California cannabis entrepreneurs have to go through the often lengthy and cumbersome process of applying for local and state commercial cannabis licenses. But that is only the beginning of the journey to becoming a successful, fully-compliant business in this emerging industry.
Entrepreneurs interested in operating a cannabis business in California must decide how their business will operate and what business structure will work best for their specific business goals. They must consider the commercial, legal, and tax implications that come with deciding which business structure they want to operate under.
Once entrepreneurs have decided which business structure will best work for their specific business goals, the next step is to begin the entity formation process. This process consists of deciding what the Company name will be and drafting the entity formation documents that will determine how your cannabis business will operate.
As a full-service cannabis law firm, we represent many clients who have gone through this process already. Two of the most common business structures we have seen entrepreneurs decide to start their cannabis business as have been Limited Liability Companies (LLCs) and Corporations. Although there are some similarities between both business structures, there are some major differences that entrepreneurs need to understand prior to beginning the entity formation process.
At Margolin & Lawrence, our cannabis attorneys can help you with all the formation and governing documents for your LLC, such as the articles of organization, operating agreements, and statements of information. If you decide on structuring your cannabis business as a corporation, our cannabis attorneys can help you with your corporate formation documents such as bylaws and articles of incorporation.
Additionally, we understand how important it is for new businesses to raise capital to continue to grow their business. Given that cannabis is still illegal under federal law, entrepreneurs looking to raise capital for their cannabis business need to seek private investment capital. In order to do so, there are a series of important documents private investors want to examine before they decide to invest in your cannabis business.
For instance, companies looking to raise capital need private placement memoranda (PPMs) and subscription agreements. A PPM is a legal document that is given to prospective investors when selling stock or any other security interest in a business. The PPM provides prospective investors with an in-depth look at your business, including management, analysis of operations, risks factors, financial information, among other things. The goal of the PPM is for prospective investors to be fully informed about all aspects of your cannabis business.
A subscription agreement is an agreement between a corporation and the investor (the subscriber) in which the corporation promises to sell a certain number of shares at a specific price to the subscriber and, in return, the subscriber promises to buy the shares at the agreed upon price.
At Margolin & Lawrence, our cannabis attorneys can help you and your business with any capital-raising compliance and legal representation. Additionally, our cannabis attorneys can help you decide which business structure best meets your cannabis business goals. And we can help your cannabis business remain compliant with all the governing laws every step of the way, including ongoing compliance with state and local commercial cannabis regulations and employment laws, avoiding and minimizing the expenses of civil litigation, addressing the implications of federal illegality of cannabis, and helping to informally resolve any internal or external disputes that jeopardize the business operation.
Attorney Lauren Estevez presented at the The California Cannabis Forum at the Skirball Center this week. She will be discussing the City of Los Angeles's Social Equity Program and Corporate Social Responsibility for California cannabis companies.
Commercial cannabis is heating up on the central coast. Here’s a look at what’s green:
The City of Goleta began accepting cannabis planning applications on August 17th. Applicants will need to obtain either a Land Use Permit or Conditional Use Permit issued by the Planning & Environmental Review (PER) Department. A Cannabis Business License will only be issued upon approval by the PER Department. Applicants are required to submit an Odor Abatement Plan and Certification approved by a Professional Engineer or Certified Industrial Hygienist. In addition, cultivators will need to show proof of consultation with Southern California Edison (SCE) showing participating in SCE’s Savings by Design Program as well as participation in the Resource Innovation Institute’s Calculate Powerscore Tool. More information on Conditional Use Permits and Land Use Permits for cannabis operators in the City of Goleta can be found here.
Cannabis Business Licenses will be valid for one year from January 1 to December 31, regardless of when the license was issued. Something to consider as we approach the latter end of the year, as all businesses will need to renew their license prior to January 1 and pay the applicable renewal fee. The amount of retail licenses the city will issue has been limited to 15. The city will review applications on a first-come, first-serve basis and will implement a waitlist for potential retailers. More information on Cannabis Business Licenses for the City of Goleta can be found here.
The City of Lompoc is open for all cannabis operators with the exception of outdoor cultivators. Currently, there is no cap to the amount of licenses the city will issue and will allow for onsite consumption. Prospective operators will need to obtain a commercial cannabis use license issued by the City. Application materials and information on the city’s laws and regulations can be found here.
