In this special segment, we discuss the intricacies of starting a Cannabis business, although much of it would apply to most entrepreneurs looking to start a structured business! Join us as we discuss each phase of starting your business venture the right way! If you’ve even been intimidated by the process of starting your own business, definitely subscribe to this!
Announcer: Information provided on this podcast does not, and is not intended to constitute legal advice. All information, content and materials available on this podcast are for entertainment purposes only. The views and opinions expressed are those of the speakers and do not necessarily reflect the official policy or position of Cultiva Law. Now, without further ado, here are your exquisite esquires, Mio Asami and Fabiola Jimenez.
Fabiola Jimenez: [crosstalk 00:00:23] What’s up squad? It’s ya girls.
Mio Asami: Back with me and my Fabi per usual.
Fabiola Jimenez: Per usual.
Mio Asami: Per usual, bro.
Fabiola Jimenez: You get it, get it, get it, get it. All right, so today’s going to be the kick off a four-part business series, where we get to answer the very, very often asked questions when it comes to starting a cannabis business. I’m going to take lead on Washington. Mio’s going to take lead on California. There’s going to be some overlap, but there’s always going to be some distinctions as well.
Mio Asami: Important distinctions.
Fabiola Jimenez: Very important distinctions. So, we’re going to do a quick overview. We’re going to do kind of the overview of what business requirements are needed. Some licensing requirements that are needed. That’s what we’re going to cover in today’s episode. The next episodes are going to go into a little bit more in depth. We’re going to talk about branding. We’re going to talk about issues when you have your business up.
Mio Asami: Liabilities, stores.
Fabiola Jimenez: So we’re going to get into the nitty gritty because as much as we like to take your money, it would also be super beneficial to y’all to know all the stuff, man.
Mio Asami: To know what you’re asking us to do too.
Fabiola Jimenez: It’s really important to understand these business basics. That I think a lot of people don’t know exist or just don’t take advantage of some of these structures that unfortunately, by the time they get to us, it’s kind of too late, someone fucked up down the road, done something weird and you have to come up and clean it up. And it usually has to do with corporate formation documents. And no one really understands the importance of those documents until there’s something wrong. Yeah. You have a partnership dispute your business is doing really well or not doing well. I mean all these-
Mio Asami: Someone’s trying to hostile takeover the shit out of your business.
Fabiola Jimenez: 100%, 100%. So there’s a bunch of things that we’re going to have to cover. So weekly word is going to be entrepreneur.
Mio Asami: Entrepreneur.
Fabiola Jimenez: Entrepreneur, and you have to say it in that accent, thank you very much.
Mio Asami: Which Dictionary.com defines as a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.
Fabiola Jimenez: And we all know that that’s exactly what you need to be successful in this business.
Mio Asami: Everyone and their mom is an entrepreneur.
Fabiola Jimenez: Shit, that’s true. That’s true. That’s true. And then there’s some people that really shouldn’t fuck around with being entrepreneurs.
Mio Asami: It’s one of those blanket occupations where your occupation on bachelor is entrepreneur.
Fabiola Jimenez: Remember that one dude that was on the bachelor, he was “former baby?”
Mio Asami: I don’t remember that. I don’t watch the show, but I’ll take it.
Fabiola Jimenez: I didn’t watch it either. It was a fucking dumb ass meme and I saw on [inaudible 00:03:22] on my For You page. Alright, alright, so getting to the basics of first and foremost, starting a cannabis business is just that you are starting a business. One thing that people kind of gloss over are the basics of starting with a corporation with the limited liability company, with a sole proprietorship or a partnership. Those are the most common forms of business entity structures that we see.
Mio Asami: I mean, each of those have different. I mean, they’re different for a reason, right? So when you’re starting your business, you also, I think one of the initial things to think about is which one do I want to form?
Fabiola Jimenez: Exactly. Exactly. So obviously sole proprietorship is just that. It’s one person you’re going out and you’re pitching yourself as a business and saying, “yo, I sell weed” and that’s it. That’s your business. You know, “my name is Bobby and I sell weed DBA. I sell weed.” Legitimate, I could actually totally go ahead and do that. Obviously the risks with that is that you’re the only person that fault if shit hits the fan-
Mio Asami: Liability wise.
