How to Successfully Launch a Legal Cannabis Business

What to know about launching a legal cannabis startup business

Let’s take a look at the key areas you must be familiar with in order to start a cannabis business. 

Types of cannabis businesses

Cannabis businesses come in all shapes and sizes, including the following:

• Cultivation operations 
• Dispensaries 
• Logistical support businesses, like distribution and transportation companies 
• Technology companies, such as dispensary software development or high-tech infrastructure, for grow houses

In addition, labs are needed for testing the potency and genetics of cannabis flowers, extractors are needed for harvesting oils and ongoing research provides insights into the specifics of cannabis for medical treatment. Glass blowers, vape purveyors and edibles creators are also in high demand.

“I believe there is plenty of opportunity,” Titus said. “It’s the very, very early stage [for] everything from medicinal to recreational, support industries and infused products. Creative minds, unique products and delivery methods will just continue to move along as time goes, and I think there’s ample opportunity for people to make a significant business opportunity in this incredible industry.”

Regulatory landscape

The state of the industry remains in flux. Beyond the federal prohibition, or perhaps because of it, varying state frameworks have led to a fragmented industry that looks different in each state. Everything from licensing to reporting can be vastly different, making it difficult for a company to expand. Experience gained in Colorado, for example, does not necessarily translate to the New York market.

“Since we’re not a federally recognized industry, there are many things that are affected,” said Sara Gullickson, CEO of DispensaryPermits.com, a consulting service for marijuana entrepreneurs. “In terms of regulations, every single state program varies. They’re crafting programs specifically for their environment. So, things that are important in Arkansas might not be as important in Ohio, and so we’re seeing that kind of flesh out.”

Fragmented policy

The lack of federal policy has created a sort of experimental period, where states are borrowing what works from one another and trying to scrap what doesn’t, Gullickson said. While the federal prohibition creates a lot of confusion and many problems, she said, this trial-and-error period has been positive for the industry’s evolution.

“I’m a little bit more optimistic than most,” Gullickson said. “I almost think if the feds stepped in and pushed something down everybody’s throat, there’d be a lot of resistance. How could the feds come up with something that’s uniform, implemented across the U.S., that works in every state? It’s something that’s necessary but also scary, because we do know what we’re doing in different states and there are some really good programs. We don’t want something to come into play that diminishes what good we’re already doing.”

Fewer deductions allowed

Because cannabis remains illegal at the federal level, cannabis companies face different taxation challenges than other industries. One of these is the Internal Revenue Service’s Section 280E, which does not allow cannabis companies to deduct ordinary business expenses from their tax bills.

Section 280E resulted from a 1981 court case in which a convicted drug dealer successfully wrote off his business expenses related to his illicit activities. Shortly after, Congress enacted Section 280E to avoid a repeat incident. Section 280E stipulates that any expenses related to the “trafficking of controlled substances” shall not be eligible for deductions or credits. Because cannabis remains a controlled substance under federal law, state-compliant legal cannabis businesses are subject to this tax rule.

Higher taxes

Cannabis businesses pay more taxes than they would if they sold a federally legal product. Cannabis companies must pay taxes based on their gross income, rather than on their income minus the cost of goods sold. The result is an average effective tax rate of 55% on cannabis businesses, compared with an average effective rate of 30% on similarly situated non-cannabis companies.

Beyond the federal tax code, cannabis companies must abide by various state tax plans. Some states charge excise taxes on top of their normal tax structure; one such state is Washington, where cannabis companies owe an excise tax of 37% on all sales. Your tax obligations as a cannabis business owner are significant and sometimes complex, so be sure to familiarize yourself with both federal and state tax policies.

Licensing and permitting

For businesses that deal with the plant, licensing and permitting are essential. These processes vary by state and can be rather arduous. In addition to outlining policies and procedures, applicants must provide an overview of who makes up their organization and prove that what they say is true. According to Gullickson, balancing a level of detail in applications of limited length has become a skill set of its own in the consulting industry.

“About three or four years ago, when you were sending applications, everyone threw in the kitchen sink – thousands and thousands of pages to confuse people and hope they wouldn’t read it,” she said. “Now, the application process is often to describe in five pages what your operation looks like. You need someone to communicate to an uneducated audience what your policies and procedures look like. We had to sharpen our skill set to be as granular as possible in limited characters.”

Ultimately, cultivators and dispensaries looking to score a license should be prepared to spend between $150,000 and $200,000 to navigate the process, Gullickson said. 

Banking problems

Another problem caused by the federal prohibition involves banking. Many banks are hesitant to do business with cannabis-related companies, while others refuse outright. Working with cannabis businesses is a risk for banks: On one hand, it opens the bank up to additional oversight and liability; on the other, there is a palpable fear that a federal crackdown could result in seized assets and a business catastrophe.

The lack of conventional banking options has led cannabis entrepreneurs, especially those who touch the plant, to work primarily in cash. Not only is that dangerous – cannabis entrepreneurs are regularly targeted for robberies – but tracking cash payments for tax and regulatory purposes is difficult.

“It’s crippling right now,” said Keegan Peterson, CEO of payroll and HR company Wurk. “You don’t realize how important banking is until you don’t have it – just giving employees a paycheck is just brutal. In a cash environment, it’s difficult to even prove you paid [your employees], or your vendors, or your tax liability.”

Finance struggles

Moreover, cannabis businesses are often unable to open a traditional line of credit or loan, thus limiting a common early-stage option for additional growth financing. That means bootstrapping or raising money from friends, family members and angel investors is the most common way young companies gain a foothold.

