Now that recreational cannabis use and sales is legal in the State of New Mexico, we’ve helped a lot of these businesses get started — we have helped with everything from company formation, to partnership agreements, to licensing, to intellectual property, and much more.
We’ve written in the past about starting up a cannabis-based business, including summarizing licensing types and tips for starting, and we’ve learned a lot in the past couple of years. In this article, we want to share with you the Top 5 Issues we see cannabis-based businesses facing over and over again, in the hopes you learn from us and improve your chances of success.
#5: Location, Location, Location
In New Mexico, the Cannabis Regulation Act (CRA) gave local jurisdictions the authority to dictate “time, place, and manner” regulations, usually in the form of zoning ordinances. Most local jurisdictions have enacted zoning ordinances that address all three. For instance, it is common for there to be a 300-foot buffer zone between schools and cannabis entities, or in Albuquerque, there is currently a 600-foot buffer zone between retail dispensaries. However, some jurisdictions, notably those that have yet to enact zoning regulations, have addressed the issue through other ways, like limiting access to water. All that said, some jurisdictions, like Albuquerque if a retail dispensary is within 600 feet of another dispensary, allow applicants to apply for a Conditional Use Permit.
I write this to say – do not purchase or lease any building or property without knowing in advance if the location is prohibited to engage in cannabis conduct. That said, if you have found a location that you believe is a good spot, make sure there is language that gives you an opportunity to get out of the lease or purchase if the location turns out to not be sufficient for your goals.
There are two things certain in life and that is death and taxes. While you won’t die from consuming cannabis, it is certain that you will pay taxes, and as a cannabis entity, you are likely going to pay more taxes than a non-cannabis business. Arguably, taxes are more important than any other business decision, because without adequate knowledge, you are likely to run into substantial issues. That is why it is extremely important to obtain the services of a knowledgeable Certified Public Accountant (CPA) or have a tax attorney at the ready to answer questions.
In addition to the local and State cannabis excise tax, IRS code 280E is widely known by everyone in the cannabis industry. It reads, “ No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” See IRS guidance re: 26 U.S. Code § 280E – Expenditures in connection with the illegal sale of drugs.
In other words, because cannabis is still considered a schedule 1 drug and thus federally prohibited under the Controlled Substances Act, your entity cannot deduct the normal business deductions like payroll or rent. As such, it is wise to know well in advance so that you are not hit with a large tax bill at tax time.
#3: Type of CCD License
The Cannabis Control Division (CCD) is the statutory entity that regulates, approves and enforces licenses in the State of New Mexico. Before recreational legalization, all cannabis entities were “vertically integrated,” or were able to do all types of conduct. But that all changed with the CRA, and now there are numerous types of licenses. For instance, if you want to only be a grower – micro or macro – or only an edible manufacturer, you can do so. Alternatively, if you want to do everything, big or small, you can as a Vertically Integrated Cannabis Establishment (VICE) or a Micro-Integrated Cannabis Business (MICB). Non-refundable application fees range from $1000 on the low end for micro businesses, to the hundreds of thousands of dollars for entities producing the current maximum allowable plant count.
Folks engaged in the Cannabis game often want to be the best – at everything. However, being vertically integrated, macro or micro, is extremely difficult to do as each licensed activity is essentially a different type of business. Thus, it is advisable to perfect what you are good at doing and what you enjoy doing. If you are great with growing plants, then don’t consider becoming a courier.
That being said, under the current law and regulations, entities cannot be a testing laboratory while simultaneously holding other cannabis licenses.
#2: Structure of Entity
Before recreational legalization, all entities were required to be New Mexico Non-Profit Corporations. However, this was all changed after the passage of CRA. CCD recognizes all recognized business for a CCD license, to include Corporations, Limited Liability Companies (LLCs), partnerships, trusts, sole proprietorships, and even other governmental agencies such as Native American governments. Some business structures are more advantageous than others. For instance, partnerships and sole proprietorships do not offer personal liability protection in the same way as a Limited Liability Company (LLC) or Corporation does and thus should be not utilized when conducting cannabis business. Further, you need to be cautious of forming a “de facto partnership.”
Like any other business, most CCD licensed entities happen to be LLCs, most likely for ease of administration and operation. However, while we help with anonymous LLCs in other industries, anonymous LLCs are likely not an option with cannabis entities as the CCD will be made aware of all members of LLCs and those individuals that are considered to be “controlling persons” of a company and thus would be subject to a public record under the Inspection of Public Record Act.
In nine out of ten instances, our recommendation is going to be form a LLC. If you form a LLC with us, we’ll include a high-quality Operating Agreement that can help you with the #1 issue discussed below.
#1: Business Partners
The most important thing to decide when starting a business is with whom you will partner in your business. A business is a relationship like any other important relationship and thus it is wise to only engage in business with people that you trust. While everyone is happy to start a business together, not everyone is able to engage in business with each other when the going gets tough.
If you want some interesting reading, read our other blog articles about Narcissistic Partners, Rogue Business Partners, and When Business Partners Declare War. Do more than cross your fingers this doesn’t happen to you. Pay attention to the little voice in your head, and take care on who you partner with.
Rest assured, you want everyone to be on the same page at start up, with a good idea of what might happen if things don’t turn out to be successful, lest you suffer a bad business breakup that can take a toll on you financially and emotionally. That is why it is so important to have a well thought out Operating Agreement or Bylaws, so that every partner understands how the business will make decisions and, heaven forbid, what will happen should the destruction of the company take place.