Cannabis Business: Selecting the Best Corporate Structure

Sole Proprietorship

A sole proprietorship is a type of unincorporated business where one person is responsible for running the business. In other words, this refers to a self-employed business where you and you alone are responsible for funding your business, paying taxes, and making all important decisions related to your business.

When you run a sole proprietorship, your income comes from the profits your business makes. You need to pay taxes on all your income, but you can also deduct business expenses. The equipment, software, and services you buy for running your business can be deducted from your taxes, making your yearly tax bill much cheaper.

With that said, operating a sole proprietorship is only practical for small businesses with limited expenses. If you’re trying to sell or manufacture cannabis products, you shouldn’t run your business as a sole proprietorship as you could end up with hefty bills due to liability issues. However, if you’re running a small-scale business as a cannabis marketer, accountant, web designer, or another ancillary service, this could be a practical idea for you.

General Partnership Or Limited Liability Partnership

A general partnership is another type of unincorporated business where the owners are liable for all business expenses. The difference between a sole proprietorship and a general partnership is that a general partnership is run by two or more people. In a general partnership, you and your partner are responsible for running the business and paying taxes on your income.

In a general partnership, you and your partner(s) are liable for business debts and obligations. For instance, if someone sues your business, you’ll need to pay from your personal funds and assets. As such, this isn’t a good business structure for serious, large-scale businesses but can be a good idea for small-scale ancillary services such as cannabis accounting, marketing, or web design firms.

A limited liability partnership (LLP) is another business structure where multiple partners are responsible for the taxes, debts, and obligations of the business. However, a limited liability partnership protects your personal assets from liability. It also offers flow-through taxation, meaning you and your partner(s) only pay taxes via your individual tax returns.

Limited Liability Company (LLC)

A limited liability company (LLC) is a common business structure used in the United States that protects owners from personal responsibility for debts and liabilities. Registering your business as an LLC helps you prevent many of the pitfalls of unincorporated businesses. For instance, if your business faces legal issues, it’ll be paid from your business funds and your personal assets will remain untouched.

Registering your business as an LLC also gives you much more flexibility in how you wish to run your business. You can manage the business yourself, hire a manager, or even hire multiple people to manage different parts of your business. Important responsibilities like real estate acquisitions can be delegated or shared between multiple members of your LLC.

Tax reporting options are also flexible. An LLC can be taxed as a partnership via the tax returns of individual members. It can also be taxed as a corporation, meaning business taxes are paid via business funds and members pay income tax on the distributions they receive. This is arguably the best corporate structure for mid-sized and large businesses, although you may want to consider a C-corporation or S-corporation structure for large-scale corporations.

C-Corporation

Cannabis entrepreneurs starting small or medium businesses often register their companies as Limited Liability Companies as it gives them the most flexibility on decision-making, taxes, and other important factors. However, if you’re planning on running a large-scale cannabis corporation, you might want to consider a C-corporation structure.

A C-corporation is a corporate structure where the company exists as a separate entity from its shareholders. Various investors can provide funding to a C-corporation and new investors can be brought on board at any time. Large decisions are made by a board of directors and shareholder meetings are held to report quarterly earnings or losses.

C-corporations are taxed twice. The entity must pay business tax whereas shareholders are also responsible for paying tax on any profits. There’s no limit to the number of shareholders a C-corporation can have, meaning you can bring on many investors and experienced professionals. However, this can also make it difficult to set up and also means important decisions will be shared between various people.

S-Corporation

The S-corporation business structure is another corporate structure you may want to consider for your cannabis business. Like a C-corporation, an S-corporation protects shareholders from business liabilities and handles decisions via a board of directors. However, taxes are only paid once, when shareholders pay taxes on the profits they receive.

While C-corporations aren’t limited on how many shareholders they can have, S-corporations are limited to 100 shareholders. What’s more, these shareholders must all be U.S. citizens or residents. As such, it’s only a suitable business structure if you have a small number of U.S.-based shareholders.

It can be difficult to find willing investors for an S-corporation. Not only are shareholders responsible for business taxes, but non-deductible business expenses are passed through to shareholders. Like C-corporations, they can also be difficult to set up and make decision-making cumbersome as you need to consult various people.

Conclusion

Selecting the best corporate structure for your cannabis business will largely depend on what kind of business you’re running. Most dispensaries, growers, and manufacturers will want to register their business as a Limited Liability Company (LLC) to avoid personal liabilities and gain outside funding.

Sole proprietorships and partnerships can work well for ancillary services without major liability issues. However, larger-scale businesses will want to incorporate their company. You can also consider a C-corporation or S-corporation structure if you’re building a large-scale business with many investors.

For more information on starting your cannabis business, attracting customers, and building your brand, visit Cannabis Promotions.