Fabiola Jimenez: You’re just the one person. There’s nobody else that you can kind of shift the blame to or split the blame to. Which brings us over to what is a partnership, right? Exactly. That two people, or more, coming into a business enterprise. This can be formalized by a formal partnership creation or it doesn’t have to be, it’s just a partnership, but again-
Mio Asami: I think actually most state partnership acts or state laws, right, that talk about partnerships, say that you don’t even have, like you said, you don’t even have to have a formal document that says partnership. I don’t even have to even use the word partnership. It just has exactly two people that decide to go into business together, and decide to share in the liabilities and the profits of that business.
Fabiola Jimenez: And again, you’re able to kind of break up a little bit of that liability or break up the profits. And so it’s good and it’s bad for the same reason. But once you get kind of past the two person mark, and you’re looking at creating something that’s a little bit larger, my number one recommendation is to do an LLC, which is what I consider like a baby company, right. You’re starting off. It can grow massively absent LLCs with tons of people in them, tons of investors, tons of members. I’ve definitely seen the run the gamut of that. And then also seeing single member LLCs. The perk of an LLC is it creates a barrier between you and the business. So your business does well, then your business as well. Your business does shit, people can’t come after you because they can only come after the LLC. I mean, obviously.
Mio Asami: Well, legal terms, we like to say, you know, I mean, all of these technically have a corporate veil of what’s called the corporate veil, which is that corporate protection. Whereas an owner of the corporation, if the corporation goes south or whatever the fuck happens, you as an owner are not going to be liable, but the business or the corporation is going to be liable and we call that a corporate veil in legal terms.
Fabiola Jimenez: And so when you’re talking about sole prop and partnership, that corporate veil is much more easily pierced because there is no formalities that separate you and your business. So when you’re talking about an LLC, you automatically create that barrier that if someone is going to try to get to you personally for something that your business has done, they have to prove that you pierce the corporate veil. Which has in and of itself its other prongs and be kind of, well depending how shitty the situation is, it could be easily or not easily pierced. So it, it definitely varies-
Mio Asami: It’s not an ironclad way to-
Fabiola Jimenez: To protect yourself. Yeah. But it does make it just slightly more difficult because the policy reason is like you’re taking the time and effort to create this business and to formalize it and-
Mio Asami: Capitalism!
Fabiola Jimenez: it comes with some perks, right? And then that takes us to the fourth, most common business entity formation, which is a corporation. The way I see it is once you create an LLC and you get kind of fancy schmancy, then you can go ahead and kick off and say, you know what, I’m ready to convert my entity from an LLC into a corp. You get the same protections as an LLC, but you also get some perks on taxes and stuff. Which allows people-
Mio Asami: We like to, we work usually with startups, right? From, in, even from a tax perspective or just kind of general maintenance perspective, corporations also have a lot of formalities that you have to go through in order to maintain just kind of, like I said, the corporate formalities versus an LLC is not as costly to maintain. You have less maintenance issues to think about. So for startups, we like to recommend LLC.
Fabiola Jimenez: Yeah, yeah. LLCs. And once other people start coming in, once it gets a little bigger, you graduate to a corporation. Some people like to go straight into a corporation, they already understand the structure. Highly recommend talking to a tax attorney or an accountant, and they can really get into those details in the perks of both. So.
Mio Asami: And each of those actually also to kind of give a little brief legal lesson, each of these entities have different words for what essentially is an owner of the company. Right? So when you were having a corporation, the owners who have equity in the company who are owners of the company, those are shareholders. And then for LLCs, we have members-
Fabiola Jimenez: or managers.
Mio Asami: …or managers. Yeah. But managers don’t always have to be members either. They don’t have to have ownership of the company but they still manage the company. And then partnership and partners.
Fabiola Jimenez: You know, another difference corporations, those shareholders in the company are governed by the bylaws and the articles of incorporation there. And when you’re talking about an LLC, your entity is governed by an operating agreement. Basically, these documents is labeled as the are really set out and lay out the structure for the business, how it’s going to be run. If it’s going well, this is what’s going to happen. If it’s going bad, this is what’s going to happen. Are new shareholders coming in, shareholders leaving new members, coming in, members are leaving and kind of everything in between. And one of the important things to remember is that these documents, having these documents have definitely saved some of our clients a lot of headaches and have allowed pathways to resolve issues. The lack of these documents have created incredibly, incredibly expensive litigation cases that we’ve had to handle, that really, honestly could have just been nipped in the butt if the documents had been had somewhere by someone.
