What Is Cannabis Law?

What to know as a business owner about an emerging area of law

By Super Lawyers staff | Reviewed by Canaan Suitt, J.D. | Last updated on November 8, 2023

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Medical and recreational cannabis use and sales have been legalized in nearly half of all U.S. states.

Given that recreational and medical cannabis products are being sold through dispensaries in many parts of the country, the cannabis industry has grown significantly in recent years. Many entrepreneurs and existing business owners are considering opening a cannabis business or becoming involved in the cannabis industry.

Cannabis legalization has not yet happened at the federal level. This results in many complications for business owners and cannabis businesses in states where cannabis products have been made legal for medical and recreational use. It is crucial to seek advice from a cannabis law attorney with experience representing individuals and entities in cannabis business formation and development and in handling business law matters that arise in the course of doing business for cannabis-related companies.

Cannabis Law – What You Need to Know

  • State laws govern cannabis regulation for businesses since cannabis is only legal for medical and recreational use at the state level.
  • Federal law has not yet legalized medical or recreational marijuana.
  • Cannabis businesses and grows face unique and complex regulatory situations when establishing the business and choosing the appropriate business structure.
  • To get off the ground, cannabis businesses must typically obtain financing, secure permits and licensing, determine land rights and zoning issues, and devise a marketing strategy.
  • Cannabis businesses are highly regulated and require significant planning and continued compliance efforts, but these businesses can be highly successful and fulfilling.

Six Steps for Starting a Cannabis Business

What steps must be taken to open a cannabis business? In general, if you are considering the possibility of a legalized marijuana or cannabis business in your state, you should look at the following steps:

1. Decide What Type of Cannabis Business You Want to Open

Do you want to grow marijuana to go into business with retail establishments? Do you want to create cannabis products, such as edible products or tinctures, that medical or recreational marijuana retail stores can sell? Or do you want to open a retail store where cannabis products are sold? You will need to start by deciding what kind of cannabis business you want to create.

2. Consider Your Eligibility

Most importantly, are you planning to set up a marijuana business in a state where recreational or at least medical use of cannabis is legal? You will also need to examine state-specific laws concerning eligibility for certain persons with criminal records if you have ever faced criminal charges.

3. Explore Financing Options

Since marijuana is not legalized under federal law, traditional financing is not usually an option. Yet other financing options exist and may be appropriate for your plans for a cannabis business.

4. Create a Business Plan

Once you know that you are eligible to start a cannabis business and that options for funding may exist, you should draft a business plan. Like other types of businesses in other industries, a business plan for a cannabis-related business should clarify the business’s goals, the timeline for getting the business running, and the necessary startup costs.

5. Consider the Best Structure for Your Business

Entity formation for a marijuana business, like any other type of business, will require determining which kind of business structure best suits your business plans. Once you have a business plan, you can secure financing.

6. Seek Licenses and Permits

Cannabis businesses and dispensaries sell a product that is strictly for adult use; therefore, they are highly regulated at the state level. It will be critical to ensure that you have any necessary permits or licenses required to open the business.

7. Build Relationships

Cannabis businesses cannot operate without relationships with other cannabis-related businesses, including parties associated with the cultivation, manufacture, distribution, and retail of cannabis products.

8. Open Your Business

Opening your business will allow you to hire employees (if you plan to do so), begin advertising, and receive customers.

Choosing a Structure for a Cannabis Business

Like any other type of business, there is no single business structure best for a cannabis business in general. Instead, the structure you should select for your cannabis business will depend upon various factors. These include:

  • How funds will be raised;
  • The number of business owners;
  • How business owners will make decisions about the cannabis business; and
  • The amount of personal liability necessary for the business owner(s) to feel confident running the company.

The following are the types of business structures that may be possible for a cannabis business, and the best structure for a specific cannabis company will depend upon the entrepreneur’s plans:

  • Sole proprietorship
  • Partnership
  • Limited liability company (LLC)
  • Corporation

Financing a Cannabis Business

Many cannabis business entrepreneurs cannot turn to traditional bank financing to get a cannabis business started since banks insured by the Federal Deposit Insurance Corporation (FDIC) can face consequences for providing loans to businesses that violate federal law. In addition, banks may worry about criminal liability under federal law.

Since cannabis is not yet legal under federal law for medical or recreational purposes, banks could face criminal penalties for involvement with businesses that violate federal law. This includes the cannabis businesses.

Since traditional financing through a bank is not usually a possibility for cannabis businesses, entrepreneurs will often turn to other funding sources. Most frequently, business owners seeking to open a cannabis business will look for financing from private investors, including angel investors (another term for wealthy individuals), or through private equity funds.

Tax Issues for Cannabis Businesses

You will need to determine your state-law obligations concerning state taxes since the state taxes cannabis businesses. In addition, although the IRS will not recognize your cannabis business as a lawful entity, you must still pay federal business taxes on income earned.

Obtaining Licenses and Permits for Cannabis Businesses

Each state has its own laws concerning the required licenses and permits to open and run a cannabis business. You should know that states heavily regulate cannabis businesses, and obtaining a license or permit, and maintaining that license or permit, will require regular compliance efforts.

It will be essential to work with a cannabis lawyer in your state who can ensure that you obtain all necessary permits or licenses to run your cannabis business and take any required steps to remain in compliance while your business is in operation.

Common Cannabis Law Questions

When you are thinking about starting a cannabis business, it is crucial to seek advice from a lawyer with experience serving cannabis businesses in terms of entity formation, licensing, business development, employment law issues, and other related matters. Before getting started, you should identify any questions or concerns you have to discuss with an attorney.

The following are common cannabis law questions posed by business owners:

  • What steps do I need to take to set up a cannabis business?
  • What are my state’s licensing and permit requirements for a cannabis business?
  • If I cannot use traditional banking for my cannabis business, what kinds of banks or entities can I use to run my business?
  • What are some of the most common types of cannabis businesses that exist?
  • Can I choose any entity structure for my cannabis business?
  • Can a cannabis business be run as a sole proprietorship?
  • What types of jobs should I plan to hire for when I start a cannabis business?

States Where Recreational and Medical Marijuana Use Is Legalized

Dispensaries are opening across the country in states that have embraced marijuana legalization. Many states authorize the sale of CBD and hemp-derivative THC products. Other states have passed decriminalization legislation without fully legalizing it.

However, if you’re thinking about starting a cannabis business, here are the states (in addition to Washington, D.C.) that have legalized the use of cannabis as of November 2023:

  1. Alaska
  2. Arizona
  3. California
  4. Colorado
  5. Connecticut
  6. Delaware
  7. Illinois
  8. Maine
  9. Maryland
  10. Massachusetts
  11. Michigan
  12. Minnesota
  13. Missouri
  14. Montana
  15. Nevada
  16. New Jersey
  17. New Mexico
  18. New York
  19. Ohio
  20. Oregon
  21. Rhode Island
  22. Vermont
  23. Virginia
  24. Washington

Finding the Right Attorney for Your Needs

It is essential to approach the right type of attorney—someone who can help you through your entire case. To do so, you can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.

To help you get started, you may want to consider looking for a lawyer who practices cannabis law.

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