Starting a Cannabis Business in New York? Don’t Forget These Important First Steps
By Zachary Windham
Jul 13, 2022
The New York cannabis rush is here, and with the release of more license categories on the horizon, cannabis entrepreneurs are (hopefully) busy preparing for the upcoming historical licensing round.
To beat the summer slump, VS’s New York team created an eight-part series of VS Insights to help your business navigate the path to applying for a New York cannabis business license. The series will cover essential topics for New York cannabis entrepreneurs, such as finding real estate, preparing for the license applications, branding and trademarks, fundraising and investment, qualifying as a social equity applicant, communicating with municipal officials, and environmental requirements. Read on for part two of the series, focusing on a crucial first step for any company—creating a plan and forming a business.
Determine Your Future Goals and Vision
The biggest mistake made when forming a company, whether plant-touching, ancillary or just generally, is proceeding with the formation before creating a comprehensive business plan. It may seem obvious, but you must consider your future goals and vision for the company in the long term. Too often, entrepreneurs will jump into a project without proper planning, which will often result in spending more money and time trying correct bad decisions that could have been avoided by establishing a business plan.
Choose an Entity for Your New York Cannabis Business
The first decision any entrepreneur will face is which entity type to use. It is important to note that to apply for a cannabis license in New York, the applicant must be a New York entity. There are a variety of entity types to choose from, but most cannabis ventures are either a corporation or a limited liability company (LLC). The LLC is the newest type of business entity and provides the most flexibility. Whether the LLC will be operated more similarly to a corporation or a partnership is a decision for each respective LLC’s founders.
One consideration that is unique to New York is derived from the availability of cooperative (Co-op) licenses. Entrepreneurs interested in applying for one of these Co-op licenses should speak with counsel at their earliest convenience, as New York has specific requirements for entity selection and corporate governance.
For more information on entity selection for a cannabis business, check out my colleague Charlie Alovisetti’s VS Insights series “Budding Companies: Forming Cannabis Startups.”
Determine Which Taxation Status is Right for Your Business
Entity selection and tax status are two decisions that go hand-in-hand. For example, while the default tax status for LLCs is to treat them as pass-through entities, they can also elect to be taxed as a corporation (i.e. a stand-alone entity). Taxes present complicated and nuanced issues for any business, so you should always speak with a tax professional when making these decisions. Tax preparation and strategy is also important due to the impact of Section 280e of the IRS code, which limits the kinds of deductions your business is able to take. For these reasons, you should seek out a tax professional with experience in the cannabis industry to strike the right balance between minimizing your tax bill and protecting yourself from 280e liability.
New York Cannabis Business Funding & Equity Considerations
Once you have your entity and tax status selected, you may need to focus on getting the necessary capital to get your business licensed and operational. Generally, entrepreneurs have the option of raising funds by issuing debt or equity. If you plan to raise funds through debt, lenders are less likely to care what type of entity they are lending to. Historically, equity investors in the startup and venture capital space have been typically more comfortable dealing with corporations. However, in our experience, we have seen investors become more comfortable investing LLCs—leading to more and more entrepreneurs electing the LLC structure.
Entrepreneurs should also remain mindful of any requirements pertaining to social equity status or future requirements that New York might place on certain license types. While these license types can provide some advantages when it comes to the licensing process, they may present challenges for raising capital by restricting the amount of equity that can be issued to investors. This can be particularly challenging for applicants with limited assets and no revenue on which to base their valuations.
Don’t Forget Your Exit Strategy
The final stage of any entrepreneurial journey is the exit. Unlike the other topics mentioned, which are all more than likely to require your attention before you are issued a license, many entrepreneurs may not begin considering their exit strategies until well after their business operations are underway. Nevertheless, New York cannabis entrepreneurs will greatly benefit from thinking about potential exits when making their initial plans, as the Empire State’s legal cannabis market may very well become one of the largest in the world.
Decisions regarding entity selection, tax status, and funding methods can significantly impact which exit strategy makes the most sense. Some entity types lend themselves to certain exit strategies better than others. For instance, an exit strategy involving an initial public offerings (IPOs) might benefit from the use of a corporation, while a business with plans to be passed down through a family over generations might benefit from the LLC structure.
With everything cannabis entrepreneurs must do as part of the process of applying for and receiving a license, it’s easy for the decisions above to fall by the wayside or be made on a whim. That’s why it is best to find legal counsel and a tax professional—with experience working in the cannabis industry—as soon as possible to get an entity formation and governance plan in place. By doing so, entrepreneurs can then focus on the licensing process and eventually operating their business.
Read part 3 of the series "How to Find Appropriate Real Estate for Your New York Cannabis Business."
Did you miss part 1? Read it here “How to Get Started on Your New York Cannabis Business License Application.”
Are you interested in joining the New York cannabis industry? Don’t delay! VS has a track record of success and is ready to help you get started—including corporate formation, real estate, community benefits outreach, and licensing application services. Contact our New York team today to get started.