LLC for a Cannabis Business

Do I need an LLC for a cannabis dispensary?

If you’re considering opening a cannabis dispensary, you might be wondering whether forming a limited liability company (LLC) is necessary or beneficial for your business. In this guide, we’ll explore the key considerations and advantages of forming an LLC for your cannabis dispensary.

Forming an LLC for your cannabis dispensary can offer several benefits that provide protection and structure to your business operations. One of the primary advantages of forming an LLC is the limited liability protection it provides. By establishing your cannabis dispensary as an LLC, you can separate your personal assets from the liabilities of your business. Another perk is that forming an LLC can enhance your professional image and credibility. Last but not least, forming an LLC grants you tax flexibility, letting you pick the structure that works best for your unique business.

Throughout this guide, we’ll provide you with step-by-step instructions and valuable insights on how to form an LLC for your marijuana business. Whether you’re a seasoned entrepreneur in the cannabis industry or considering entering the market for the first time, forming an LLC can be a crucial step toward building a successful and sustainable cannabis dispensary business.

Is an LLC good for cannabis businesses?

Forming an LLC for your dispensary can be a strategic business decision. Let’s discuss the main benefits. 

Personal Asset Protection

The top reason to form an LLC for a marijuana retailer is to gain access to the personal asset protection provided by this business structure. Whether you operate a medicinal dispensary or a recreational retail shop with a wide variety of products, you need the limited liability protections that an LLC can provide.

As an example, let’s say that a customer slips on a wet spot on your floor, falls over, and injures themselves. If you operate your cannabis store as a sole proprietorship or general partnership, your personal assets — like your house, car, or personal bank accounts — would be at risk if that customer decides to sue your business.

On the other hand, if you form an LLC for your marijuana retail store, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will usually be protected by the business structure you’ve chosen.

Taxation

Another primary advantage of an LLC is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which could potentially save you a considerable amount of money compared to simply operating as an informal business entity.

Of course, it’s important to note that marijuana businesses in some states have some industry-specific taxation guidelines to follow, which can change the landscape a bit compared to most other business types. Still, there are some distinct advantages to be gained from the way an LLC gives entrepreneurs a choice when it comes to taxation models.

Sole Proprietorship/General Partnership

Your marijuana LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your cannabis store itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.

C Corporation

You can also choose for your pot shop to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.

S Corporation

The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most marijuana vendors have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, and so on.

S corp taxation can help your cannabis shop save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.

Compared to operating a sole proprietorship or general partnership pot shop, the S corp taxation model could potentially save you quite a bit of cash that you can use to buy expensive equipment upgrades and make other improvements to your store rather than writing a big check to Uncle Sam.

However, we will note that there is some confusion regarding which business expenses can and cannot be deducted for marijuana businesses, due to the substance’s legal status on the federal level. It is a certainty that at least the cost of products distributed as part of your company’s total sales can be deducted from your gross business income.

Beyond that, the fact that marijuana remains a controlled substance on the federal level brings into question the deductions available on distributions from this business type. For more information, we recommend that you contact an attorney or accountant.

Enhanced Credibility and Name Uniqueness

Finally, an LLC structure can enhance the credibility of your cannabis business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a marijuana dispensary.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another pot shop wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name in your state, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

What is an LLC?

LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships in that the owners include any company profits or losses in their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.

There are similarities to corporations, too, especially when it comes to financial responsibilities. In an LLC, the owners (known as “members” in an LLC) are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk in most cases. For more information see our LLC definition page.

How to Start a Cannabis LLC

The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a thorough overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:

1. Choose an LLC name

Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.

2. Designate a registered agent

Your LLC’sregistered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process or annual report reminders — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.

3. File your formation documents with the state

The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.

4. Acquire an EIN

The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can obtain an EIN from the Internal Revenue Service free of charge.

5. File a BOI report

Beginning in 2024, new LLCs are required to file a beneficial ownership information report, or BOI report. You’ll file this report directly with the Financial Crimes Enforcement Network (FinCEN), providing information about your beneficial owners. Your beneficial owners are the people who exert control over the LLC or get substantial financial gain from it. 

It’s free to file this report, but be sure to file it on time to ensure you operate legally. Failing to file can result in hefty civil and criminal penalties. 

6. Create an LLC operating agreement

Most states don’t require operating agreements, but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.

7. Create a financial infrastructure

You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.

8. Handle taxes, licenses, and permits

Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. Cannabis vendors are subject to strict licensing requirements, and each state’s guidelines vary considerably. Make sure that you know exactly what your state expects and follow the rules to the letter to avoid serious legal issues. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.

9. Understand maintenance requirements (annual reports, franchise taxes, etc.)

Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up to date in the state’s business database. Some states require reports each year, while others only require them biennially or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.

Additional Resources for Starting a Cannabis Vendor

1. Weediom

There are plenty of online tools and resources for cannabis entrepreneurs, but none are as valuable for getting a marijuana retailer off the ground as Weediom. Their 27-part how-to guide describes everything you need to know to open your pot shop, from startup ideas and business planning resources to information about product providers.

2. Marijuana Doctors

With Marijuana Doctors, you can access resources for physicians, patients/customers, and recreational dispensary owners. You’ll find video tutorials, articles, blogs, case studies, a symptom-tracking tool, and much more. Marijuana Doctors isn’t the most regularly updated site out there, but their information is still highly relevant.

3. National Cannabis Industry Association (NCIA)

The NCIA’s mission statement is “to promote the growth of a responsible and legitimate cannabis industry and work for a favorable social, economic, and legal environment for that industry in the United States.” They do this by advocating for policy updates, hosting trade shows and other events, and providing a wealth of news and resources through their website.

4. Leafly

Leafly is an incredible resource for marijuana retailers, as it provides an online portal for vendors to market their products for pickup or delivery, and it also offers a search function for consumers to find the nearest pot shop. In addition, we really appreciate their industry news page, which includes “tips, news, and advice for dispensaries.”

5. THCBiz

As you may have gathered from their name, THCBiz is a comprehensive resource and business directory for dispensaries. They feature different cannabis industry businesses each month, and they also offer a wide variety of tools and resources for business services, cultivation, dispensaries, education, legal services, products, software, and more.