rapidly changing industry brings about rapidly changing regulations, and it’s imperative to work with experienced cannabis lawyers to ensure that your business follows protocol across the board.

Several Types of Cannabis Companies

With such a high ceiling of potential and constant legal progress, cannabis is just cracking the surface. Accordingly, expect to see continued growth in terms of the types of cannabis businesses that are necessary to facilitate a fully functioning industry. Plant-touching businesses, or businesses that deal with the plant directly, include breeders, cultivators, dispensaries, extractors, and manufacturers. These entities are responsible for the growth and distribution of hemp and marijuana plants and their derivatives. Ancillary cannabis businesses, or businesses that never encounter or deal with hemp or marijuana plants, include logistical support, technology for dispensary business software or agricultural infrastructure, and others. When starting a cannabis business, it is important to understand the different fields required to support the industry and the wide variety of opportunities that lay ahead.

Cannabis and Hemp Licensing

Obtaining licenses, such as a hemp license, is essential for plant-touching businesses. The licensing process varies by state, and the required licenses and the difficulty to obtain them varies greatly based on the business category. Under the USDA plan, for example, hemp licenses for hemp producers can be obtained at the state level through the state’s application process. Obtaining a license for cultivating or dispensing marijuana is an extensive process that can be extremely expensive and time consuming. These businesses are highly regulated, and some states may even require licensing for individual employees working at the cannabis business. With so many different legal requirements, it is critical to become acquainted with cannabis licensing policies at federal, state, and local levels, and to consult a cannabis attorney before proceeding.

Cannabis Taxation

Once your new cannabis business is up and running, you are going to face difficult taxation challenges. Internal Revenue Service (IRS) Section 280E prohibits cannabis companies from deducting ordinary business expenses from their taxes. Accordingly, cannabis companies pay significantly higher taxes than companies that sell federally legal substances. Instead of paying taxes on their income after standard deductions, cannabis companies can only deduct cost of goods sold. Companies in the cannabis industry typically end up paying income tax as high as 70 to 74 percent. Additionally, some states charge an excise tax on sales, especially on sales of recreational marijuana. It is important to work with a qualified marijuana lawyer to familiarize yourself with both federal and state tax policies on legal cannabis businesses as you begin your entrepreneurship.

As a cannabis entrepreneur, it is integral to retain a qualified cannabis lawyer to advise your business, especially in the early stages. The cannabis attorneys at Ritter Spencer Cheng assist a variety of clients in the marijuana and hemp industries, including the CBD market. We remain active in legislative activity surrounding the hemp and cannabis fields and continue to represent hemp and legal cannabis companies for their business, transactional, and compliance needs. Contact Ritter Spencer Cheng or give us a call at 214.295.5070 for more information.