Last week in Marijuana and Bankruptcy: Not a Good Mix, we promised you a follow-up post discussing the importance of insulating your personal assets and other businesses from your cannabis ventures. Today we make good on that promise. We cannot overemphasize the importance of the points below. If you have a cannabis business, are in the process of opening one, or are even thinking of opening one, this is must-read stuff.

First, some absolute basics:

  • Corporate entities* exist to protect their owners (i.e., shareholders or LLC members) from company liabilities and debts. Generally speaking, the owners cannot be held liable or responsible for what the company does.
  • In contrast, sole proprietorships (and, in most cases, partnerships), are legally one and the same with their owners.
  • Corporate entities have “personhood” in the sense that they are able to enter into contracts, buy, sell, lease, and borrow real and personal property and money. Corporate entities are also able to sue and be sued.
  • Unlike actual people, a corporation can exist in perpetuity.
Say you are an established small business owner hoping to operate a state-legal retail marijuana outlet. What do you do to protect yourself personally, and to protect your other businesses? One word: separate.
First, you absolutely must set up some form of entity — a corporation or an LLC. You need to create an operating agreement among the company’s owners, and stick to it. This should be a specific agreement for your cannabis business; do not just copy and paste from the agreement governing your non-pot business. You need to do everything you can to maintain clear barriers between these enterprises: separate bank accounts and record keeping; separate offices; separate logos, separate letterhead, and separate business cards. To the extent possible, you should also have separate employees. If you want employees to work at both businesses, create clear job descriptions for both positions, and be sure to schedule and pay them for separate time at each company. If your businesses are doing business with one another (for example, your non-canna business owns a warehouse it wants to lease to your canna-business), put the terms in writing, and make sure whatever service or good exchanged between them is done at fair market value. Basically, treat everything you do personally and everything your businesses do as if you were all strangers. This will put you on the path towards insulating your own assets and those of your non-canna businesses from any trouble your canna business may get into.

For more on that trouble, and how to avoid it, check back later this week.

* We use the term “corporate entity” to refer to both corporations and limited liability companies though this usage is not technically correct.  Similarly, we may refer to a “company” debt or obligation (in contrast to a personal one), meaning that of either a corporation or LLC. For purposes of this post, the distinctions between these types of entities are not important. However, the differences between an LLC and a corporation can have a significant effect on taxes, governance, and a host of other issues.