Mio Asami: Because when you don’t have these documents for a corporation, and if you don’t have bylaws, and incorporation also, you have bylaws, you have shareholders agreement. Those are two different documents that essentially does the same thing as what an operating agreement does for an LLC. But when you don’t have these documents, each state has their own laws for how these companies are governed, right? When you don’t have them, your company will be subject to those default regulations. And those aren’t always favorable for the actual others. It’s not the best. And a lot of the, a lot of these default regulations or whatever it is, can be whatever’s written in there can be waived by having an operating agreement saying, you know what the laws say this, but we’re going to do it this way. And states allow that. For the most part.
Fabiola Jimenez: So these documents are incredibly important to the relationship that you have with your business and others have with your business. And so you kind of have to take that on with [crosstalk 00:11:28]. So take that for what it is. Some people are right off the bat, ready to go. Some people need a little bit of time. That’s super fine. We deal with this all the time. So we’re incredibly familiar with how these kind of interact with each other. So once you have your business entity set up, your corporation, LLC, set up, we’re now moving into the actual business licenses. And so some people do not understand that that’s another totally different step that you have to take.
Fabiola Jimenez: For Washington state, and I think California and Oregon are going to be the same thing, but at least we’re Washington state my processes. Boom. I set you up with your SOS, get your business into the Secretary of State set up and get you all ready to go. And then I, as soon as that, that is set up, I go ahead and I start your state business license, which is tied into the Washington state licensing services, Washington state department of revenue, that’s where you kind of pay all your taxes and kind of handle all this stuff, and that’s like the business license that you post on your business, right? And so that’s, and that’s a very different, separate registration.
Fabiola Jimenez: When you’re doing a sole prop, a lot of people just forego obviously the secretary of state registration, and they just go straight into the state licensing because you still get a UBI. You still get some of those basic formations. But the way that I like to do it is the secretary of state first and then state business licensing and you’re able to just kind of move forward with that. So-
Mio Asami: That’s kind of what allows you to, if you’re a sole prop especially, that’s what allows you to do like a DBA, right?
Fabiola Jimenez: Yeah.
Mio Asami: You still (like), for people who are just doing a sole prop and they don’t want to do business under their own personal name and they still want to get business under something else. You want to register your DBA as of doing business as. You want to register your trade name. Your BA with the state. [inaudible 00:13:23] California is kind of similar. So same thing, you have SOS registry and go to register the business. And then instead of getting a state business license, California makes you get what’s called a tax ID. CDTFA, the California Department of Tax and Fee Administration. They give you the tax ID. They basically that’s your tax ID is just to make sure that your business is being taxed as it has to be. They want to make sure that they’re putting so, so it’s not as simple as just, you know, registering with the secretary of state. You also need to get that tax ID so that you can pay your taxes, your business taxes as you need to.
Fabiola Jimenez: Exactly. So now in theory, you have your secretary of state registration. You have your state business license ready to fucking go-
Mio Asami: You have your operating agreement. You have your bylaws.
Fabiola Jimenez: …You’re set up, you’re set up, you’re ready to go. You’re like, yo, what up? I’m ready. Cool. Here we go. For Washington, you have to go ahead and register and get your license through the Washington State Liquor and Cannabis Board. That is the governing body for cannabis licenses in Washington. So, fucking weird, and I know some, for some people is kind of difficult to think about this, but like the the LCB is just this regulatory body. They get their information from the department of revenue, the Washington state business licensing services, where you get your state business license. So in theory, while you don’t have to have your secretary of state registration, if you’re a sole prop or a partnership, regardless for you to even have a cannabis license, you do have to have a state business license, but in state because that actual license itself identifies the location of your cannabis business, whether it’s a farm or it’s a store processing facility, that document in and of itself is very important.
Fabiola Jimenez: If your business license is not active, you will not have your cannabis license. It just won’t. Not necessarily the same if your business is delinquent on the Washington secretary of state, that might be an issue down the road, and they’d be kind of cranky about it, but it’s not going to preclude you from getting your license. But, if your fucking Washington state business license is all fucked up. No, no, you’re not. We’re not even going to entertain that. We got to clean up that particular license up and then be able to go ahead and move forward. So as you get a license dropped into your lap, right? It’s like, yo, I’ve got weed license, I’m going to sell some shit. Cool, cool, cool. So we have to submit your application to the Washington state business licensing services. They look at it, they get their cut of their fees. They look and make sure everything’s all good to go. And then they kick it off to the LCB. The LCB goes about their way of reviewing your application. Many people have gone through this, go through the application. Then they go ahead and take their cut of their fees. Because no on works for free bro.