Luckily, the industry has developed some workarounds:

• Some angel investors are willing to risk providing startup and growth capital.
• Several startup accelerators and incubators have burst onto the scene to help their cohorts get to the next level.
• Venture capital firms are intently watching the industry and making some preliminary investments.

Still, the industry is holding its collective breath in hopes that the federal prohibition will soon be lifted, opening access to traditional banking and improving cannabis’s already immense growth prospects.

David Goldstein, co-founder and managing partner of Our Green Solutions, told business.com that it’s important for a startup to allocate resources effectively, regardless of whether conventional banking becomes available soon. He also advised newcomers to bring in people with professional expertise elsewhere who can apply their knowledge to the cannabis industry.

“What we see is that it’s been tough to get institutional investment,” he said. “Wealthy individuals that are passionate either because they went through chemo and cannabis helped or because they see the growth potential – those are the two types of investors we see. I think institutional money is coming … but it’s important for a startup to run lean but at the same time bring in people who maybe worked in other industries … so they can add their expertise to bring this out of [the] black market into white collar.”

Frequently asked questions about starting a cannabis business

These FAQs can help you get started on the path to opening your own cannabis business.

What is an ancillary cannabis business?

The term “ancillary cannabis business” refers to a company that provides needed services in the cannabis industry without actually touching the plant. These can be marketing agencies, professional advisors, payment processors, security companies and more. Ancillary businesses tend to provide B2B services to other cannabis companies.

Ancillary businesses often avoid the onerous licensing and permitting requirements of plant-touching businesses. Many entrepreneurs entering the cannabis industry are pivoting their existing skill set or business and adapting it to the industry to provide necessary services.

How much does it cost to open a dispensary?

The cost of opening a cannabis dispensary depends on many factors, including your location, the size of your dispensary, and your state’s application and licensing process. In some cases, opening a cannabis dispensary could be a multimillion-dollar process, while in others, it could cost a few hundred thousand. The bottom line is that opening a cannabis dispensary isn’t cheap. Moreover, it is a detailed and complicated process that requires meticulous planning.

If you’re considering opening a dispensary, it is important to line up the right partners, obtain funding and familiarize yourself with your state’s application process. Every state will look for slightly different things, so it’s important to optimize your plan based on what the state is looking for in an applicant.

How much does it cost to start a cannabis grow house?

Similar to opening a dispensary, launching a cannabis cultivation operation is no cheap endeavor. The total initial investment required for a 7,700-square-foot facility with 1,000 plants is estimated at more than $830,000, according to Cannabis Business Plan, and certainly, many cultivation operations become multimillion-dollar investments. Also similar to opening a dispensary is navigating the licensing process; it’s important to understand what your state is looking for in an applicant and then build your team and business plan to suit those needs.

Where do you obtain a cannabis cultivation license?

To obtain a cannabis cultivation license, you will have to go through the regulatory body in your state. Typically, this is some kind of marijuana control board, but the exact process varies from state to state. For example, some states require your operation be vertically integrated, meaning you cultivate and sell your cannabis products from start to finish. Other states separate cultivation and dispensary licenses, meaning your company can do only one or the other.

What other permits does your marijuana business need?

Depending on where your business falls in the cannabis supply chain, you could require some other permits or licenses as well. In addition to cultivation and retail licenses for grow houses and dispensaries, there are processor licenses for companies such as extractors or edibles businesses, research licenses and transportation licenses. Before you launch your business, be sure to familiarize yourself with all the requirements of your state’s law and to obtain all necessary licenses and permits before beginning operations.

How can I guarantee my cannabis business will be licensed?

There is no guarantee your cannabis business will be licensed, but following your state’s guidelines to the best of your ability will increase your chances. A strong team and a good business plan are essential, and they should be backed up by realistic financials and a source of funding that makes your project credible. Some states prioritize social justice and diversity, giving a boost to teams led by minorities and veterans. Identifying the specific priorities of your state’s regulators and tailoring your company and plan to suit them greatly increase your chance of getting a license, but it’s never a guarantee.

How can entrepreneurs learn the cannabis laws?

Besides conducting your own research, it is critical to engage an experienced attorney when you’re starting a cannabis business. Ideally, you will want to develop a relationship with an attorney who helps educate you on the applicable laws. Entering the cannabis industry without legal counsel is especially risky given the ever-changing laws from state to state and the uncertain future of federal policy.

How do you start a cannabis transport or logistics business?

To launch a transport or logistics business for the distribution of cannabis and cannabis products, you will likely require a transportation license. In some states, direct-to-consumer cannabis delivery is legal, while in other states, it is not. Regardless, every legal cannabis company will need transportation for moving harvested product to processing facilities and dispensaries. Again, every state has its own specific rules and regulations regarding cannabis transport, so do your homework and follow all available guidelines.

What types of financing are available for cannabis businesses?

Traditional loans are rare in the cannabis industry, because the FDIC will not back any bank that lends money to a business that breaks federal law, which all state-compliant legal cannabis companies currently do. While conventional loans can be nearly impossible for cannabis businesses to obtain, funding sources are available. In addition to angel investors and venture capitalists, cannabis-specific funding companies have launched to fill the gap left by banks that are too hesitant to provide loans to young cannabis companies. Many ancillary cannabis companies are also bootstrapped, started from the owners’ own savings or personal financing options.

Kimberlee Leonard contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.