What are the Requirements for a Cannabis Business in California?

Proposition 64 legalized recreational marijuana businesses, right? Well not at the moment. Currently, the only cannabis businesses “allowed” to operate in California are medical marijuana businesses. I remember reading an NPR story that claimed that there were more medical marijuana dispensaries than Starbucks in some neighborhoods in California but recreational use will prove that further growth is possible.

State Level

There are federal, state and local regulations of cannabis. At the state level, Proposition 64 set up a structure to regulate the cannabis industry and delegated responsibilities to state organizations that are going to release laws for the sale, distribution and consumption of recreational cannabis supposedly by January 1, 2018.

Local Level

However, while the state has authorized sale and use for the future, it will still be up to your county whether or not you will be issued a permit to operate your business. For example, San Diego County currently authorizes permits for medical marijuana dispensaries, but there are requirements for its operation, such as being 1000 feet from a school.

Federal Level

If you pay attention to the news then you might be thinking, aren’t things going to get worse for cannabis? Jeff Sessions is cracking down, even on medical marijuana, right? At the moment there might be bigger fish to fry for the federal government. At the end of the day this may come down to tax revenue. However, there are twenty-seven states where medical marijuana is legal and seven that legalized recreational marijuana.

What Do I Need to Do to Start My Business?

Let’s be clear. You can only have a medical marijuana business at the moment until the state and county release new mandates regarding recreational cannabis.

First, you need to incorporate your business.

The purpose of forming an entity, not only gives you limited liability, but also serves the as the intention of the Compassionate Use Act, the Medical Marijuana Plan. According to California Health and Safety Code sections 11362.765(a), “nothing in this section shall authorize any individual or group to cultivate or distribute marijuana for profit.” Many have taken this to mean that medical marijuana dispensaries can only be incorporated as non-profit organizations.

Furthermore, California case precedent has come down suggesting that forming a non-profit organization is the best practice for medical marijuana dispensaries and entity collectives. In the Qualified Patients Association v. City of Anaheim (2010) 187 Cal.App.4th 734, 746 the the Court stated that, “[t]he [Medical Marijuana Program Act] bars individuals and any collective, cooperative, or other group from transforming medical marijuana projects authorized under the MMPA into for-profit enterprises.” Thus, anyone seeking to form a dispensary has several types of entities to choose from when forming the business.

  1. Mutual Benefit Corporation – The most common and most widely used entity for California dispensaries is the mutual benefit corporation, as defined under California Corporations Code Section 7110. Like a traditional corporation, the mutual benefit corporation has members, a board of directors, and officers like the President and Secretary. However, the mutual benefit corporation’s purpose is to provide a benefit to its members and not to make a profit. Therefore, nearly all California dispensaries require patients to join in their membership.
  2. Other Non-Profit Organizations – Some California dispensaries form as other types of non-profit organizations with purposes, such as: public good, education or religion. These types of non-profits can qualify for tax exempt status under Internal Revenue Code Section 501(c)(3), and tend to have more rigorous requirements than the mutual benefit corporation because if approved for 501(c)(3) status the organization will be tax exempt.
  3. Collectives – Very few dispensaries form as a cooperative corporation, as defined under California Corporations Code Section 12200.

Second, you need to get the required permits.

You must obtain permits and licenses from your state, county and local authorities. If you are not sure then contact us and we can help get you started. If you are a dispensary, you are going to need to find a space before your local authority will issue you a permit do to the zoning requirements.

Third, it is a good idea to have an attorney.

Today there are many changes in law regarding medical and recreation cannabis use and you, as a cannabis business owner, are expected to be up to date on all of legal changes. Ignorance of the law is not a defense in court. If you retain an attorney, then we can keep you up to date and to make sure that you stay on top of all of the new legal framework so you can focus on running your business. Contact us for a complimentary consultation.

Coastal Pacific Law attorneys are experienced in business planning, and can help with your incorporation, contracts, trademarks or other issues. To schedule a complimentary consultation, call (619)786-6563, or fill out a Contact Request Form.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Photo by Andy Schneider

Posted from San Diego, California, United States.