If you own a retail cannabis business, you’ve probably at least considered forming a limited liability company (LLC) for your company. The LLC is a popular option for all sorts of businesses looking for asset protection, and it has a handful of other major advantages as well.
Of course, forming an LLC isn’t the only option for your marijuana shop, so our mission is to help you decide if it’s the best choice for you. There are many different factors to consider when you’re forming a business entity for your cannabis store, so let’s dive into the details of the LLC to figure out if you should form one for your shop.
If you need help starting an LLC or just want to make sure it’s done correctly, hire an online LLC service like ZenBusiness ($39) or LegalZoom ($99). They take care of all the legal paperwork so you can focus on what you do best.
Tip: ZenBusiness is the best deal and scored higher than any other LLC service.
What Is an LLC?
First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
Why Starting an LLC for a Cannabis Vendor Is Important
The top reason to form an LLC for a marijuana retailer is to gain access to the personal asset protection provided by this business structure. Whether you operate a medicinal dispensary or a recreational retail shop with a wide variety of products, you need the limited liability protections that an LLC can provide.
As an example, let’s say that a customer slips on a wet spot on your floor, falls over, and injures themselves. If you operate your cannabis store as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if that customer decides to sue your business.
On the other hand, if you form an LLC for your marijuana retail store, and you operate and maintain that LLC in a compliant fashion, the scope of your customer’s lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.
However, this is just the tip of the iceberg when it comes to the advantages of the LLC for a cannabis retailer. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.
Of course, it’s important to note that marijuana businesses in some states have some industry-specific taxation guidelines to follow, which can change the landscape a bit compared to most other business types. Still, there are some distinct advantages to be gained from the way an LLC gives entrepreneurs a choice when it comes to taxation models.
Your marijuana LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your cannabis store itself does not pay taxes, but rather the profits are passed through the business entity and your owners pay taxes on that money when they file their own personal taxes.
You can also choose for your pot shop to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to your owners.
The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most marijuana vendors have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.
S corp taxation can help your cannabis shop save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself and your co-owners a reasonable salary for your roles and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.
Compared to operating a sole proprietorship or general partnership pot shop, the S corp taxation model can save you quite a bit of cash that you can use to buy expensive equipment upgrades and make other improvements to your store, rather than writing a big check to Uncle Sam.
However, we will note that there is some confusion regarding which business expenses can and cannot be deducted for marijuana businesses, due to the substance’s legal status on the federal level. It is a certainty that at least the cost of products distributed as part of your company’s total sales can be deducted from your gross business income.
Beyond that, the fact that marijuana remains a controlled substance on the federal level brings into question the deductions available on distributions from this business type. For more information, we recommend that you contact an attorney or accountant.
Finally, an LLC structure can enhance the credibility of your cannabis business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a sole proprietorship, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a marijuana dispensary.
In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights. This means that if another pot shop wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.
With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.
How to Start a Cannabis LLC
The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete guide on the topic. The basic steps in the LLC formation process in any state are as follows:
The 3 Best LLC Websites
When forming an LLC for your business, you generally have three main options. You can form your own LLC using the DIY method, you can hire an attorney, or you can hire an online business formation service.
The DIY route can require quite a bit of effort, and if you’re not comfortable with the process, it can cause some undue stress. As for hiring a lawyer, many startups can’t afford to spend the thousands of dollars it can cost for an attorney to form your business entity.
This leads us to the third option, hiring an online LLC service. There are dozens of reputable companies offering this service these days, and they can all save you a tremendous amount of money compared to an attorney. In addition, while these companies may not have as much expertise as an attorney does, they still provide a considerable amount of peace of mind compared to the DIY route.
If you want to take a look at the top options for online business formation services, head on over to our guide to the seven best LLC services available. In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for business formation service:
🥇 ZenBusiness – Best Overall Value
ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s the best LLC service online.
IncFile – Cheapest LLC Service
IncFile has a business formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
Northwest – Premium Support
Northwest is a bit more expensive, but their industry-best registered agent service includes local scanning of every document they receive on your behalf. They also have the best customer support for LLC services. If you’re looking for a premium service, Northwest is excellent.
Additional Resources for Starting a Cannabis Vendor
- Weediom: There are plenty of online tools and resources for cannabis entrepreneurs, but none are as valuable for getting a marijuana retailer off the ground as Weediom. Their 27-part how-to guide describes everything you need to know to open your pot shop, from startup ideas and business planning resources to information about product providers.
- Marijuana Doctors: With Marijuana Doctors, you can access resources for physicians, patients/customers, and recreational dispensary owners. You’ll find video tutorials, articles, blogs, case studies, a symptom tracking tool, and much more. Marijuana Doctors isn’t the most regularly updated site out there, but their information is still highly relevant.
- National Cannabis Industry Association: The NCIA’s mission statement is “to promote the growth of a responsible and legitimate cannabis industry and work for a favorable social, economic, and legal environment for that industry in the United States.” They do this by advocating for policy updates, hosting trade shows and other events, and providing a wealth of news and resources through their website.
- Leafly: Leafly is an incredible resource for marijuana retailers, as they provide an online portal for vendors to market their products for pickup or delivery, and they also offer a search function for consumers to find the nearest pot shop. In addition, we really appreciate their industry news page, which includes “tips, news, and advice for dispensaries.”
- THCBIZ: As you may have gathered from their name, THCBIZ is a comprehensive resource and business directory for dispensaries. They feature different cannabis industry businesses each month, and they also offer a wide variety of tools and resources for business services, cultivation, dispensaries, education, legal services, products, software, and more.