Before you start any business, and especially before you start a new cannabis business, you should have some idea of what the industry landscape is like. What’s the earning potential? What are the risks? Who is your competition?
Given the cannabis industry’s short history, no one can be fully confident in how the cannabis industry will unravel — and how cannabis businesses will fare. So, a huge thing to consider is the demand in your area where you’re planning to start your cannabis business and how you can set yourself apart from others offering the same service. After all, you’re not the only one wondering how to start a cannabis business when a new state get legal.
As more and more states legalize the plant, cannabis businesses – even existing ones – are presented with more profit-earning potential. Think about it. Since legalization in 2014, Colorado’s regulated cannabis industry sales have topped $6 billion. And sales are projected to reach $50 billion by 2026 — further proving the potential of a lucrative industry.
So here’s what you need to know before starting a cannabis business and the steps to take if you decide to enter the cannabis industry.
1. Decide what kind of new cannabis business to start
Normally, the first step for starting a business would be coming up with a business idea, but if you’re ready to start a cannabis business, you already have that step completed.
What you do need to decide, though, is what part of the cannabis business you want to be in. Do you want to open a dispensary, grow cannabis or deliver it? Or, maybe you want to do it all!
Either way you go, the steps to starting a cannabis business can’t progress until you’ve decided on this aspect. Many of the other steps for starting a business will be fairly basic, but remember that with cannabis businesses the laws from state to state can change drastically and you need to be very sure of them before taking action. You’ll want to spend a lot of time doing your research so you completely understand the rules around where and how you can sell cannabis.
Talking to people who’ve started cannabis businesses of their own is also a good place to start. Josh Delaney started and grew his CBD company from zero to a $26 million exit because he picked exactly where he wanted to be in the cannabis industry and then stayed laser focused.
2. Write a business plan
When starting a cannabis business, your business plan will need to be a bit more detailed than it would be if you were opening a less strictly regulated business like a restaurant or jewelry business.
First of all, make sure you’re following every law in your state. From where you want to open your cannabis business to who your suppliers will be, make sure everything is in line with the law. The most surprising thing about having a cannabis business for new cannapreneurs is the amount of regulation that’s involved and how it’s constantly changing.
Your business plan will likely continue to change as the laws do, but it’s key to have it in place when you’re first starting a cannabis business.
Now when you create your first business plan make sure it includes:
- Business costs and when you plan to turn a profit.
- How you plan to attract customers.
- What will set your business apart from others like it, and who your competitors are.
- Who your suppliers will be.
- Whether you have legal counsel to help you keep everything in order.
- And, accounting services to keep your books and records, and seed-to-sale tracking because that’s critical in our industry.
One of the reasons why investors don’t invest in a cannabis business is because there’s no business plan. No business plan means no investment. Full stop. It’s really that crucial!
3. Register your business name and entity
3. Register your business name and entity
Since cannabis isn’t legalized on the federal level, and federal law prevents the interstate sale of cannabis, big businesses have generally stayed away from the cannabis industry. So, it’s a prime industry for local businesses to enter. Your cannabis business will likely be local and on a smaller scale, but you still need to choose a business entity that’s right for you. The business entity you choose will affect the taxes you pay and the level of risk you’re personally exposed to.
You might be leaning toward opening your business as a limited liability company, also called an LLC, or maybe a corporation. Both entities can shield owners from personal liability but there are some key differences when it comes to an LLC vs. a corporation. So, it’s important to think through the full list of considerations when setting up of your cannabis business.
And, next comes the fun part: choosing a name for your cannabis business. The process for choosing a business name is specific to your state. Generally, you should conduct a search to ensure the name you want is available. Then there’s a small fee associated with reserving your name for a set amount of time. Nail down both of these things before you try and register your cannabis business, as you’ll need this information to do so.
4. Register your new cannabis business and obtain licenses or permits
Every state has different laws around starting a cannabis business. And with them, different types of business licenses, permits and registration practices. Do your homework. Ideally contact a legal professional in your state who can help you sort through everything to register your cannabis business and get the proper permits.
Before starting any cannabis business, you should know exactly what documentation, licensing and regulatory bodies you need to comply with to start and operate your business. And especially if you’re applying for a social equity applicant license. Some states, like California, have portals designed specifically for the licensing of cannabis businesses. And many states have entire websites designed for entrepreneurs looking to start a cannabis business.
