By Jonathan Bench, Attorney at Harris Bricken
One of the most fundamental questions facing any businessperson in the cannabis industry and every other industry is: “What type of business entity should I use?”
This is such a loaded question that your lawyer or accountant will first respond with, “That depends,” and then they will need to ask you at least ten follow-up questions to understand your goals and expectations, as well as the goals and expectations of your business partners and financiers. Some of these follow-on questions are tax-driven; others are regulatory-driven; others are dictated by financing relationships; and still others deal with control and flexibility within your business.
This is Part 1 of a two-part series. In Part 2, I will discuss more in depth the difference between and among various legal entities from which you can choose. For those who are wondering whether it is “really necessary” to use a business entity instead of just hanging out your shingle, know that your properly established and maintained business vehicle puts the “limited” in “limited liability.” And don’t forget insurance (here and here) and clean business contracts (here), both of which are also essential in helping you sleep at night.
Some types of industries are relatively low risk (NOT cannabis); some business owners are relatively judgment-proof (but it’s hard to start a business if you have no assets); and some business owners like to drive their cars without windshields and seat belts (neither they nor their businesses tend to last very long). I get that many potrepreneurs are used to taking on more than their fair share of risk, but my short response is: forming a business entity is a relatively inexpensive foundation upon which to build a solid business. Don’t ever cut corners in your business, but really don’t cut corners when it comes to your business entity (or getting good insurance or having great contracts in place).
Let’s go over some of these important questions to help you decide how to move forward with your entity selection.
The tax-related questions:
The regulatory questions:
The purpose-related questions:
The financing-related questions:
The control and flexibility-related questions:
The answers to these questions will help your legal or tax advisor help you make the right decision on what type of entity to choose and what to do with that business entity. For instance, just because you are already using an LLC does not mean that you cannot take advantage of making a Subchapter S election with that LLC. You just need to have a good reason for doing so, time it correctly, and your accountant needs to know and agree with you. The same is true if you want your business to be taxed as a C corporation or you want to convert your entity to another type of entity.
In a future post we will dig in more deeply to the advantages and disadvantages in the various types of entities you can choose. Stay tuned!
Re-published with the permission of Harris Bricken and The Canna Law Blog
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