Choosing the Correct Legal Structure for Your Medical Marijuana Business
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Collective vs. Cooperative
Under the California state law, medical marijuana patients may create either a collective or a cooperative in order to cultivate marijuana within the state of California. While both of these entities have very similar purposes, they do share a few differences.
Collective: “A collective is a group of entities that share or are motivated by at least one common issue or interest, or work together on specific project(s) to achieve a common objective.”Cooperative (Co-OP): A cooperative is a “union of individuals, commonly laborers, farmers, or small capitalists, formed for the prosecution in common of some productive enterprise, the profits being shared in accordance with the capital or labor contributed to each.”
Nonprofit Mutual Benefit CorporationBy far the most common entity for medical marijuana dispensaries, grow operations, or delivery services is the nonprofit mutual benefit corporation as defined under the California Corporation Code §§7110. Just like a traditional corporation, nonprofit mutual benefit corporations have members, officers, and a board of directors. However, unlike traditional corporation, MBCs must be not-for-profit entities. This is why the vast majority of medical marijuana-related operations make patients becomes members of the MBC before selling marijuana to them. This is also called a closed-circuit membership and is one of the most important things to remembers when running a medical marijuana entity in the state of California.
Things to Keep In Mind
Regardless of whatever entity you decide to choose for your medical marijuana business in California, you should remember that the state of California does not allow for-profit entities when dealing with medical marijuana. Whether you set up a collective or a cooperative, choose to incorporate or not incorporate, any remaining profits at the end of the year are generally distributed back to members or used for the entity’s operations.
Furthermore, it should be noted that most dispensaries, grow operations, and delivery services, do not to seek tax exempt status under IRS code section 501. This is largely due to the fact that most 501(c)(3) nonprofit organizations have much more complicated tax and regulatory requirements that make it difficult for medical marijuana collectives to comply with.