How to Successfully Launch a Legal Cannabis Business

How to start a cannabis business

Starting a business in any industry can be exciting and challenging. However, Stuart Titus, president and CEO of industrial hemp company Medical Marijuana Inc., says cannabis startups have a unique opportunity to launch, grow and succeed. 

“The whole industry itself is at the very ground-floor level,” Titus explained. “We’re certainly nowhere near maximizing what we could do. Look at alcohol prohibition. Suddenly, legalization spurred industries and businesses. We think the same is true for this industry.”

If you’re interested in starting a cannabis business, here are five essential steps: 

1. Get to know the laws surrounding cannabis.

The cannabis industry is highly regulated, and the rules governing it vary widely from state to state. Additionally, cannabis remains illegal at the federal level — a discrepancy that can create unique challenges for business owners regarding banking, taxation, interstate commerce and more.

Before trying to launch a cannabis brand, it’s essential to understand federal regulations and thoroughly research your state and regional rules, ideally with the help of a legal professional. Determine the following for your area:  

• What type of cannabis businesses are allowed?
• What licenses do you need, and how do you get them?
• What measures must be taken to stay compliant? 

2. Decide what type of cannabis business you want to launch.

Your business choice will determine the specific laws and regulations you’ll follow and how much you’ll earn. Aside from growing or selling cannabis, numerous business types are available in the industry, including the following: 

• Developing cannabis-infused products (e.g., edibles, beverages, topicals)
• Supplying equipment and technology to growers
• Supplying packaging solutions to retailers
• Providing distribution solutions
• Becoming a digital marketing expert for the cannabis sector
• Providing legal and accounting services for cannabis businesses
• Manufacturing ancillary products (e.g., vaporizers, smoking accessories)
• Offering cannabis consulting services (e.g., compliance, business strategy)
• Running cultivation operations
• Running dispensaries

In addition, labs are needed for testing the potency and genetics of cannabis flowers. Extractors are needed for harvesting oils, and ongoing research is necessary to provide insights into the specifics of cannabis for medical treatment. 

“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.”

3. Create a business plan for your cannabis venture.

Create a detailed business plan to ensure your cannabis business idea is viable. Your business plan should include the following: 

• The products and services your business will sell
• Your venture’s target audience
• Customer personas for your intended buyers
• Appropriate marketing methods 
• The staff you’ll need at launch
• Anticipated staff as your business scales
• Employee training protocols
• Proposed business location premises (if the business will have a physical location)
• Security measures
• Quality control measures
• Inventory control systems
• Financial projections, including startup costs, revenue forecasts and operational expenses
• A detailed analysis of how the business will comply with local, state and federal cannabis regulations

Every element in your business plan will require extensive research as it relates to the cannabis industry, including an analysis of compliance and legal issues. For example, regarding business location, you must drill down to the following elements: 

• Zoning laws: You must inspect area zoning laws as they relate to cannabis businesses. 
• Proximity issues: You must consider your cannabis business’s proximity to residential areas, schools and other sensitive locations. 
• Growth concerns: If you plan to scale your business, your location should have potential for growth, such as an adjoining unit or a nearby business location.
• Security concerns: You must ensure your physical location has robust security to protect your staff and stock. Cannabis businesses may be theft targets due to high-value stock and the potential for available cash.
• Community and local issues: You must assess community sentiment and consider local regulations that may affect operations. For example, are there restrictions on signage or operating hours?

4. Find funding for your cannabis business.

Opening a business in the cannabis sector can be very capital-intensive before and after launch. Compliance costs, security requirements, supply chain complexities and ongoing licensing fees may add to your operating costs. Additionally, tax expenses may be considerable (more on taxes later). 

