Federal Prohibition Continues
Despite cannabis being legal in 18 states, the federal government still maintains cannabis prohibition through the Controlled Substances Act. Cannabis prohibition creates numerous challenges for cannabis businesses which other businesses do not face.
According to the federal government cannabis businesses are still criminal enterprises. While LLCs do not offer full legal protection, cannabis business owners should set up different LLCs for different aspects of their businesses, e.g., different LLCs for the medical and recreational businesses. This protects business owners in the event that the federal government starts selectively enforcing existing laws which ban cannabis. For the same reason, business owners should keep personal financial assets and cannabis business assets separate. Failure to separate these assets could make business owners targets of RICO laws.
Other Businesses
In addition to the problems created by current federal law, many businesses will not do business with cannabis distributors because of the federal status of cannabis.
Major national banks do not work with cannabis businesses, but some local banks do. Cannabis businesses, thus, need to find a local bank who will accept the industry. Businesses should work with their bank to understand evolving regulations and make sure they are secure.
Not all credit card companies currently allow cannabis transactions because of the federal prohibition. This restricts the ways in which cannabis companies can receive payment to cash, checks, and cryptocurrency. Of these options, cash is the most simple for business owners to deal with. Checks can raise more questions with regulators and some cryptocurrency vendors are not secure.
Some accountants and landlords are also hesitant to work with cannabis businesses because of the issue of federal illegality. Nonetheless, cannabis entrepreneurs can still succeed because not all accounts and landlords are opposed to working with the industry. Some advertisers are also hesitant to host cannabis content as a result of federal prohibitions. Cannabis businesses can still advertise their product with willing advertisers but can also do so by other, less traditional means. One untraditional way cannabis businesses can advertise is by drawing media attention. Thus they are not officially “advertising,” but by appearing on the news are raising the profile of their business.
If the federal government ultimately acts to deschedule or otherwise decriminalize cannabis, it is likely that the banking, credit card, landlord, and advertising issues would improve. Various legislation has been proposed at the federal level, but so far none has been passed by both the House and Senate.
Internal Business Risks – And How to Avoid Them
Although it faces unique challenges, the cannabis industry is, in many ways, like any other business. In some instances, however, the risks faced by other businesses are simply amplified in the cannabis industry.
Working with lawyers from the start is helpful for business owners to insure they follow all rules and regulations. Hiring knowledgeable individuals with a thorough understanding of the industry is extremely important. The cash heavy nature of the cannabis industry causes it to be more susceptible to fraud, so hiring trustworthy employees is especially important.
Cannabis businesses need to be more judicious than other businesses in making sure that business records are pristine. If a cannabis business is called to court, their business records are admissible as evidence. Because courts already tend to be more skeptical of cannabis businesses, keeping neat and precise records gives them more confidence that a business owner is competent.
Some landlords are reluctant to allow cannabis businesses to use their properties in part because of federal illegality, but many who do include terms which require businesses to manage the distinctive smell of cannabis.
Taxes
The federal government taxes income. It does not care whether income was legally obtained; it just taxes whatever income citizens report. Most taxpaying businesses in the United States are allowed to take tax deductions on business expenses, but a federal law called IRC 280E prevents cannabis businesses from taking that exemption. 280E officially prohibits business deductions for businesses which deal in controlled substances, of which cannabis is still one.
Thinking of starting a CBD based business? Set up your business correctly from the start. L4SB knows the Cannabis Business. Reach out to L4SB today for a consultation.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.
