Did you know that the value of the global marijuana industry is projected to grow to $63 billion by 2024? This growth will lead to an increase in jobs in the industry across the United States, which means the industry is showing no signs of slowing down.
If you’ve been thinking about starting a marijuana business, now is a great time to do so. However, it can be tricky to understand marijuana business corporate structures if you’re not sure whether you should legally register as an incorporation or an LLC.
That’s why we’ve created a complete guide to help you better understand how to structure your marijuana business so that you can operate legally in the United States.
Table of Contents
The Best Way to Structure a Cannabis Business
You can structure your cannabis business as either an incorporation or an LLC.
What Is an Incorporation?
Incorporation is a term used to describe a corporate entity. Basically, this means that there is a separation of the assets that the company has from the assets of the investors and the owners of the company.
For your company to register as an incorporation, you have to write up a document that’s referred to as the Articles of Incorporation, as well as enumerate the shareholders of the business.
What Is an LLC?
LLC stands for a limited liability company. An LLC is the easiest way for you to structure your business to protect any personal assets that you have in case your company is involved in a lawsuit.
Companies that are registered as in the LLC can be owned by one person or a group of people. However, if the company is owned by one person, it will be referred to as a single-member LLC. If the organization is owned by a group of people, it will be referred to as a multi-member LLC.
Reach out to a tax attorney at Polston Tax so we can help you start your marijuana business and ensure everything is handled correctly.
What Are the Benefits of Registering as an Incorporation?
As a small business owner, you probably understand that owning a small business can be risky. Let’s take a closer look at the benefits of registering as an incorporation and how it can help to better protect you as a business owner.
Keeps Your Personal Assets Protected
The best way that you can keep your personal assets protected is by registering your cannabis business as an incorporation. This means that when you register your business, your company will gain the ability to carry on business, game liabilities, own property, and even can sue or be sued by other people.
In addition, this also means that your incorporation will be held legally responsible for any debts incurred. If your company begins to struggle financially and goes into debt, the personal assets that you own, the director owns, any officers own and any shareholders own will be protected.
Increase the Credibility of Your Business
Not only will registering as an incorporation protect your finances, but it will also help to increase the credibility of your company. Any business associates, suppliers and even customers that work with your business may perceive your company as more stable than they would if you register your business as an LLC.
Option of Anonymity
If you’re interested in keeping your name private as you’re opening up your marijuana business, registering your company as an incorporation may be a better option for you. This is because a corporation has options for anonymity!
What Are the Disadvantages of Registering as an Incorporation?
There are also some disadvantages of registering your marijuana business as an incorporation you may want to consider before deciding.
Double Taxation
One of the major disadvantages of incorporating a marijuana business is double taxation. This occurs when you are required to pay income taxes twice for the same income. As a corporation, you are taxed on both a business and personal level. A corporation pays taxes on annual earnings, and when paying out dividends to its shareholders, the corporation pays taxes on the dividends as well. Shareholders must also pay taxes on the dividends they receive.
Expensive
Another disadvantage of incorporating a marijuana business is that the setup can be more expensive compared to other structures. This added cost is due to the complexity of a corporation. When forming a corporation, you’ll pay several fees, such as setup costs, accounting expenses, states fees and legal expenses.
Additional Paperwork
Incorporating a business involves a lot of paperwork, which makes it a more time-consuming process. When you structure your marijuana business as a corporation, you’’ll need to keep records of bylaws and articles of incorporation, information about meetings, records of financial transactions and a register of members, directors, shareholders and officers.
What Are the Benefits of Registering as an LLC?
If registering as an incorporation doesn’t sound like the best personal fit for your marijuana business, registering as an LLC may be the best alternative option for you. Let’s take a closer look at the benefits of registering as an LLC:
Simple Registration
Registering your business as a limited liability company is a lot easier to do than registering as an incorporation. You don’t have to assign any formal officer positions, record company resolutions, take note of company minutes or hold annual meetings for your company to be registered as an LLC.
Flexible Options
There are several different ways that you can register your LLC, which is a great solution if you’re looking for flexibility. If you’re the only person who owns your marijuana business, you can register your LLC as a single member. However, if there are multiple people who own your marijuana business, you can register your company as a multi-member LLC.
You also have the option to allow your LLC to be taxed as an S corp or a C Corp, depending on which one is more beneficial to your business.
Options for Business Loans
By registering your business as a limited liability corporation, you will have more credibility. An LLC business is recognized by many people to be more credible than if you were to register your business as a partnership or as a Sole proprietorship.
Once you have registered your business as an LLC, your company is eligible to begin building a credit history. This means that you will have the opportunity to gain access to business loans and to build a line of credit under the name of your business and not just your personal name.
Avoid Double Taxation
With an LLC, you can avoid the double taxation you would face with an incorporation. This is accomplished with pass-through taxation, which occurs when your taxes pass through your marijuana business and onto the company’s owners.
What Are the Disadvantages of Registering as an LLC?
There are also some disadvantages of registering your marijuana business as an LLC you may want to consider before you make your choice.
Fewer Fringe Benefits
LLC employees may receive fringe benefits like medical insurance, group insurance, medical reimbursement plans and paid parking. However, these fringe benefits must be treated as taxable income. This also applies to employees who own part of an S-corporation. Employees of C-corporations don’t have to report fringe benefits as taxable income.
Immediate Recognition of Profits
Since you are not subject to double taxation with an LLC, the business profits are included automatically in a member’s income. With C-corporations, on the other hand, you don’t need to distribute profits to shareholders as a dividend immediately, which means shareholders may not be taxed on the company’s profits.
Medicare and Social Security Taxes
Sometimes an LLC owner may pay more in taxes than the owner of a corporation. This is because an LLC’s salaries and profits are subject to self-employment taxes. With a corporation, salaries are the only income subject to Medicare and Social Security taxes, not profits.
How a Tax Attorney Can Help With Marijuana Businesses
There are many things to take into consideration when registering a marijuana business, so the process of choosing which is the right option for your business can be overwhelming. This is where a tax attorney can help.
At Polston Tax Resolution and Accounting, we can help you determine the best way to structure your marijuana business. We also offer accounting services that include:
- Record-keeping
- Documentation preparation
- Preparation of monthly financials
- Best practices to lower taxes and maximize deductions
Understanding How to Structure Your Marijuana Business
By having a solid understanding of how you should structure your marijuana business, it’ll be easier for you to launch your new cannabis organization! The cannabis industry is going to continue to grow in the United States, so there’s never been a better time to start a legal marijuana business!
Are you looking for tax help with your marijuana business? We have all of the tax resolution services you need to succeed, including cannabis CPA accounting and tax services. Contact us at Polston Tax today to learn more.