However, obtaining funding can be tricky. Cannabis businesses often face challenges when pursuing traditional financing. Consider the following financing options for your cannabis business: 

• Self-funding: Many cannabis entrepreneurs turn to self-funding or raising money from friends and family members.
• Investors: Finding investors for your cannabis business is possible. Some angel investors and private equity firms specialize in backing cannabis businesses. They are well attuned to the sector’s risks and opportunities. Additionally, venture capital firms are intently watching the industry and making some preliminary investments. However, if you go the investor route, be prepared to potentially give up some company shares and board seats.
• Loans: Applying for a business loan is a typical step for many startups. However, relatively few banks work with cannabis businesses. Those that do don’t always offer common services you’d expect, such as online banking and wire transfers. Smaller banks, regional credit unions and some alternative lenders (such as FundCanna in California) offer cannabis business loans. But rates and terms can vary​. Be sure to explore cannabis-specific lenders to find appropriate options. Additionally, your potential backers may be able to help you get your business banked. 
• Business credit cards: You may be able to qualify for a business credit card to help fund your venture. However, you could run into qualification restrictions if the institution doesn’t issue cards to cannabis businesses. You may need to turn to smaller, specialized financial institutions or alternative business credit options.
• Crowdfunding: Crowdfunding is a potential funding option for your cannabis business. For example, Fundanna is a crowdfunding portal dedicated to helping fund cannabis ventures.
• Startup accelerators: Several startup accelerators and incubators have emerged to help their cohorts get to the next level.

5. Launch and run your cannabis business. 

Getting your business off the ground and running smoothly requires attention to several elements, including the following: 

• Employees: Staffing your business is key to a successful launch and seamless operations. It is advisable to hire employees with experience in the cannabis industry. They can help ensure your team and company stay updated on industry best practices and regulatory changes. It may also be wise to appoint a compliance officer or advisory board member to oversee operations from a regulatory and governance perspective.
• Marketing: Marketing your cannabis business will be essential but challenging. You must adhere to stringent advertising regulations with publications and platforms that accept your advertising and marketing. Note that many platforms, including Google and Facebook, either ban or have strict rules regarding cannabis marketing. Your cannabis business marketing plan must adhere to state, local and platform restrictions while reaching your target audience affordably. State and local laws may also impose restrictions on cannabis marketing to ensure it’s not targeted toward minors. Consider researching cannabis publications and cannabis-friendly platforms on which to focus your marketing and advertising efforts.
• Business leadership: Business leaders must manage the company’s day-to-day operations while continually tracking industry trends, technological advancements, and regulatory changes that could impact the organization. Additionally, businesses with multiple locations must exhaustively research and comply with cannabis regulations across multiple states. Expect new opportunities to emerge, and ensure your business can embrace them and adapt to changing market conditions, consumer preferences and technology.

What to know about launching a legal cannabis startup business

The cannabis industry is changing and growing rapidly. It’s crucial to familiarize yourself with the following challenges as you start and run your cannabis business: 

1. The cannabis regulatory landscape is fragmented.

The cannabis industry remains in a state of flux. Beyond the federal prohibition, or perhaps because of it, varying state frameworks have led to a fragmented industry. Everything from licensing to reporting can be vastly different, making business expansion challenging.  

According to Pew Research, 38 states (plus the District of Columbia) have legalized medical cannabis, and 24 states permit both medical and recreational cannabis. Another 14 states have decriminalized cannabis or only allow limited medical use. Each state has developed its own unique regulatory approach, leading to further fragmentation.

“Since we’re not a federally recognized industry, there are many things that are affected,” explained 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.”

2. There’s currently no federal policy.

According to Gullickson, the lack of federal policy has created a sort of experimental period in which states borrow what works from one another and try to scrap what doesn’t. While federal prohibition creates confusion, Gullickson thinks this trial-and-error period will ultimately benefit the industry’s evolution.

“I’m a little bit more optimistic than most,” Gullickson explained. “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.”

3. The MORE Act is promising.

The MORE Act — which would make cannabis legal across the country by removing it from the Controlled Substances Act — may provide some hope for a more uniform landscape. The House of Representatives has passed it several times but hasn’t gotten past the Senate so far. 

The legislation would introduce a national tax on cannabis products that would slowly increase over a few years. From a cannabis business perspective, while it would require them to become an unpaid tax collector, it would make it easier for businesses to trade across state lines.

