If you are thinking about opening a medical cannabis business, the first thing on your mind should be the best way to structure that venture. This post will provide an overview of the advantages of incorporation, a discussion of some pros and cons for structuring your corporation as a for-profit versus a not-for-profit, and some tips for how to decide whether to start your cooperative as a non-profit.
First things first, the wonders of incorporation. Asset protection is the first and arguably greatest benefit of incorporating a business. If you choose to operate as a sole proprietor or partnership, you are subject to virtually unlimited personal liability for business debts or lawsuits. This is not the case when you incorporate, as limited liability ensures you are only responsible for your investment in the corporation. Transferability serves as a second benefit as corporations are easier to sell and are more attractive to buyers due to their limitation of liability.
Privacy is another important, though often overlooked, reason to consider incorporating. The corporate shell is a great way to keep your identity and business affairs private and confidential. If you want to start a business, but are interested in remaining anonymous, a corporation is the best way to accomplish this. Raising money is also easier with a corporation than with other business entities because if you decide to take on investors you can simply sell shares of stock. If you want to borrow, a corporation can add gravitas when dealing with banks or other lending institutions. Which leads to the final benefit of incorporation: increased credibility. People feel more secure dealing with a corporation as opposed to an individual. Though it’s difficult to quantify, having an “Inc.” after your name adds an air of legitimacy to a fledgling operation. Limited Liability companies provide similar protections but are of questionable legality in Washington, at least for now.
If you’re onboard with the idea of incorporation you may now be wondering about the choice between for-profit and non-profit. Turns out, there may not end up being much choice at all. The medical-cannabis regime in Washington State was thrown into turmoil after President Obama threatened to prosecute state employees involved with licensed cannabis-related businesses. The threat then prompted Governor Chris Gregoire to veto a major medical cannabis bill that had worked its way through the legislature. “Collective gardens,” small grow operations, survived but dispensaries (also known as “access points”) were left in limbo.
A bill proposed by Senator Jeanne Kohl-Welles, would have allowed non-profit (but taxable) cannabis access points by local option. Requiring access points to be organized as non-profits is not a new idea; California, Colorado and Arizona have either proposed similar regulations or are already operating with similar regulations in place.
In California, for example, non-profits are formed to comply with the spirit of state regulations such as the Compassionate Use Act, the Medical Marijuana Plan, and the persuasive opinions of the Attorney General as laid out in the Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use. In Arizona, the recently enacted Proposition 203 requires medical marijuana dispensaries to be formed as non-profit entities, but does not require that they incorporate or that they operate on a tax-exempt basis.
In Washington, incorporating as a non-profit corporation holds several advantages. First, it provides a layer of protection between the directors of the corporation and the organization. Second, it helps to establish that the organization is operated on a purely non-profit basis. Third, forming a non-profit organization can help ensure that the organization continues to exist in the future even if you are not personally involved.
Now for some of the downsides:
- Paperwork – The main disadvantage of forming a non-profit organization is the increased paperwork required. Articles of incorporation must be filed with the state, by-laws prepared, and meeting minutes kept. Non-profits hiring an employee creates additional forms to complete and employment taxes to pay.
- Regulatory demands – Similar to paperwork, it is important to be prepared for the amount of time and energy that will be required to comply with regulatory demands and to grow your organization.
- Restrictions – There will be operating restrictions to contend with, such as no pay for your directors, no political campaigning or lobbying, and when your organization folds, its assets must be given to another nonprofit.
One thing we should clear up right away, the name “non-profit” is somewhat of a misnomer, as your non-profit can — and should — have a profit, a surplus of revenues after expenses. A properly functioning non-profit should have some money left over at the end of each year to reinvest in improving the organization and in preparing for unexpected future costs. What makes non-profits different from for-profit corporations is that they cannot distribute their profits to the organization’s members, directors, or officers.
This has been a problem in other states as regulators in California have raided dispensaries’ business records in an effort to prove they are not being operated on a nonprofit basis. It is important to point out that you can pay employees and directors a reasonable salary; a vow of poverty is not a requisite. But you will want to take special care in documenting your business expenses and compensation decisions to eliminate any question regarding whether profits are being distributed to insiders.
The most common and most widely used entity for California dispensaries is the mutual benefit corporation (“MBC”). In Washington, a similar structure exists, with non-profits either qualifying as a mutual benefit organization or a public benefit organization. Like a traditional corporation, the MBC has members, a board of directors, and officers like a CEO and Secretary. What sets the MBC apart from usual for-profit corporations is that the purpose of a MBC is to provide only for the benefit of its members, and not to make a profit.
A public benefit organization falls under the traditional religious, scientific, charitable and educational groups. The objective of these organizations is to provide benefits to the public at large. Your organization is unlikely to qualify as a public benefit organization under current state law, making a MBC an attractive option for structuring your organization.
The following are some of the important steps you must take to establish a non-profit organization that complies with Washington State legal requirements:
- Develop a board of directors. The board must be a minimum of three people but will likely contain more, generally 7-12. You will need people with a broad array of skills in fundraising, accounting, knowledge of your programs, community contacts, etc.
- Secure your name. To avoid possible infringement on a reserved name, do a thorough search on all business names you will use. In Washington State, check the Business Search Line at 1-900-463-6000 (this will cost about $6.00) and the Trademark Division of the Secretary of State at (360) 753-7120. Contact the Secretary of State’s Corporate Division here.
- Prepare and file the Articles of Incorporation. File two sets of Articles of Incorporation with Washington State’s Secretary of State’s Corporate Division to gain incorporation status at: www.secstate.wa.gov/corps. The fee is $30. For non-profit corporations, there is no annual corporate license renewal fee.
- Prepare bylaws. You will need to decide if you are going to be organized as a membership organization or a non-membership organization. A membership organization elects the board and has regular meetings and power to amend the bylaws. A non-membership organization, or board-only organization, typically has a self-selected board, and a membership whose powers are limited to those delegated to it by the board.
- Obtain needed state licenses. Washington has a “Master Application” that is used to apply for a state Unified Business Identifier (UBI) number as well as many state licenses. It is also used to register Trade Names (Doing Business As names).
- Obtain a business license from the city in which you are doing business. The City of Seattle requires all businesses located within the city limits, or that conduct business within the city limits, to be licensed with the city.
No one should consider opening a medical cannabis cooperative without first consulting with a competent Washington cannabis business attorney, familiar not only with incorporation of business entities but also with the state’s medical cannabis laws.