Keep in mind that simply being a cannabis retailer or dispensary owner also comes with different rules and regulations than a business that grows or delivers cannabis. All of these cannabis-specific permits, licenses and registrations come in addition to registering your business in the state.
Don’t forget that while you’ll be saddled with more cannabis-specific tasks, you also have to do all of the other work when it comes to taxes and registration that a regular business would have to.
5. Register to pay taxes
5. Register to pay taxes
Taxes will also depend on the state in which you’re starting your cannabis business. However, no matter where you’re starting your cannabis business, you should apply for an employer identification number, which is also called a business tax ID number.
You can apply for an EIN online directly from the IRS and get approved almost immediately. You’ll need it when tax season rolls around and to pay payroll and income taxes for your business. Your EIN will also be necessary if you decide to open a business bank account or credit card, or if you apply for funding.
6. Get funding and growth capital
Every new entrepreneur has to face the reality of business startup costs. When starting a cannabis business, though, you’ll have more expenses than a typical business. And if you find that you can’t cover all these initial expenses yourself, you may look for funding to start your cannabis business.
This is another reason to create a thorough business plan. Any investor or lender will want to know whether your business is well thought out. Essentially, they want to know that you have a plan to turn a profit.
As a dispensary, you’ll need to have a license to sell cannabis. In states where cannabis is legal, cannabis businesses typically pay on average a $5,000 non-refundable application fee for starting the business. In Oregon it’s only $250 to apply, but in New Jersey it can be up to $20,000! Most applicants for certificates fail to meet the startup capital requirements needed to ensure smooth operations from the get-go.
A thought about investors
It’s not easy to have a successful cannabis business. The number of costs including, high rents, taxes, lack of write-offs, licensing costs, all work against you. The applications and licensing fees make starting a cannabis business an expensive endeavor. And, that’s before you consider any regular equipment, marketing and startup costs you might face.
So you may be tempted to take any investment you can, but here’s the pro tip: not all investments are good investments.
And one last thing, once you’re in business, taxes are steep. Due to IRC 280E, cannabis businesses fork over a lot in federal taxes. Because you’re taxed on gross profits rather than net profits, you’ll pay more than the average small business. Federally legal businesses can deduct a variety of different business expenses, which help those businesses stay afloat. The same is not true for cannabis businesses. You can’t qualify for the many different tax credits and deductions for operational expenses.
And, just to set the record straight once again, 280E cannot be beat regardless of what some folks may tell you.
The IRS is still winning case after case from people who try these tricks. Cannabis is a risky industry. There’s absolutely no reason to add more risk by trying to win a losing game against the IRS. About the only way to beat 280E — and it’s really not beating it but mitigating it — is using the law to your advantage by applying GAAP-based cost accounting.
Caution: borrowing money for a new cannabis business is tough
And while we’re on money, just one more thing to mention. Borrowing money in this industry is tough.
Cannabis businesses have a harder time finding small-business loans to keep their businesses operating smoothly. The lack of small-business financing for cannabis businesses stems from the fact that cannabis is still federally illegal.
If you’re looking for a small business loan, it’s difficult to find one that isn’t state-chartered or a credit union. State banking laws tend to have more flexible guidelines, which gives cannabis-related businesses a warmer reception.
So for the most part, big banks won’t lend money to a cannabis business. And that’s not going to change until we get some sort of marijuana banking reform. Until then, alternative lenders are filling some of the gaps in lending to owners of cannabis businesses. However, before you dive deep into starting a cannabis business, be aware that your financing and funding options will be limited.
There are many complications and intricacies of the cannabis industry. Aspiring cannabis entrepreneurs should think a little bit longer and harder about whether starting a cannabis business is the right move. The best advice is to pre-plan everything and be well-funded.
The excitement of the profit-earning potential in a relatively new and rapidly growing industry needs to be weighed against the downsides — namely, the costs, financing struggles and regulatory burden.
When you do decide to go ahead with your cannabis business, there are additional steps. But for now, these steps will help you get your cannabis business up and running and on the way to a million dollar business.
Want to learn more? Speak with us about how we can help you start your cannabusiness while staying compliant with the myriad rules and regulations.