With more and more states legalizing cannabis, it’s safe to say that the industry is booming. However, with wildly different regulatory requirements from state to state and current federal limitations on the industry, finding best practices isn’t always easy. What’s more, choosing a business model that meets your cannabis business goals can feel overwhelming.
In addition to following rapidly changing rules and regulations, cannapreneurs must also navigate complex financial circumstances that include limited access to banking options and unique tax considerations. This means cannapreneurs must remain flexible while running these complex, yet highly rewarding businesses.
And because many cannabis businesses have multiple partners or investors, choosing the right entity structure is vital. For many of our clients, a C-Corp is the right choice. And today, we’re diving into why.
Understanding Different Business Models
S-Corporations are increasingly popular in a wide variety of industries, particularly following the pandemic and the PPP loans. In addition to tax benefits, S-Corps minimize personal and financial liability for owners, which can be appealing to every business owner, especially those in highly regulated industries.
However, while flexible, S-Corps come with restrictions that are not always best for cannabis businesses. While this entity structure reduces liability, cannabis businesses often come with higher liabilities than an S-Corp structure can minimize. As a result, C-Corps and their higher degree of protection are often more desirable.
Funding is also a major factor.
Cannabis businesses often require significant up-front investments to get off the ground. What’s more, with the licensing structure, it may take a year or more to see income, let alone profit. While the investment and profit timeline depends on vertical—cultivation, labs, R&D, or dispensaries, many cannabis business owners need additional investors to ensure they can stay afloat long enough to realize profit.
That’s where the C-Corp entity structure may be advantageous. C-Corps make it easy to share profit with multiple stakeholders, ensuring that each has the level of responsibility and profit sharing they need.
What’s more, because many prospective investors are C-Corps, having a C-Corp yourself isn’t just about sharing profit. It also provides an additional layer of protection for investors.
Taxes are also a consideration!
C-Corps also can take advantage of the corporate tax rate, currently capped at 21%. While this may not directly tie into payroll considerations, it does offer a path to maximize cannabis profits.
C-Corp or Not? That’s the Question!
Ultimately, whether or not your cannabis business should form a C-Corp (and when) depends on your unique circumstances. Because C-Corp formation can be more complex and costly, some cannabis businesses start out with a Partnership or S-Corp and change to a C-Corp when they’re ready to open their doors or seek additional investors. Be mindful to consult with your legal and tax team for advice before making any decisions regarding entity selection or changes to existing entity status.
However, it’s important to know that changing your corporate entity isn’t quite as easy as checking a different box. There are other operational and documentation requirements to consider. So even if you start out with another business model, if you’re planning to move to a C-Corp, it’s a good idea to lay the foundation from the get-go, so it’s easier to fulfill any requirements when you do switch. And that’s just one of the ways that Accounting for Green can help.
If you’re in the cannabis industry or considering a venture as your state legalizes cannabis, Accounting for Green would love to help you with your budding business so you’re starting off on the right foot. Contact us today to get started.