NYC cannabis fever is here, and with the release of more license categories on the horizon, cannabis entrepreneurs are (hopefully) busy preparing for the upcoming historic round of licensing.
To beat the summer slump, the VS New York team has created an eight-part series of VS Insights to help your business navigate the path to applying for a New York cannabis business license. The series will cover essential topics for New York cannabis entrepreneurs, such as finding real estate, preparing for license applications, branding and trademarks, fundraising and investment, qualifying as a social engagement applicant, communicating with municipal officials and environmental requirements . Continue reading for part two of the series, focusing on a crucial first step for any company – creating a plan and forming a business.
Define your future goals and vision
The biggest mistake made when forming a company, whether related to plants, ancillary or just in general, is to proceed with the formation before creating a comprehensive business plan. It may seem obvious, but you need to consider your future goals and long-term vision for the company. Too often, entrepreneurs jump into a project without proper planning, which will often result in spending more money and time trying to correct bad decisions that could have been avoided by creating a business plan.
Choose a legal entity for your New York cannabis business
The first decision any entrepreneur will face is which type of legal entity to use. It is important to note that in order to apply for a cannabis license in New York, the applicant must be a New York entity. There are different types of legal entities to choose from, but most cannabis businesses are either a corporation or a limited liability company (LLC). The LLC is the newest type of business entity and provides the most flexibility. Whether an LLC will be run more like a corporation or a partnership is a decision for each respective LLC founder.
One consideration that is unique to New York stems from the availability of cooperative (Co-op) licenses. Entrepreneurs interested in applying for one of these Co-op licenses should speak to an attorney as soon as possible, as New York has specific requirements for choosing legal entities and corporate governance.
For more on choosing legal entities for a cannabis business, check out my colleague Charlie Alovicetti’s VS Insights series Startups: Creating Cannabis Startups.
Determine which tax status is right for your business
Choosing a legal entity and tax status are two decisions that go hand in hand. For example, while the default tax status for LLCs is to treat them as pass-through entities, they can also choose to be taxed as a corporation (ie, a stand-alone entity). Taxes are complex and nuanced issues for any business, so you should always speak to a tax professional when making these decisions. Tax preparation and strategy are also important because of the impact of Section 280e of the IRS code, which limits the types of deductions your business can take. For these reasons, you should seek out a tax professional with experience in the cannabis industry to strike the right balance between minimizing your tax bill and protecting you from liability of €280.
Financing and Equity Considerations in New York Cannabis Businesses
After choosing your legal entity and tax status, you may need to focus on raising the necessary capital to get your business licensed and up and running. In general, entrepreneurs have the option of raising funds by issuing debt or equity. If you plan to raise funds through debt, lenders are less likely to care what type of entity they are lending to. Historically, equity investors in the startup and venture capital space have generally been more comfortable working with corporations. However, in our experience, we have seen that investors feel more comfortable investing in an LLC – leading to more and more entrepreneurs choosing the LLC structure.
Entrepreneurs should also be aware of any requirements relating to social capital status or future requirements that New York may place on certain types of licenses. While these types of licenses can provide some advantages when it comes to the licensing process, they can present challenges to raising capital by limiting the amount of equity capital that can be issued to investors. This can be particularly challenging for applicants with limited assets and no income to base their assessments on.
Don’t forget your exit strategy
The final stage of any entrepreneurial journey is the exit. Unlike the other topics mentioned that more than likely require your attention before if you are granted a license, many entrepreneurs may not begin to consider their exit strategies until their business operations begin. Regardless, New York cannabis entrepreneurs would benefit greatly from thinking about potential exits when making their initial plans, as the Empire State’s legal cannabis market could very well become one of the largest in the world.
Decisions regarding choice of legal entity, tax status and financing methods can significantly influence which exit strategy makes the most sense. Certain types of entities lend themselves to certain exit strategies better than others. For example, an exit strategy involving initial public offerings (IPOs) may benefit from using a corporation, while a business with plans to be passed down through the family through generations may benefit from an LLC structure.
With all that cannabis entrepreneurs must do as part of the application and licensing process, it’s easy for the decisions above to fall by the wayside or be made on a whim. That’s why it’s best to find legal counsel and a tax professional—with experience working in the cannabis industry—as soon as possible to prepare a plan for setting up and running a business. By doing this, entrepreneurs can then focus on the licensing process and ultimately running their business.
Read part one of the “Getting Started with Your New York Cannabis Business License Application” series.