As we move into the era of legalization, many are looking to start a cannabis business yet are unsure of how to do it. We discussed the legal maze of starting a fresh weed biz with Larry Donahue, a partner in local law firm, Law 4 Small Business.
The [Rolling] Paper: With the governor signing the legalization bill, we will most likely be seeing a lot of new faces in the cannabis market. What sort of legal representation would a new pot business need?
Donahue: It’s a little hard to answer that currently. All the current act did was set a deadline for a new division to be set up. What matters most from a business perspective are any rules that might be put into place around the sale of cannabis for recreational use. This new division will determine these new rules and licensure requirements. So, all the hoops businesses are going to have to jump through to obtain a license from the state have yet to be determined. And it may not just be the licensure rules—there may be reporting requirements. There may be concerns about where the persons purchasing products are from. The business may be required to validate or keep track of who comes in and buys products. For now, there is still a lot to learn in terms of what’s needed for a recreational cannabis business or how different parts of the supply chain can participate in this new opportunity. The devil will be in the details as they say, and we will not know those details until sometime between now and January 1, 2022.
Can you explain what an anonymous LLC is and why a cannabis company might want to consider utilizing it?
Let me start at a high level and talk about the risks a business like this can have.
There are the obvious problems the business could potentially have with the federal government. Now, the feds have not created a hell of a lot of problems for cannabis businesses lately, but keep in mind they certainly can. Let’s not spend a lot of time discussing that risk today and what it entails. Just know, as a cannabis business owner, that the feds are always in the background somewhere.
The next set of issues a business owner must consider are the risks—potential problems and liabilities—associated with third parties. Group one is the partners—the people you go into business with. Group two is the consumers and guests who purchase your products and walk onto your premises. Group three is the government that regulates your business and sets up the rules associated with licensure and record keeping. Group four are ancillary risks like dealing with a landlord or other businesses in the same strip mall you do business in.
The one thing that every business needs to do is try to contain the risk. That’s why you wouldn’t ever want to operate as simply a partnership or sole proprietorship. You’d want to operate with a corporate structure around your business to protect your personal exposure to liability.
Forming a corporate entity needs to be one of the very first things a business owner does. When you form a corporate entity, the business becomes its own person, so to speak. It is an entity separate from the owners. This way if anybody is doing anything in furtherance of the business and the business gets sued, the potential fault is with the business entity, not the individual owners. Forming a corporate entity structure is not going to protect you personally from government risk if you do not have the correct licensing and are not following the right legal procedures, but it will protect you from all the other risk groups that I mentioned earlier.
What does this have to do with Anonymous LLC? Well, a traditional LLC is one way to form a corporate entity, and it’s very popular because it’s inexpensive to set up and maintain. It’s also inexpensive to dissolve if you want to close the business. Ultimately, it is a great way to establish a partnership and give all the owners liability protection.
An anonymous LLC is a regular LLC—however, who owns the LLC is not disclosed to the secretary of state. This means that the people who can know about your ownership in a cannabis business—as well as other personal information—is very limited. The anonymous LLC ensures your ties to a business that some may view as controversial remains private. It gives everybody in the supply chain a level of protection.
What are the challenges you see facing cannabis companies today?
First and foremost I find it is almost as though the partners in cannabis companies are spending much of their time using their own product instead of focusing on business issues in a clear-minded way. By this I mean, I see partnerships that are often based on friendship and a mutual affection for smoking marijuana, versus good business sense. These partnerships often turn into brutal disasters. Ultimately, when picking a business partner for any business, the same selectivity should go into it as if one were picking a spouse. You simply should not go into business with someone just because they are the person you enjoy hanging out with in your free time. Partners need to bring some business value and sense to the table.
Problem number two is they tend not to document anything. By not having documentation in place, you will find that dumb mistakes are happening regularly, which starts to jeopardize the entire business. Also, without accountability measurements, it is not uncommon for one or two partners in the business to stop contributing in any way, leaving the others to do all the work.
That being said, I think that with this new act, we’re going to start seeing more sophisticated players enter New Mexico. Hopefully this will lead the early adopters to take my advice carefully and not enter lightly into silly partnerships that will jeopardize their businesses.