California Cannabis (Marijuana) Law
“MAUCRSA” is the new California Statute which describes procedures to license both commercial medical marijuana and recreational (adult use) marijuana related facilities/activities in the State of California. Medical marijuana was approved for usage in California, subject to specific legal requirements, in 1996. Recreational marijuana (adult use) was approved for usage in California, subject to specific legal requirements, effective January 1, 2018. At this time, old medical marijuana entities should be modified from non-profit to profit. As a result, one of the first important decisions to make is:
“What entity should I choose for my prospective cannabis business?”
We can help you to choose the right entity. These choices generally include C-Corps, S-Corps, LLC’s, General Partnerships, and Sole Proprietorships. The choice you make will depend upon what plan you have for the growth and expansion of your business and how you want to structure you taxes. Take a look below at a comparison, for example, between a C-Corp and S-Corp entity as it relates to business expansion and tax structure.
- Double Taxation
For example, if you choose a C-Corp., there will be double taxation—taxation of the corporate net income at the new corporate rate of 21% + taxation of the distributed income to individual tax payers at their normal personal income tax rates (let’s assume 23.8%). This can amount to a very substantial tax cost. *On the other hand, the corporation can retain its earnings and therefore severely reduce the amount of tax cost to the individual taxpayers.
- Multiple Levels of Stock:
In addition, the corporation can offer multiple types of stocks—some with corporate control and others without corporate control. The corporate officers can retain control of the company while still distributing stock ownership to employees as bonuses or outside parties who are purchasing shares in the company.
- Types/Breadth of Shareholders:
If you wish to “go public,” and greatly expand the finances and size of the company, this is the entity to use. For example, institutional investors, other corporations, stock and income funds, and foreign investors can all purchase stock of a C-Corp.
Let’s compare the C-Corp structure briefly to an S-Corp:
(1) No Double Taxation
This entity is known as a “pass through” entity. There is no double taxation. There is no federal taxation to the S-Corp itself. All the income is simply passed through from the Federal Tax Returns to the Personal Tax Returns of the individual owner(s) of the entity. Of the net income which is passed through to the individual returns, part of this income is attributable to corporate profit which is non-taxable and “fair and reasonable compensation” of the taxpayer for his role in the company which is taxable. This is a very different tax structure and does not involve a structure of double taxation.
(2) No Multiple Levels of Stock
Unlike the C, the S does not allow for multiple levels of shareholders. When a person purchases stock, he/she has a right to equal control of the property as the founders of the company. This is a potential disadvantage for an S-Corp. The founders can quickly lose control of their company.
(3) Types/Breadth of Shareholders
The breadth of shareholders is extremely limited. S Corp investors are limited to 100 shareholders—each of whom must be a US citizen or US resident and certain trusts. There is a very limited pool of potential shareholders for an S-Corp. Corporations, stock funds, and foreign investors are not even eligible. This is not an ideal entity to become a large corporation. As a result, this is not an ideal entity to go public. .
*There are other tax liabilities, in addition, which must be paid by the entities discussed above.
Also, there are issues of individual liability involved with respect to each different entity. We will discuss those during the course of our consultation.
In addition, other entities including the LLC, general partnerships, limited partnerships, and sole proprietorships all have differing tax structures and liability issues. We can help you to determine the best and most beneficial entity for your prospective cannabis business.
Other questions of concern for you may be:
Where can we set up our business?
You must have a local city or county license approved and issued before you can be approved for your California state license. Many counties don’t allow for any type of cannabis business while some cities within those counties do and vice-versa. Also, some jurisdictions will provide licenses for medical marijuana but not for recreational marijuana. You need to know your options. Also, will you be dealing with medical marijuana or recreational marijuana or both? We can help you with this question.
I’ve found a business premises. Will this landlord’s lease work for my business?
You typically have to lease or purchase a business premises in order to get even a local license. One of the first issues becomes: how can I sign a lease for a cannabis business if I don’t have a local license and State License for my business? In addition, there are multiple other issues that must be dealt with in the lease—which include (but are not limited to) disclosure to the landlord regarding the specific use of the premises, handling lease provisions which refer to the “legality of the business,” and insurance, utility, and security provisions.
How do I get insurance for my business? I’m having trouble finding insurance!
You will find that it may be very difficult to get insurance for your cannabis business because it is an “illegal business” under Federal Law. We can identify insurance companies that cover cannabis businesses in California. The issue of coverages will also be critical to your business.
How will I set up banking for my cannabis business?
You will find that many, in fact most, banks simply will not give your company financing and a regular bank account since your cannabis business is deemed an “illegal business” based upon federal law. We will discuss this issue with you and identify a company which provides certain necessary banking services for your business.
How does President Trump’s new tax and jobs bill impact the taxes I pay for my cannabis business?
The new bill provides an additional important deduction which may reduce your company’s tax liability. We can explain this to you.
How much marijuana can I possess as a recreational marijuana user?
Any person 21 years of age of over can legally possess 28.5 grams of marijuana (1 ounce) which you can take outside of my home. You can also possess up to 8 grams of “hash and concentrates.”
Can I legally grow marijuana plants at home as a recreational marijuana user?
Yes, you can legally grow 6 marijuana plants inside your home regardless of their stage in the growing process. Outside growing may be illegal based upon local law or if you live next to places like a public park.
Can I legally purchase and possess medical marijuana?
At the least, you should have a written recommendation from a California licensed physician to use marijuana for an accepted medical condition.
As a medical marijuana patient, how many marijuana plants can I grow at home, if any?
You can grow 6 mature or 12 immature plants inside your home and may be able to grow more if the amount you grow is “reasonably related to your medical needs.” That’s a touchy subject, however, as you better be able to prove your sincere necessary medical needs if the police visit your home. You better have a physician’s recommendation or California Medical Marijuana ID card to prove your entitlement to all this marijuana.
In closing this section, there are multiple issues to discuss regarding possession of cannabis (marijuana) as regards to your personal use and establishment of a cannabis business if you wish to proceed with this goal. We stand ready to discuss these issues and assist you with your goals in this growing industry.