There is a buzz in the business community in the Commonwealth of Massachusetts, and widespread anticipation of what is to come in the cannabis industry. After months of public input, hearings, and many hours of hard work, the Cannabis Control Commission filed final regulations with the secretary of state on March 9, 2018.
Subject to the preparation by the secretary’s regulation division, the final regulations should be published in the Massachusetts register on March 23, 2018 and will become effective when published. These are the regulations that will shape the cannabis landscape in Massachusetts.
Entrepreneurs, family offices, investors and other interested parties are flocking to this emerging industry in record numbers, with the first licenses set to be issued on July 1, 2018. Undoing the stigma and perceptions and navigating the waters between the federal illegality and the state legal licensing process has resulted in a lot of interest and excitement, but not a lot of ability to act.
The industry hinges on the concept of local control at the municipality level, and entrepreneurs will have to navigate 351 different micro-industry environments in order to be able to open their doors.
What should aspiring business owners do in this impending state of suspense between aspiration and approval?
The first industry rule is to be adaptable. The second is to be patient. Find ways to keep the passion burning so you don’t lose sight of the end goal — to operate a state-legal business under the parameters set by the Commonwealth of Massachusetts’s voters and regulators.
Our cannabis advisory service professionals suggest the following.
1. Build a team of trusted professional advisors
You may have experience in owning and running a business, but are you familiar with the specific industry challenges that lay ahead? Even basic business structures such as banking, insurance coverage, and payroll services can cause unexpected headaches.
Think that your local bank is willing to provide you with a place to deposit your cash from this cash-only business? Think again. You’ve hit the first wall. Find the right advisors that can help you navigate these waters.
2. Introduce your professional advisors to each other
Ideally, you’ve hired an attorney who is going to set up your corporate structure and register you with the secretary of state. You may have also identified a CPA with experience in the industry that you want to work with.
Introduce your providers to avoid costly pitfalls. For example, the tax ramifications of your corporate structure may result in double taxation due to the federal illegality of the industry and the applicability of IRS code section 280E. The more your advisors work together, the easier it will be to navigate such situations.
3. Identify an appropriate accounting professional
Gain an understanding of the IRS code section 280E and the importance of proper accounting records by forming a relationship with the right CPA. Together you should incorporate tax planning, internal control and proper record-keeping into the genesis of your venture.
From structure to build-out, tax and accounting in this industry may be the difference between being cash positive or cash negative. Depending upon the structure of your entity and the license you plan to obtain, you may be facing effective tax rates as high as 75 percent. In your first few years of operations, those rates could surpass 100 percent. Yes, you may actually pay the state and the IRS to operate your business as you start out. It happens.
4. Plan your rollout
Work together with your team of experts and maximize their time with you. Funding can be tough in this business. Interest rates charged by private lenders will increase your cost of capital at an exponential rate. Every delay in the process will cost you more than your average business venture.
Understand your funding needs, gather the pertinent information, follow the local government, and strike when you have your plan set up and you are ready to execute.
In the end, it all comes back to the two basic rules in this industry — be adaptable and be patient. The cannabis industry is here to stay in Massachusetts, and the right advisory team will enable you to stay the course as you set and reach your goals.