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Medical Marijuana — What Would-be Entrepreneurs Need to Know

Medical marijuana is a booming industry. As of 2017, 29 states and the District of Columbia have legalized the sale of cannabis products to people for whom it is medically necessary. Several others allow medical marijuana use under very limited circumstances. And as of November 2016, nine states had passed laws legalizing recreational marijuana use for adults over the age of 21.

Yet, even with all this progress towards marijuana legalization, the industry is still in its infancy. Barriers to entry, including regulatory uncertainty, tax issues and difficulty obtaining financing, have discouraged many would-be entrepreneurs from jumping in with both feet. And those who have say it’s a long, rough road. “It’s one of the hardest things you could possibly do,” said Mitch Woolhiser, the owner of Northern Lights Cannabis Company in Denver, Colorado, in an interview with Bplans. The road to success is paved with red tape, bureaucratic nightmares, and a whole lot of hard work. And, Woolhiser warns, “It’s an expensive business to run.”

But for those who have access to capital and are undeterred by hard work and more than a few bumps in the road, starting a medical marijuana business can be a great idea. And if you’re patient and motivated and possess some good business sense, it can be profitable in the long term.

So, how do you get started in the medical marijuana business? Here’s a brief overview of what you’ll need to do — and what you’ll need to learn.

No. 1. Make sure you’re eligible

State laws regarding who can cultivate and sell medical marijuana vary considerably. But all states require some documentation, and most make growers and sellers obtain permits. Others mandate fingerprinting, licensing and background checks. If you have a felony conviction on your record, particularly one involving drugs, your application may well be denied.

Keep in mind, too, that laws are always evolving, and what’s acceptable today may be taboo next year.  In California, for example, a new state law says that everyone involved in the medical marijuana industry — growers, distributors, and retailers — must obtain a license by 2018. And if a person has a drug felony on their record, that license can be denied. This might pose a big problem for hundreds of business owners who were convicted of possession or sale of marijuana before medical marijuana became legal in 1996, says the LA Times

Note: According to the San Diego Union Tribune, some individuals with a prior drug conviction may be able to petition the court to reverse the conviction or reduce the charge (e.g. from a felony to a misdemeanor) if the conviction is for an offense that is legal under existing state law.

No. 2. Find a place to set up shop

Finding a location for a medical marijuana dispensary can be a challenge. Even in states where marijuana is legal, state and local laws often limit where cannabis can be sold. In Los Angeles County, for example, the law says that dispensaries “shall not be located within a 1,000-foot radius of schools, playgrounds, parks, libraries, places of religious worship, child care facilities, and youth facilities, including but not limited to youth hostels, youth camps, youth clubs, etc., and other similar uses” or within 1,000 feet of another dispensary. And in parts of San Diego County, dispensaries are simply banned.

Even if you find a suitable property, you may not find a landlord who will rent to you. Even in communities that are philosophically supportive of medical marijuana laws, many people don’t want a dispensary in their “backyard.” And some landlords are simply too frightened of legal liability or federal law enforcement to take the chance.

No. 3. Do your homework

This one should be obvious, but it’s still worth mentioning. You can’t just open up a medical marijuana dispensary like any other brick and mortar store. State and local laws around medical marijuana sales are amazingly complex, and if you run afoul of any of them you could be hit with stiff penalties. In some cases, your business could even be shut down and your property forfeited.

For a quick overview of the laws in your state, check out this database from the National Organization for the Reform of Medical Marijuana laws. But don’t rely on just one resources. Thoroughly research your city and county ordinances as well.

No. 4. Understand the tax code

Federal law requires all businesses, even illegal ones, to pay income taxes. So despite the fact that a medical marijuana dispensary is considered an “illegal enterprise” by the federal government, you’ll still have to pay Uncle Sam. What’s more, U.S. Code 280E, the tax code governing businesses that sell Schedule 1 and 2 controlled substances, is particularly complex. Many medical marijuana dispensaries are facing enormous tax bills because they didn’t understand that law when they started out. To be safe, hire a CPA and/or a tax attorney to help you stay on the right side of the IRS.

No. 5. Write a business and marketing plan

A medical marijuana dispensary is a business, and if you want to be successful you’ll need a well thought out business and marketing plan. Any investors you approach will certainly want to see that you’ve mapped out a business strategy and researched who your potential customers are. More importantly, honing in on your target market will help you know what products to order and how to price them later on.

No. 6. Get funding

Starting a medical marijuana business is expensive. According to Mitch Woolhiser, the amount you’ll need to get off the ground today is about 10 times what it was a decade ago. He recommends that anyone planning to enter the market have at least a $500,000 investment to start. And keep in mind that selling marijuana is a federal crime, so you won’t be able to get a loan from a bank. You’ll need to tap your own savings, ask friends and family to invest, or find venture capital to fund your enterprise.

Once you’ve managed to secure funding, your next steps will be finding your products, advertising and setting up shop. We’ll cover those details in next week’s post. 

 

Learn More

At the Carmoon Group, we work hard to help your business grow. Whether you need guidance with risk management or a comprehensive insurance plan, we’ll work with you every step of the way. Give us a call today to set up an appointment to discuss your needs. Or simply reach out online and we’ll get back to you right away.

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