Santa Barbara County is expected to open by the end of the year for new businesses. Prospective applicants will first need to obtain either a Land Use Permit or Conditional Use Permit. Permit type is dependent on whether you are located inside or outside the Coastal Zone and distance to sensitive use receptors. Check here for information on land use and zoning in Santa Barbara County. A maximum of 8 licenses will be issued for retailers and all outdoor cultivation has been prohibited in the Coastal Zone. Once you have received the applicable land use or conditional use permit, you will then need to apply for a Cannabis Business License. Application materials for a Cannabis Business License will be made available here. Supplemental information may be required such as, environmental and energy conservation measures dependent on your zone. Be sure to check through the application requirements carefully and thoroughly or consider hiring an attorney to breakdown the process.
The logistics of running a legal cannabis operation involve many questions that may seem surprising or daunting to both current and aspiring business owners. As a California cannabis law firm, here are a few of the issues that we’ve seen cannabis businesses need answers for. If you’ve found yourself asking any of these questions about your own operation, our lawyers may be able to help.
How much can I expect to spend?
At present, the capital requirements to start a cannabis business are very high; on top of the normal costs of starting a business, like buying real estate and hiring employees, the industry is very tightly regulated, and it’s not possible to get an outside loan. That means your business has to be privately fundraised, so it’s important to figure out exactly how much money you have and how much you’re willing to spend.
The application fees alone for cannabis licensing are often several thousand dollars, and many jurisdictions require both proof of funding and a detailed business plan before they consider a cannabis licensing application complete. A cannabis lawyer can help you find this information in order to start your licensed operation.
Is my property in an eligible location for cannabis business?
Zoning requirements vary widely based on your jurisdiction and which type of cannabis activity you’re interested in, so it’s not always easy to tell whether a given property or address is eligible for a particular activity. In addition to restrictions on which zones a given activity can be located in (for instance, cannabis cultivation might be banned in commercial zones but allowed in industrial ones), many municipalities have setback restrictions that prevent cannabis businesses from being located within a certain distance of schools, parks, residential areas, or other cannabis businesses.
Interpreting the local zoning regulations to determine for what activities your business is eligible is another service that cannabis lawyers can provide.
What information do I need to apply for a cannabis business license?
Applying for a cannabis business license isn’t just a matter of filling out an application form – most state and local licensing authorities will require a large amount of information about the business and its owners, including a complete operating plan describing how your establishment will meet all legal requirements for cannabis business activity.
On top of this information, you’ll also need to have business documents such as a seller’s permit, federal employer ID number, and certificate of good tax standing in order. On top of that, most applications will require you to provide accurate financial information, insurance documentation, and enough personal documentation for each member of your business to pass a full background check.
Finding these documents and preparing them for your final application is just one service that cannabis lawyers can provide for your business.
Should I get a license for medical-use or adult-use cannabis?
At the present moment, many states and municipalities have separate regulatory regimes for medical-use and adult-use cannabis, often with very different legal requirements. For your cannabis business to succeed, you’ll need to decide which license (or combination of licenses) is best for your business, then master the licensing and compliance processes for the type of cannabis business you choose. A cannabis lawyer can help guide you through this process, from choosing the right activity to applying for a license to remaining in compliance with the law once your business is operational.
What cannabis activity should I apply for?
In addition to medical-use and adult-use, cannabis business licenses are broken down into different activities, such as cultivation, manufacturing, and retail. Additionally, many of these categories are split into subcategories such as indoor and outdoor cultivation or storefront and non-storefront retail. As with medical and adult-use cannabis, these different types of cannabis activities often have very different requirements.
Some jurisdictions also offer boutique categories with special requirements such as Microbusiness, impose restrictions on how many licenses can be granted, or limit which types of licenses a single business can hold simultaneously. For your cannabis business to succeed, you’ll need to optimize which activities to apply for – another task that a cannabis lawyer can help with.
How can I ensure that my business is licensed as quickly as possible?
Given that legal cannabis licensing is a complex, highly regulated bureaucracy currently receiving a large number of applications, it can be difficult for a cannabis business owner to predict how long it will take their business license application to be approved, or to optimize their application in order to be licensed and operational as soon as possible.
Some areas offer a fast track to licensing under their Social Equity Program, in order to ensure that business owners who are disadvantaged or disproportionately affected by the War on Drugs have a quicker path to licensed operation than other applicants. Our cannabis lawyers can help you find out whether you qualify for one of these programs.
Whether or not you qualify for a Social Equity Program, the best way to ensure that you’re licensed as soon as possible is to choose the right license for your business and make sure that the information in your application is complete and correct.
