Important Steps for Starting a New Legal Cannabis Business

Although marijuana is still illegal under federal law, nearly every state allows the use of some type of cannabis product. A few states limit cannabis use to industrial hemp products or CBD oil to treat epilepsy and other conditions.

The number of cannabis and marijuana businesses has increased since California legalized medical marijuana use in 1996. Operating a cannabis business can be lucrative if you follow the steps and obtain the licenses necessary to operate legally.

Even in permissive states like California and Colorado, the licensing process is lengthy. And cannabis sales, cultivation, and manufacture are tightly regulated.

Would-be cannabis entrepreneurs should have a good business plan and a second marijuana business plan in place before starting the licensing procedures. It’s also important to work with a business attorney who understands the cannabis industry.

This article discusses the most helpful way to structure your legal cannabis business. FindLaw’s Starting a Cannabis Business section includes other articles covering cannabis business startups.

State Cannabis Regulations

There are only six states (Idaho, Kansas, Nebraska, North Carolina, South Carolina, and Wyoming) where cannabis is fully illegal. Seven states (Georgia, Indiana, Iowa, Kentucky, Tennessee, Texas, and Wisconsin) permit the use of CBD oil or allow the cultivation of industrial hemp. Many allow the use of medical marijuana. And an increasing number have legalized recreational use.

Before starting any cannabis-related business, check the cannabis licensing laws for your state. You should also check any local regulations since state laws permit cities and counties to opt out of state laws that permit dispensaries within their boundaries.

Marijuana licensing laws may have other requirements, including background checks or residency requirements. Once you’ve determined if a cannabis-related business is legal in your state, you can move on to the next step.

Types of Cannabis Business

Because states regulate the cannabis industry closely, there are many businesses and license types available. States that allow recreational marijuana use permit adult-use cannabis only. New adult-use cannabis products contain a range of edibles and consumable hemp products. Retailers can legally sell CBD oil products in many retail stores without violating state or federal law.

Common types of marijuana businesses include:

• Retail sales: What most people think of when they talk about "marijuana businesses," retail sales include medical dispensaries, storefront recreational sales, delivery or online sales, or a combination of these.
• Cultivators and growers: Cultivation requires a large initial investment and knowledge of agriculture. States that prohibit medical and recreational marijuana use may still allow industrial hemp cultivation or CBD oil production.
• Distribution: Transportation of marijuana products requires a separate business license since "transportation of a Schedule I narcotic" remains a federal offense. Businesses that transport these products may do so with the proper licensing and regulations from the state.
• Manufacturing: Manufacturers may be part of the cultivation process. These businesses extract THC from plants or prepare them for use and sale. Manufacturers need expertise in handling chemicals. State licenses depend on the nature of the chemicals used (volatile solvents) and the size of the operation

In addition to the primary businesses that handle growing and processing cannabis and hemp, there are also ancillary businesses related to the marijuana industry.

• Laboratories and testing facilities: These businesses are essential for medical marijuana and THC producers to determine the amount and quality of the product.
• Accessories and packaging: The days when marijuana users had to find a "head shop" for their smoking equipment are long gone. Users can purchase a wide array of accessories and options for imbibing their substance of choice. Cannabis products need labels, packaging, and brochures, too.
• Advertising and sales: Being a good businessperson does not mean being a good salesperson. Those with talents in selling a product can profit from the cannabis industry without needing the same licensing and background checks as the growers and sellers.

Once you decide on the nature of your cannabis operation, you need a business plan and business license. Most states require a business license before you can apply for a cannabis dispensary license or other cannabis business license.

Business Planning and Licensing

A cannabis business is no different than any business. You must have a business plan, financing, a corporate structure, and a state and local business permit. If you need help starting your business, consult a small business lawyer or talk to others in the industry. Three of five small businesses fail within their first year, mostly due to insufficient preplanning.

• Write your business plan: You don’t need a formal business plan, but it’s a good idea. A written plan is like a road map. It helps you know where you’re going and gives potential investors an idea of what you intend to do.
• Select your business structure: Consult an attorney about the best type of business structure for your cannabis business. Limited liability corporations (LLCs) offer the best protection for startup businesses without the complexities of a full corporation.
• Register your business name: How you register your business name depends on your business structure. Sole proprietorships and partnerships don’t need to register. If you plan to trademark your product, you may want to register your name anyway.
• Obtain your business license and tax ID numbers: There are a surprising number of licenses necessary to start a business. Depending on your municipal codes, you must have a state business license and may need a local license. If your cannabis business needs a new building or property, you’ll need a building permit. You may need a retail license and a federal and state tax ID number.

Once you have a general business license, you can apply for your state’s cannabis license.

Cannabis Business Licensing

State cannabis control agencies are different in every state. Some states have separate cannabis regulatory agencies that issue licenses for medical cannabis and recreational providers. In others, the health department oversees medical marijuana and the department of agriculture issues cultivation licenses. The application process takes time, so plan accordingly. You may wait up to two years in some states for approval.

In general, you’ll need to consider these factors in your state marijuana business license application:

• Location and zoning restrictions: Even in legal states, municipalities have opt-out rights. Within cities, neighborhoods can limit dispensaries through zoning ordinances. Make sure your business location allows cannabis businesses before applying.
• Financing: Cannabis businesses and banking have a complicated relationship. Marijuana remains illegal under federal law. Banks must report any money transfers related to illegal narcotics to Federal authorities. However, legal cannabis businesses pay high taxes to produce and sell their products. Banks and state governments have found ways for legal marijuana dispensaries to use banks, obtain financing, and stay clear of federal banking laws.
• Licensing fees: Most states require both an application fee and a licensing fee. The fees are steep and nonrefundable, meaning you won’t get your money back even if the state denies your application.
• Miscellaneous requirements: Do any of your partners have criminal backgrounds? Are you a state resident? Do you need to apply to other agencies like the Department of Agriculture? Startup business owners should consult an attorney before making any final decisions on their business.

Cannabis Microbusinesses

A cannabis microbusiness resembles a microbrewery. Microbusinesses perform at least three of the four basic cannabis-related activities in one location:

• Cultivation
• Manufacturing
• Distribution
• Retail

Microbusinesses typically manufacture, distribute, and sell onsite. A dispensary with a delivery service is an example of a microbusiness.

In California, a microbusiness license prohibits product testing or selling alcohol or tobacco products in the same establishment.

Get Legal Advice From a Cannabis Law Attorney

Many opportunities have opened under cannabis legalization. But keep in mind that the cultivation, distribution, and possession of marijuana remain illegal under federal law. Federal policies on state marijuana laws are subject to change.

Entrepreneurs considering starting a cannabis business need help from an attorney who knows the state and federal regulations about starting the business and staying within the legal guidelines. A cannabis law attorney can guide you through the latest changes in the law and help your business grow.