New cannabis businesses must consider whether to classify themselves as a corporation, limited liability company, partnership, or other type of entity. Each entity structure imposes different legal liability, tax implications, and different requirements for formation and post-formation maintenance.
Many cannabis business owners question whether they should form an LLC or a corporation for their cannabis business. While both entity structures protect against personal liability from the business' creditors, there are additional factors to consider.
If the cannabis business contemplates shareholders, rather than owners, the business will need to be formed as a corporation and will be subject to certain corporate formalities, such as election of a board of directors, stockholders, and annual meetings. If the business does not contemplate going public or raising capital by selling shares of company stock to investors, venture capitalist, or private equity firm, structuring the company as an LLC will free the company of observing the aforementioned corporate formalities.
Unfortunately, the federal illegality of cannabis remains a factor. As such, pursuant to Internal Revenue Code 26 U.S.C. § 280E, businesses trafficking in Schedule I controlled substances cannot deduct any ordinary or necessary business expenses, even in states where cannabis is recreationally and/or medically legal. Thankfully, the IRS has finally given some guidance on what costs are allowable and deductible. The preceding will affect both personal and corporate tax liability, which should be considered when deciding between a corporation (either S- or C-corp), an LLC, or other entity structure.
As you can see, no one structure is suitable in all situations. If you require assistance forming an LLC or a corporation for your cannabis business or want to learn more about which business structure is best for you, contact the attorneys at Leaf Legal, P.C. to request a consultation.