As soon as you initiate a leap into the cannabis industry, you’re committing to a plethora of regulations. This is on top of every day business-related things, like licensing, permits, and business registration requirements. Licensing in the cannabis world, however, is decidedly more complex. The industry is heavily regulated, and compliance depends on the state and the business category (retail versus processing) that applies.
Naivete is no excuse for not following the rules. Pay close attention to local regulations. Even if you think you’re operating compliantly based on state regulations, additional restrictions may apply at the local level. Some areas in states where cannabis is legal might be allowed per state rules to forbid cannabis business operation. Understand how the restrictions apply specifically to the place you want to operate.
A good example is this: California allows local jurisdictions the right to control what activities are and are not permitted within their domain via the state’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). In Mill Valley, California, this act was put to use. While 74 percent of voters favored Proposition 64, the city decided to follow local regulations prohibiting commercial cannabis activities.
It would be a shame to put a ton of time, effort, and money into something that isn’t legal in the first place, right? So always, always, always do plenty of due diligence first.
There’s so much information out there, and requirements change all the time. To ensure a legal, compliant business, all required components must be accounted for — like a business license, permits, registration, and more. To help guide you in the right direction, here are some essential, fundamental items you should know about before starting a business in the cannabis industry. Use this guide as a start. Let’s dive in, shall we?
The following are the standard business basics required for just about everyone; these could vary depending on your location. Don’t assume that because your business operates from home or online that you’re exempt. Many online and home-based businesses must comply with these rules as if they were a standard brick-and-mortar retail location. My best advice? Reach out to a subject matter expert (SME) in the area if you have specific questions.
Business creation: To protect your personal assets from business-related debts or liabilities, incorporate your business or form an LLC with the state.
Business license: While a standard business license does not automatically give you the ability to operate a cannabis business, it is required for all businesses’ legal operations, so you need one. Business licenses are renewed annually.
Figuring out which department is responsible for licensing can be a challenge; some states require filing organizational paperwork with the Secretary of State’s office. Other states require collaboration with local licensing agencies. In California, for example, potential cannabis business owners can apply to one of three agencies. Some, like the Bureau of Cannabis Control, license specific cannabis business types, like retailers, distributors, testing labs, and even issue licenses for temporary cannabis events.
Suppose you want to make edibles in California. In that case, you need a license from the Manufactured Cannabis Safety Branch, part of the California Department of Public Health. In Nevada, however, the Department of Taxation is the entity responsible for licensure and regulation of retail marijuana businesses, including the state’s medical marijuana program.
The topic of cannabis business licenses is a loaded one; the license requirements sway wildly from state to state.
Some states might hold open application periods and distribute large quantities of licenses. Some states opt for a more restrictive approach and severely limit the number of licenses available or issued.
Despite the recent social-equity push in some states for those seeking an opportunity to own or operate a cannabis business, there are (of course) restrictions on who can apply for licenses. Some states have residency requirements. Others perform background checks, giving the ol’ heave-ho to those with prior convictions, including employees, owners, and contractors. At the recreational cannabis farm I managed, we performed background checks on all employees. So, the norm here is that there is no ‘standard’ that applies across the board.
DBA: This stands for ‘Doing Business As’ and allows you to do business with a name that isn’t included on your incorporation papers (for context, see the business creation section above).
Permits: Permits vary depending on the type of business, and you might need more than one permit to operate. Retailers that operate in physical and digital capacities might need to get a sales tax permit, too. These are generally applicable to retailers required to collect state and local sales taxes. Based on your business location, you might need permits for signage, zoning, land use, etc. A good rule of thumb is to consult with your local planning office for specifics.
Tax ID: The IRS uses this number to identify your business for everything tax-related. The tax ID number is also referred to as the federal tax identification number and/or employer identification number, or EIN. Like it or not, you need one of these to function compliantly.
Licensing and your business category
The topic of licensing is a doozy, so we’ll continue with how a business categorization might affect the licensing required. For cannabis businesses, regulations are generally based on business categories — from cultivation to manufacturing to retail to investing. Make it your business to really understand the category you’ll be operating within. Here are examples of cannabis-industry categories that apply to most cannabis-legal states.
- Cultivation: The cultivation part of the industry is regulated to the hilt. This is stage one for the industry. Nothing is possible without licensed cultivators. Cultivation operations require a massive chunk of investment, a thoughtful and calculated site plan review, and plenty of horticultural expertise.
- Edible production: As described earlier, some states require those that make edibles to follow a different set of rules and/or obtain a specific license. One requirement may be that edibles (or any edibles component, like butter) must be manufactured in a commercial kitchen. This makes sense; products intended for human consumption (like food) should be prepared in a sanitary location.
- Investors: Those with a wad of cash burning a hole in their pocket can invest in cannabis businesses — they just have to follow their own set of specific regulations to do so. For example, Colorado has very detailed provisions that apply to anyone interested in making a legal investment in a cannabis business in the state. In other words, just because you have the cash doesn’t mean you’ll be allowed to invest it in the cannabis industry, at least in some states.
- Retail: This category might be as onerous as cultivation. Some states require retailers to provide adequate retail product supply. Building security requirements usually apply, too. Additionally, like in Oregon, there might be limitations on how much product can be sold to one individual per day. Other states might restrict pricing to a specific range. Some states, like Nevada, require a particular amount of liquid assets ($250,000) that can be converted to cash within 30 days. Nevada’s requirement applies to each establishment, so if you own three retail locations, guess what? You have to have $250,000 available at each location.
Since there’s a regulation or requirement for all other aspects of the industry, why wouldn’t there be a licensing requirement for employees, too? Some states, like Oregon, require all cannabis-industry employees to have a marijuana worker permit to work for a farm, retail establishment, or lab. The “worker permit” costs $100 and is suitable for three years. Colorado has two license types — key employee and support employee — that allow cardholders to work for medical or retail marijuana facilities in a specific capacity. Key employees are those in operational or management roles. Support employees work within the business but don’t make operating decisions, like a budtender.
Nevada uses a registered agent card. The state requires all cannabis business employees or volunteers to apply for this card, which requires a background check.
Learn, know, ask
Let’s be frank; it’s hard to start a business in the highly-regulated cannabis industry. That’s a fact. It requires a ton of planning, research, preparation, and cash. Understand the legal requirements expected of you, based on the category of business you choose. Ask questions, reach out to industry experts, and research the living hell out of things before you officially start to do anything. Rules might not apply across state, county, and city levels, so have a firm grasp on the whole gamut first.
Remember, these are just the first steps to a long and complex process. Even when your business is up and running, you’ll have continuing legal obligations, including license renewals. As the industry matures, changes to existing rules and regulations are a given, so remain vigilant and proactive. Your business success will depend on it.