3 Tips for Navigating Cannabis Corporate and Regulatory Challenges in the Face of an Uncertain 2024

If there’s one thing owners and aspiring owners of cannabis businesses are used to, it’s uncertainty. Just when it seems like lawmakers might finally clarify one thing, they make other things muddier. 2024 is shaping up to be another year where cannabis businesses must roll with the punches.

There are rumblings of major evolution in the cannabis world, with a lot of noise about two subjects in particular.

The first is to reschedule and whether or not the Drug Enforcement Administration (DEA) will change marijuana from a Schedule I to a Schedule III drug. The Department of Health and Human Services (HHS) recommended the rescheduling, but the ultimate decision belongs to the DEA.

Second is the fate of the SAFER Banking Act. If it becomes law, it means cannabis businesses will finally be allowed to operate in the financial mainstream. Cannabis businesses would be able to have deposit accounts at banks.

Payment processors could do business with cannabis companies, too, which would allow cannabis businesses to stop dealing so much in cash.

Cannabis businesses are wise to take the risks posed by the general uncertainty facing the industry in 2024 seriously. In this article, our attorneys offer three forward thinking ideas to help you navigate uncertain times.

Review Your Business Structure

It’s important to choose the correct business form that makes the most sense with your particular cannabis business goals. The choice often boils down to whether you’re better off forming a limited liability company (LLC) or a corporation. There are other possibilities, but we’ll limit the discussion to LLCs and corporations today.

LLCs can be an excellent choice. They have far fewer formalities than corporations, making LLCs much simpler to set up and run. Corporations require more elaborate structures that include shareholders, directors, and officers. LLCs can be set up with just one sole member. However, LLCs can and often do have many members.

Taxes loom large in every business, including those that buy, sell, store and process cannabis. By default, multi-member LLCs are taxed as partnerships, meaning the profits and losses of the business are treated as the profits and losses of its members for tax purposes. This “flow-through” taxation is more favorable for cannabis businesses under these circumstances:

• The business is not a retailer.
• The business distributes cash rather than reinvests for growth.
• The LLC members all fall below the 37% tax bracket.

Corporations are complicated and expensive to set up and run, but they have some advantages, too. Particularly, if you plan to seek investors and possibly go public, you’ll want a corporation.

Investors are more comfortable with corporations, where they can get director positions and define equity classes. Corporations can also reap tax advantages, such as lower effective tax rates under certain conditions.

Deciding which entity to form isn’t always easy. It’s best done in consultation with both a cannabis attorney and a cannabis tax professional.

Review Your Intellectual Property

Some people mistakenly believe that marijuana-related intellectual property can’t be protected by law. In fact, cannabis businesses can and should protect their IP under federal and state laws.

Trademarks are one massive aspect of IP law. Because marijuana is federally illegal, you cannot currently get a federal trademark for products and services that are directly cannabis-related. However, most states do allow trademark registration for cannabis.

Also, keep in mind that ancillary products could be eligible for federal trademark. For example, a brand of rolling papers could be eligible for a federal trademark because they could roll tobacco, which is legal.

Protecting your IP allows you to open an additional revenue stream in the form of licensing. Basically, this is you allowing, or licensing, your trademark to be used commercially. For example, your logo could appear on t-shirts, coffee mugs, or any other product you can think of. Licensing is done using contracts called licensing agreements.

These must be carefully written to protect your rights as an IP holder. Make sure you get yours written by a qualified lawyer.

Review Your Contracts

It’s essential to have an attorney review all of your business contracts in 2024. Particularly, you should focus on any agreements that have to do with loans or funding your business.

Remember the discussion of the SAFER Banking Act at the beginning of this article? Well, it would give cannabis businesses access to capital, just like any other business. In other words, banks and credit unions would be allowed to lend to cannabis companies.

As you probably know, these institutions are not currently allowed to lend to cannabis companies. This forces cannabis business owners to seek funding through other, often less favorable, methods.

Now, when starting a cannabis company, you could be considering getting a promissory note from a loan company or other non-bank financial institution. Often, these non-banks will charge extraordinarily high-interest rates or load their contracts with other onerous terms. Have an attorney review any and all paperwork before you sign it.

Do you already have a promissory note or other debt instrument related to your cannabis business? Take it to a cannabis lawyer for review. If the lender is charging an unreasonable rate, an attorney may be able to help get it reduced. They could also make other changes to the deal.

Get the Guidance You Need to Help Your Cannabis Business Grow

At Messner Reeves LLP, we have an entire practice group dedicated to the cannabis industry. Our attorneys help everyone from small startups to large, multi-state companies navigate the tangled web of cannabis laws. Our clients include dispensaries, cultivation facilities, CBD and hemp companies, vendors, marketing companies, investors, real estate companies, and more.

Contact us at your convenience to arrange a discussion with members of our cannabis team.