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Setting Up a Marijuana Business: The Basics

Not too long ago, the term "marijuana business" applied to the illegal cultivation and distribution of a strictly black market drug. While it remains illegal under federal law and many state laws, a growing number of states allow for the medical use of marijuana and a minority of states (plus the District of Columbia) have legalized its recreational use. Each jurisdiction that allows some form of legal marijuana consumption has its own unique regulations, while the federal government has taken a mostly "hands-off" approach to state marijuana laws.

The legal marijuana (or cannabis) industry has grown exponentially since California first legalized the herb for medical use in 1996. In fact, combined marijuana retail and wholesale sales reached $2.7 billion in 2014, according to the ArcView Group, a marijuana business investment, and research firm. The legal marijuana industry offers numerous opportunities for entrepreneurs willing to wade through a complex and ever-changing web of laws and regulations.

This article covers the basic steps and legal considerations involved in business owners setting up a cannabis business. See Medical Marijuana Laws by State and Marijuana Legalization and Decriminalization Overview for more information.

Types of Marijuana Businesses

The main types of marijuana businesses can be broken into three general categories: cultivation, infused product manufacturing, and retail sales. These can vary depending on if they are for recreational marijuana or medical cannabis. Other marijuana businesses include testing facilities, delivery services, devices for cannabis consumption, and software or online services.

  • Cultivation: Business interests that grow marijuana tend to be heavily regulated, and these operations require large initial investments and horticultural know-how.
  • Infused Cannabis Products: Many patients or recreational users prefer to use edible marijuana, tinctures, salves, and other infused products.
  • Retail Sales: These often are referred to as "dispensaries" or "collectives," but are generally stores that sell cannabis-based products to authorized customers. These typically are the most difficult and expensive to start, but also the most lucrative.

Starting a Marijuana Business: General Factors to Consider

Opening a legal cannabis grow house or dispensary is more complicated than starting many other kinds of businesses, mainly because of the regulatory environment and its uncertainties. State laws tend to vary for cannabis companies and the cannabis entrepreneurs trying to start them. The following factors should be considered before deciding whether the cannabis industry is right for you:

  • Cost: Costs vary by location, state laws, and type of business. You will want to consider the costs of licensing, rent, utilities, equipment, supplies, marketing, security, and employees.
  • Residency: Virtually all marijuana business licensees (and investors, in some cases) must be state residents. Colorado, for example, requires a two-year residency prior to getting a license.
  • Criminal Record: Most states prohibit felons with drug crime (or violent crime) convictions from applying for a marijuana business license.
  • Risk: The industry is very risky, due to its fledgling status and the ever-changing regulatory environment, but the rewards are potentially very high as well.
  • Timing: Make sure you are willing and able to wait several months for the application process to get a license. This can take between three and 10 months in California, but as long as 18 months in Washington.
  • Investors and Partners: As with any other startup, you will need capital to get up and running; but keep in mind that some investors remain wary about investing in something that is still illegal under federal law. Most funding for marijuana ventures comes from private investors, not banks.

Setting Up a Marijuana Business: Step-by-Step

Regardless of the industry, startups require the right combination of market differentiation, investment, and shrewd management. The fundamentals of setting up a cannabis-based business are not much different, although shifting regulations and federal marijuana prohibition complicate matters. Reference the following basic steps when starting your marijuana business:

  1. Write a Business Plan: The business plan outlines your company's goals, startup costs, timelines and milestones, finances, and other key information. It will help you stay organized and on task, while also serving as a "resume" of sorts when seeking additional investors.
  2. Find a Location: Regardless of state licensing requirements, local and/or county zoning laws and regulations (not to mention real estate costs) will largely determine where you locate your cannabis-oriented business.
  3. Form Your Business Structure: You will need to form your business within the applicable legal and regulatory constraints and identify the company's partners before applying for a license.
  4. Obtain License(s): Waiting for approval of any applicable licenses typically takes several months, and this can get delayed even longer if you make mistakes in your application or business formation.
  5. Get Operational Infrastructure Up and Running: Once you have received all necessary licenses, you will need to implement the regulatory measures into your business, ensuring compliance (in accordance with the terms of your license application).
  6. Contract with Partners: The type of partners with whom you will need to form contractual relationships will depend on the type of business. For example, dispensary owners (retailers) typically contract with cultivators and infused product wholesalers.
  7. Promote Your Business: There are a number of advertising forums (such as weekly tabloid-style newspapers) and online directories available for retailers. Cultivators and other wholesalers will want to consider advertising in trade journals and attending marijuana business trade shows.

Starting a New Business? Discuss Business Opportunities and Compliance First.

Starting a marijuana business is a serious undertaking that requires extra patience, dedication, and a keen understanding of the complex regulations and legal shifts involved. If you have additional questions or need legal assistance, consider speaking with a cannabis law attorney with knowledge of the marijuana industry.

Note: The cultivation, distribution, and possession of marijuana remain illegal under federal law. Federal policies regarding state marijuana laws are subject to change.

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