What Do I Need To Do To Start A Cannabis Or Marijuana Business In Colorado?

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Henry M. Baskerville - Business Litigation - Super Lawyers

Answered by: Henry M. Baskerville

Located in Denver, COFortis Law Partners

Denver, CO
Phone: 303-565-8066
Fax: 303-295-9701

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Colorado led the way in a controversial experiment when, in 2014, it became the first state to legalize recreational marijuana. In June of 2019, the state announced it had surpassed the $1 billion mark in cannabis revenue, while private companies reported more than $6.5 billion in sales over the past five years.

While 10 other states and the District of Columbia have also legalized recreational marijuana, Colorado has had years to work out the kinks. The state has nearly 3,000 licensed marijuana businesses, and more than 41,000 people work in the industry. However, opening a cannabis-based business can be a complicated and arduous process. So, how do you begin?

First, Select The Type Of Cannabis Business

Owners of cannabis businesses can face numerous state laws and municipal regulations. However, the requirements and even the taxes you will pay depend upon whether you sell cannabis products containing more or less than .3% of tetrahydrocannabinol (THC). THC is the psychoactive ingredient in marijuana, which gives people a “high” or euphoric feeling. The three main cannabis businesses in Colorado are:

  • Retail marijuana operations: Products contain more than .3% of THC resulting in strict regulations by the Colorado Marijuana Enforcement Division (MED). Applicants must apply for a retail marijuana business license.
  • Medical marijuana operations: Dispense products containing more than .3% of THC and sales are also controlled by the MED. Applicants must apply for a medical marijuana business license.
  • Cannabidiol (CBD) products: CBD oils and other hemp-infused products face significantly fewer regulations in Colorado. While producers need a license to grow industrial hemp, retailers only need a typical business license required for any company.

Next, Form A Business Entity

Once you decide which type of cannabis business you want to start, it’s time to form a business entity. There is no right choice for everyone. Your decision will depend upon several factors, including your plans for the future and the number of partners you have. This choice will also have a significant impact on the amount of taxes you will pay as well as liability concerns. Types of entities include:

  • Sole proprietor: This is the simplest form of business entity. It is an unincorporated company owned by an individual who is personally responsible for all debts, obligations and liabilities.
  • Partnership: Formed by two or more co-owners who personally share in all profits as well as all debts, obligations and liabilities.
  • Corporation: Shareholders own this traditional entity, which is run by directors and officers. Owners are shielded from personal liability and cannot be held responsible for outstanding debts. However, owners pay more in taxes.
  • Limited liability company: LLCs are a hybrid of other business structures. Like a sole proprietorship, owners report profits and losses on their individual tax returns. However, like a corporation, LLCs provide limited liability for debts and other obligations.

Document Your Business Relationship With Partners

Properly outlining the nature of the relationship between you and your partners is critical to the success of your business. Failing to do this on the front end is the biggest mistake cannabis businesses make as statistics show roughly 70% of business partnerships fail.

Creating a document spelling out what happens is vital when something goes wrong, such as one partner wants to leave or is not pulling their weight. Think of it as a prenuptial business agreement, which protects all partners from an expensive and lengthy legal battle to get out of a bad relationship.

Open A Business Bank Account

Since marijuana remains an illegal substance under federal law, banks that are protected by the Federal Deposit Insurance Corporation (FDIC) don’t accept cannabis businesses. However, several so-called cannabis-friendly banks have stepped in to fill the void.

Since hemp was legalized under the 2018 Farm Bill, CBD products are no longer illegal under federal law, and FDIC banks are beginning to accept some of those businesses. However, companies that use words such as weed, cannabis, THC or CBD in their names are still rejected by most banking institutions.

Get The Proper Licenses And Other Documents

Finally, getting all the necessary licenses from the state and local municipalities can be a time-consuming and frustrating process. Make sure your business plan allows for a three-to-six-month waiting period to become licensed. The types of licenses and permits you need will depend upon whether you decide to open a THC-based business or sell CBD products.

Each municipality is different over the number of licenses available, where businesses can be located and whether existing licenses can be transferred to new retail operations. Choosing an attorney who has successfully guided several cannabis businesses through this complicated and rigorous process can be critical to getting licensed as well as the future success of your business.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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