The MORE Act would also work to expunge the criminal records of individuals with prior cannabis convictions, helping address some of the racial and economic disparities tied to past drug enforcement.

Still, until it’s enacted, cannabis business owners must continue navigating confusing rules that differ from state to state while monitoring the federal government’s actions.

4. Cannabis businesses deal with more tax complexity and fewer deductions.

Cannabis businesses face tax challenges and complexities other businesses don’t have to contend with, even in states where it’s legal. Consider the following:

• IRS Section 280E: The big challenge is Internal Revenue Code Section 280E, which forbids deducting or crediting any expenses tied to “trafficking controlled substances.” This regulation came into being to stop the loophole exploited in a 1981 court case in which a drug dealer managed to write off business expenses for illegal activities. Because cannabis is federally classified as a controlled substance, businesses that trade in it legally cannot deduct ordinary business expenses like advertising, wages or travel. However, the cost of goods sold (COGS), such as expenses related to production, may still be deductible. As a result, cannabis companies often face much higher effective tax rates than other businesses, which is highly detrimental to their cash flow.
• U.S. tax law: U.S. tax law states that all income is taxable, even income from activities that are illegal under federal law. This means cannabis businesses must still file and pay income and employment taxes like other businesses. Under Section 280E, cannabis businesses effectively pay tax on turnover, not on profitability. Despite these disadvantages, cannabis businesses still must keep detailed accounting records, even for expenses they can’t deduct.
• State tax laws: Some states add extra excise taxes. For example, Washington charges a 37 percent excise tax on all retail sales. Other states impose similar taxes that vary by jurisdiction, further increasing the tax burden for cannabis businesses. 
• Cash transaction reporting: Another challenge for cannabis businesses is that, because many can’t access regular banking services, they deal in cash. However, they must report cash transactions over $10,000 using IRS Form 8300. This requirement adds an additional layer of complexity for cash-based cannabis businesses.

5. Cannabis businesses must deal with licensing and permitting requirements.

Licenses and permits are essential for businesses that deal with the plant, and obtaining them can be arduous, depending on your state. In addition to outlining policies and procedures, applicants must provide an overview of who comprises 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,” Gullickson recalled. “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.”

Dispensary license costs vary widely across the country, starting at $2,500 in Massachusetts and going up to $120,000 in California. Cultivation licenses are similar, with costs ranging from $1,000 for small-scale growers in Oregon to $77,905 or more in California, depending on the size and type of the operation.

6. Cannabis businesses face banking and financing problems, but help may be on the way.

Cannabis businesses face the following banking and financing challenges: 

• Banks are reluctant to work with cannabis businesses. As mentioned earlier, many banks and traditional lenders are reluctant to do business with cannabis-related companies, while others refuse outright. Because cannabis remains illegal at the federal level, banks fear additional oversight, liability and possible federal penalties. Banks also worry about the potential for asset seizures if there is a federal crackdown, which could lead to financial and operational catastrophes for cannabis businesses.
• Cannabis businesses often rely on risky cash models. The lack of conventional banking options has led many cannabis entrepreneurs, especially those who handle the plant, to work primarily in cash. However, this practice is dangerous, as cannabis entrepreneurs are regularly targeted for robberies, and tracking cash payments for tax and regulatory purposes is challenging. Additionally, a cash environment makes payroll, accounting, and discerning your tax liability extremely difficult. 

However, relief may be on the horizon. The SAFER Banking Act, which has passed the Senate Banking Committee, will hopefully accomplish the following: 

• Ensure banks and credit unions won’t be penalized for providing services to legal cannabis businesses. 
• Reduce cannabis businesses’ reliance on cash transactions. 
• Make it easier for financial institutions to service the cannabis sector in general, including obtaining loans. 
• Help generate a more competitive lending landscape for the cannabis sector.

David Goldstein, co-founder and managing partner of Our Green Solutions, says it’s crucial 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,” Goldstein noted. “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.”

 Adam Uzialko contributed to this article.