Our most frequently asked consulting questions are always centered around legal entity structure and ownership structure when it comes to cannabis businesses. Partners, shareholders and operators all want to know the same things, how can they get the best legal and tax protection from their business structure. But like most everything else in the world of cannabis compliance, the answer is not cut and dry.
Entity structure advising in the traditional business world differs in cannabis for a couple very crucial reasons. The first one being that state laws governing cannabis operators can often restrict ownership options. For example, Maine does not allow for two license holders to form a jointly held business to operate together.
Partners each holding their own license are required to keep their own accounting records, their own inventory counts, and report their own sales. Two growers could share space and form a separate partnership company to pay administrative expenses together like rent, utilities, and administrative fees, but they are growing operations cannot be combined from a legal and accounting perspective.
Some states also still require licenses to be held by individuals and not by legal business entities, which can further restrict the choices when it comes to looking at the entity structure. Understanding the regulations and compliance requirements of the state you are operating in before doing any legal work on your business structure is critical. For this reason, we highly recommend working with a cannabis specific attorney as well as a cannabis specific CPA.
The second big factor is still playing out in the Supreme Court in the infamous Harborside case. We have clients who ask all the time about creating real estate holdings companies to own the buildings they operate their grow in or creating a branding company to sell their labeling and/or trademark.
The key factor in Harborside is that the IRS came in and basically said that all the commonly owned related entities were subject to 280(e) even if they were not cannabis touching.
What does that mean? It means in this case that the same owner, or the same majority control group owned the cannabis touching business as well as the real estate as well as the marketing and branding companies, and because they were all essentially owned by the same person the IRS treated them all as “one business” for applying 280(e). So, operators beware if you are receiving advice that forming these entities are a great way to skirt around cannabis tax issues. Working with someone who understands this risk as you are making entity structure choices is hyper critical.
We absolutely do believe that there are always better entity structure options than others, but most of that decision is situational and must be evaluated on a case-by-case basis after all the facts and risks are understood. Until that evaluation has been done with someone tested in the industry, proceed with caution.
To schedule a consult with us book on our website or call 603-948-6845.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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