What license should I apply for if I plan to expand my operation?
Especially for new cannabis businesses, the size of a cannabis business at the time of initial licensing might not be the same as the size of the business you hope to run in two or three year’s time. However, cannabis license application fees often vary based on the size of the operation in question, and applications often require businesses to provide details that depend on the size of their operation, including what types of equipment they plan to use, their planned hours of operation, and how many employees they’ll hire (including their labor practices and management structure).
Our cannabis lawyers can help you figure out how to reflect your long-term growth plans in your licensing application, including the multi-year pro forma budgeting and income documents that many municipalities require.
Will I need to apply for additional licenses or permits?
For many businesses, the cannabis license itself is only one of a number of licenses you’ll need for a fully licensed operation. To begin with, new cannabis businesses will need to apply for their tax registrations and seller’s permits. Additionally, depending on your activity, you may need to apply for Conditional Use Permit or Land Use Permit from your local planning department before you can apply for a cannabis business license.
For some activities, like outdoor cultivation, this may require further permits, such as for diversion of water, tree removal, or environmental review. On the other hand, businesses located in cities may be required to apply for enrollment in local Social Equity or community benefits programs. Our cannabis lawyers can help you find out what additional permits you need and help you apply for them.
The state regulators have released the annual fees for cannabis licensees - manufacturing fees are determined by the CDPH, cultivation by CalCannabis, and testing, microbusiness, retail and delivery fees are set by the BCC. We have compiled all of these fees into a calculator you can use to estimate your costs for the state annual license into one place.
California’s transition into a regulated market has many operators wondering what the universe of compliance looks like and where they fit into the process. In order to operate legally in California after January 1, 2018, you need both a local authorization and a state license. Temporary licenses from the state of California are sufficient to continue operating, though you will eventually need to obtain an Annual License. To date, 954 cannabis businesses in California have received Cease and Desist letters from the Bureau of Cannabis Control. While some were in error, others were operating without the required licenses for California.
It’s important to understand that licensure is not the end-all-be-all of compliance -- in fact, it is the minimum requirement for your business to operate legally. In addition to having a state license (which requires local authorization), you will need to begin thinking about how to set up your business with compliance processes that facilitate and enable adherence to state regulations for your activities: cannabis microbusiness, retail, manufacturing, cultivation or testing. The below infographic is an overview of the entire licensing/compliance process.
Where does your business fit in?
Only a week is left until Culver City starts accepting applications for cannabis business
permits - except storefront retail, which is scheduled to open by May. With delays in the City of LA's application process, the City's original slogan,"All Roads Lead to Culver City" is beginning to ring true for many cannabis businesses.
The state of California has officially begun to grant temporary licenses for cannabis distribution, pending applications and processing of full state licenses. Temporary licenses are “a conditional license that allows a business to engage in commercial cannabis activity for a period of 120 days.” They can only be granted to businesses which have already received their local licenses, and are intended to allow locally-licensed businesses to operate while waiting for their full state license to be reviewed.
When it comes to record-keeping, in particular, the requirements of temporarily-licensed cannabis distributors are different from those of annually-licensed ones. The reason for this difference is that the track-and-trace system which California will use to record the movements of cannabis products has yet to be fully implemented. While annual license holders will be required to use this system, based on the Franwell METRC software, to keep track of their inventory, CalCannabis states that temporary license holders must manually document their sales using “paper sales invoices or shipping manifests”.
For the temporary distribution licensee, then, keeping in compliance with state regulations is not only about following the operating requirements, but also about keeping track of a relatively complicated set of information for the sake of record-keeping. Distributors need:
- Local cannabis recordkeeping requirements (usually keeping business, inventory, & patient records for a several-year period)
- State cannabis record retention requirements (listed in California Code of Regulations, Title 16, Division 42, §5037) – financial, personnel, training, security, etc.
- The California Board of Equalization’s general record-keeping requirements for businesses (keeping track of the sales & use taxes, receipts, deductions, and purchase prices for 4 years).
- Paper sales invoices or shipping manifests for all sales
- A resale certificate for all sales intended for resale
If a distributor plans on reselling cannabis rather than just distributing it, they’ll need to make sure their seller’s permit is in order as well. For more information on resale certificates, check our recent post on the subject.
While all this paperwork may seem daunting at first, a licensed distribution operation should be more than qualified to handle it – and, once the California METRC system is implemented, keeping records of sales and inventory should be streamlined considerably.