Choosing the Correct Legal Structure for Your Medical Marijuana Business

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By far one of the most important decisions you have to make when opening a medical marijuana dispensary, grow operation or delivery service, is choosing the correct legal structure for your medical marijuana business. In this post, we'll get into the nitty-gritty details of what you need to know to get started. Creating an Operating Plan Before you determine which legal structure is right for your specific medical marijuana entity, it is important to lay out the goals of  your operation and how you plan to meet those goals. Not only will this help you in terms of organizing and planning for unexpected events, but an operational plan might be required by your county depending on where you are establishing your collective. Just as a business creates a detailed business plan for their for-profit endeavor, so must you create an operating plan for your medical marijuana non-profit collective.  

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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 Corporation

By 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.

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