Fabiola Jimenez: And so then they do that. And so then by beautiful grace, you get through all the stuff you are now blessed with a cannabis license to operate. So that’s in Washington. Also interesting in Washington is that you can just purchase either the license, a cannabis license itself, or you can purchase an actual business, which is a big difference with California.
Mio Asami: California is a shit show, especially because, you know, Washington has been legal since it’s, Washington’s one of like the model states for cannabis and California just still said “fuck you, we’re doing it different.” So like California to get a license you need. I mean, I pretty sure we’ve talked about this before in the California licensing episode? But yeah, so you need a state license and a local license, but either way, when you’re applying for these things, the license is issued to the business. It is specific to whoever applied for the license. So whether it was an individual that applied for the license or whether it was an LLC or a corporation or partnership that apply for the license. The license is attached. They are not transferrable, which is a huge difference. And it is a pain in everyone’s ass, literally.
Fabiola Jimenez: Because, so like in Washington, my biggest thing is when I am buying a license, I’m just buying the license and it’s just less liability, I don’t have to deal with taxes, I don’t have to deal with shit. When I’m just buying the assets that asset in and of itself, just the license. From the seller, I’m like, are you totally done? Unless there’s some underlying issue there where they have IP, or they have this business turned into another business, whatever the case may be. But I was like, you don’t want to just get rid of everything and let them take care of whatever’s happening. And so we’ve had clients do that, where they sell their business and then they leave the tax liabilities to the buyer to handle. And that’s part of the consideration for the purchase price in terms of purchase price is pretty low because the business has back taxes that need to be taken care of. And so you can kind of make all these creative solutions to try to go ahead and just get rid of the whole problem in and of itself. But with California, having the licensed tied into the business, you really are taking a bite of that big liability apple and just swallowing it.
Mio Asami: Or acquire it. I mean, it’s either, [inaudible 00:18:58] you can, there’s literally the only way to do it as an M&A, you would have to either merge with the company or you have to acquire the company. Period. But, what. On God, period. But what comes with that though is because you’re not buying, not just the license, you’re buying the entire business. So you’re buying the businesses contracts, you’re buying the businesses IP, you’re buying the businesses, whatever the fuck else that they have, whatever other assets that they have comes with that. So, which is also a heads up to, I’ve seen so many ads and just bullshit posts about, “Hey there, I’m selling this license in California.” No bitch, you’re not selling the license, you got to sell the company. So unless your business is not in operation and you know, it’s worth nothing, then maybe you sure your the license, I did air quotes. You can’t see that.
Mio Asami: But yeah, like I said, it’s attached to the fricking company, so you gotta buy everything. Which again is a huge thing to think about for both the buyer and seller. Does the buyer want to buy into that? All the debts and the liabilities and everything else that the previous business had, or the licensed holding entity has, or, and then from the seller standpoint, does the seller want to give up other contracts that they’ve already the business [crosstalk 00:20:22] reputation, all of that also goes with the license.
Fabiola Jimenez: It’s a, yes, it’s a huge, huge difference. And it makes a really big difference in the pricing as well. I think for, for Washington, some people overvalue their license and think they got a $7 million license for a sale. And it’s just like, it’s just the license and it just doesn’t make any sense. But in California, if you have a business entity that is successful with IP, that has a bunch of branding deals kind of going on a $7 million deal for that and the license is actually pretty on par with the value, but for Washington-
Mio Asami: Retail.
Fabiola Jimenez: …yeah retail. But for Washington, the fact that you can split your license, it’s very different. And another thing too, is that you can actually split. As of right now, you can split to your producer processor license.
Mio Asami: That’s another huge difference too.
Fabiola Jimenez: So you can, again, within that realm, that is a separate, that’s a separate asset that you can, that you can sell off. And so you can keep your business with a production license for the processing license and then sell that other license out to a totally different business. It’s not that crazy for Washington now that I’ve gotten into it. But when you coming from California into the Washington market, it’s really hard to digest. That’s the situation. And then vice versa. It’s hard to see how even though both states allow for recreational weed, how vastly different the way that they view the commodity of what is a cannabis license.
Mio Asami: And on top of that, producer license in Washington is the cultivation license in California. The processor license in Washington is the manufacturing license in California. Those, and again, as we talked about in the California licensing episode, the cultivation license is handled by the CDFA manufacturing and [inaudible 00:22:13] CDPH. They’re different entities, they’re it’s own whole different fucking thing. You can’t combine them into one license, like again in Washington and you can’t split them because, oh, I mean, they are split, so yeah.
