If you’re in the process of setting up a new cannabis business in California, one of your considerations will be the type of entity you create. There are a number of different ways you can do it and what’s right for you will be a personal decision considering the nature of your business.
Below are some of the ways you can structure your business to give you a brief overview of the differences between them.
You can set up as a sole proprietorship
This is probably the simplest form of business and doesn’t require you to fill out any forms or other documentation. You just register yourself as a sole proprietorship and you can get started. The biggest downfall of operating as this type of entity is that you are afforded no legal protection if the business is unsuccessful. You’re also personally liable for lawsuits or to creditors if the business owes money that it cannot pay.
Many companies set up as an LLC
The benefit is the protection from personal liability you’re given once you’ve registered the business with the state as an LLC. This can provide some comfort to Members that there’s less individual risk operating as an LLC than as a sole proprietor. In an LLC Operating Agreement, Members can also be given individual roles for which they are responsible and for which they receive decision-making power.
One of the downsides to an LLC is for businesses that are looking to raise capital in order to fund their operations. There are not as many options available for offering investors a stake in the business in return for their investment.
For businesses looking to raise capital from investors, a C-Corporation is a popular choice for cannabis businesses. You are still afforded protection from personal liability as with an LLC but you have more options available to you to bring on outside investors through offering stock in the business.
Legal compliance is one of the most important things for a cannabis business owner. Making sure you structure your business in the right way is the first step in ensuring you meet those obligations.