Fabiola Jimenez: So other considerations that people kind of don’t think about, and as we’re, as we’re getting into this is as understanding that you have startup costs. It’s not just for the startup cost is not just like the actual license itself. But you have to understand as you’re registering for the secretary of state, that’s some money. You’re registering for your business license, that’s some money. You also have to look at like where your location is going to be at. Are you buying the property? Are you getting a lease for the property? You have to understand. That’s a huge, huge, huge, huge, huge, huge thing to consider is that location is incredibly important for Washington. Again, I’m not sure California is huge.
Mio Asami: Oh yeah, it’s huge.
Fabiola Jimenez: So that’s a huge thing. You have to consider where your license is going to be at.
Mio Asami: Where it can be at.
Fabiola Jimenez: Where it can be. And trust me, when I tell you that having a location and having issues with it is very, very fucking common, which is why a lot of people want to sell their shit. There’s on the time they’re on a timeline, they’re on a ticking time bomb to get rid of this while it still has some value, and we can get into that later. But anyways, so now you have that. You also have to look at the requirements for your location. Do you have insurance? Do you have the right security and surveillance equipment? This is not even talking about product yet. We haven’t even touched product yet!
Mio Asami: We haven’t even talked about inventory, bro! [crosstalk 00:23:55]
Fabiola Jimenez: Yeah, we haven’t even talked about that. There’s a lot of considerations that you have to take in which sucks. You have the actual cost in and of itself for your business, and then the actual cost of actually operating your licenses are very different. So it is pretty, it is pretty wild-
Mio Asami: A lot of stuff to think about, but obviously if you do this right way properly, if you think about these properly and really thoroughly, and you have a good plan and-
Fabiola Jimenez: Taking it a step at a time. Let’s take it a step at a time. Do you have your business structure? Boom. Do you have your license? Boom, do you have your cannabis license? Boom. And then once you have that, you can start thinking about it, all those other costs, but you have to have the basics. Your corporation, your business license, your weed license, and then the other costs. You can do this in an Excel spreadsheet, you can do it on a fucking napkin, whatever. But you really have to think about it. You have to think about that there’s all these concepts, all these moving parts that you have to keep up. The way that I see it running a cannabis business is like any other business, you’re either selling weed or you’re selling chocolates. You have to follow the same rules of running a business.
Mio Asami: At the very foundation.
Fabiola Jimenez: At the very foundation, yeah. And is there a lot of shady people out there? Yes. But I promise you that if you can take a minute and slow down to look at these different considerations, you will save yourself a lot of headache. You’ll save yourself up from being the victim of a lot of fraud that we see in this industry too, because people just don’t understand.
Mio Asami: Especially California, holy shit.
Fabiola Jimenez: Yeah, California is a fucking shit show, but that’s the thing, right? If you understand these four different distinct points that we discussed today, then you’re good. You’re on good footing-
Mio Asami: You got a good foundation. You’re on your way.
Fabiola Jimenez: Mio, what is our strain?
Mio Asami: Our strain of choice today? So we conclude, as we always do, with a strain of choice. And today, our strain of choice is called Cinex. It’s a hybrid of the parents, Cinderella 99 and Vortex, has a mixture of flavors ranging from sweet citrus to the earthy skunk, which I don’t know how I feel about that, but still sounds kinda good. It sounds dank at the least and the effects are clear-headed and uplifting. Perfect for building a positive mindset and stimulating creative energy. Yeah.
Fabiola Jimenez: Which is what you need to do to deal with this bullshit in this cannabis industry. So, all right, well, thanks for joining us episode one or the four-part business series come back next week and the week after, and the week after that. So you can get to know a little bit more of this juicy stuff that me and Mio will deal with on everyday basis.
Mio Asami: We’ll talk about expansion, branding, just growing your business.
Fabiola Jimenez: Taxes!
Mio Asami: Taxes!
Fabiola Jimenez: We’ll have our tax expert come in here and talk about-
Mio Asami: I don’t want to talk about taxes.
Fabiola Jimenez: …I don’t want to talk shit about taxes because I don’t know shit. Aren’t taxes due soon? I don’t know. Anyways, anyways, as always, you can find me @fabiatcultiva on Instagram.
Mio Asami: To find me, you know, @mioatcultiva on Instagram.
Fabiola Jimenez: Follow us on Facebook and we’ll catch you guys in the next episode, bye.