What to Know When Starting a Cannabis Business in California

By: Paul Goyette

If you are interested in starting a cannabis business in California it can be hard to figure out where to start, especially when it comes to complying with ever changing regulations in the industry nation-wide.

A Little Background on Cannabis, Hemp, CBD and Marijuana.

There is a lot of misinformation out there regarding exactly what hemp is, how it is related to the traditional marijuana plant and exactly what is CBD.

The difference between hemp and marijuana is often inaccurately explained. Hemp and marijuana are simply broad classifications of cannabis that were adopted into our culture. “Hemp” is a term used to classify varieties of cannabis that contain .03% or less of THC content. In the Agricultural Act of 2018, (often referred to as the “Farm Bill”), hemp is generally used to describe non-intoxicating cannabis that is harvested for industrial use of its derived products.

“Marijuana” is the term to use to classify varieties of cannabis that contain more than .03% THC and can induce psychotropic or euphoric effects on the user. Hemp and marijuana share many similarities and can even appear very similar if not exactly alike.

The four key differences between hemp and marijuana are:

1. Chemical composition contained within each plant
2. Hemp contains no more the 0.3% THC while marijuana can contain up to 30% THC content or more
3. Both hemp and marijuana can produce high amounts of CBD
4. Due to the difference of their levels of THC, hemp and marijuana are regulated very differently under federal and California law. 

Experts in this area assert that hemp is one of the oldest cultivated crops in human history and that hemp has an extremely wide variety of practical uses including textiles, industrial textiles, paper, building materials, body care such as soaps and shampoos and foods including hemp seed oil and hemp protein powder. Finally, hemp can contain large amounts of Cannabidiol otherwise abbreviated as CBD.

Are Hemp and CBD Legal in California?

Hemp and CBD are legal in California. Hemp and CBD derived from hemp are not heavily regulated by the state of California. However, there are many and varied local regulations in various cities and counties that will greatly impact your ability to successfully run a hemp and CBD business. Bear in mind that with few regulations there are also few consumer protections which is essential true when buying CBD products from a brick-and-mortar shop.

The only exception to this is that the California Department of Public Health prohibits CBD from being added to food until it has been approved by the federal Food and Drug Administration.

There are currently a number of legislative efforts in Sacramento to clarify the law and make CBD a legal food additive. But thus far, those legal changes have not passed. So the entrepreneur needs to be aware that his or her hemp and CBD business is perfectly legal, but using CBD as a food additive will run a foul with California Department of Public Health regulations.

Marijuana is legal in California as well, although the licensing process and regulations are much steeper than with hemp and CBD products and/or businesses. With that, we strongly recommend at least getting a consultation from an attorney in the space to make sure you are fully compliant. 

Goyette & Associates has years of experience consulting in the cannabis space. Of course, we always recommend consulting an attorney while starting your business, but as an intro here is what you to know to start a marijuana, hemp and/or CBD business in California.

What to Know When Starting a Hemp and CBD Business in California.

Follow the fundamentals of starting any business. A hemp and CBD business is no different in many respects than any other business. The entrepreneur needs to know and follow some basic fundamentals.

1. Have a Business Plan.

 The process of developing a business plan will force you to think about exactly what kind of business you are going to start. It will force you to look at issues like corporate structure, capitalization and shareholder interaction. Carefully draft a business plan with a focus on how your company is going to make money.

• Corporate Structure.

It is important that you pick the correct corporate structure to start your hemp and CBD business. Current regulations to do not require a particular type of business structure. We typically recommend corporations for businesses that will be operational and have employees. You may incorporate your new company in a number of states. We frequently recommend Wyoming and Delaware as ideal states to incorporate your new company.

• Shareholders and Partners.

Be extremely careful in selecting your partners and ultimately the shareholders of your new corporation. Your business partners must be unquestionable trustworthy. But they also must pull their weight for the company to be successful. And probably the most important factor is each partner or shareholder must be committed to the success of the company. Without commitment from the owners of the company it will be destined to fail.

• Capitalization and Funding.

As part of your business plan please carefully consider and develop a capitalization and funding plan. One universal truth of starting a business is that you will need money. And the most valuable asset a partner or shareholder can bring to the table is exactly that: cash. The rule of “sweat equity” to develop an ownership interest in the company is vastly exaggerated. The real value comes from those rare people who actually can and will capitalize a company with hard earned money.

Capitalization can take a number of forms but general falls into two categories:

Debt or equity investment. Debt is essentially a loan that the investor makes to the new company with specific and usually strict repayment schedule. Equity investments are investments where the company grants the investor an equity share in the company. That may include the eventual payments of dividends and other forms of compensation.

• Knowledge Base.

It is important that the founders of the new company have a significant knowledge base of hemp, CBD and the industry as a whole. This does not necessarily mean that you have to have experience in starting or running a hemp or CBD company. But it does mean you need to learn a lot about the industry prior to launching your new company. Ideally, the founders of the new company have worked in the hemp or CBD space either farming, manufacturing or in retail. If not, network with industry leaders and learn as many tricks of the trade as possible from them.

Now It’s Time to Get Started.

Once you have sufficiently developed your knowledge base and drafted a solid business plan, it’s time to get started. Here is a rough outline of the basic steps you will now need to take:

1. Start and complete a corporate entity set up.

• Obtain an Employer Identification Number and open up necessary bank accounts. Typically, you will need at least two accounts. An operations account and a reserve account. And do not underestimate the time it takes for your bank to approve your new accounts. The U.S. banking industry is severely regulated which means simple procedures in the past are now sometimes slow and cumbersome. Give yourself sufficient time to get your accounts set up.

• Capitalize the company. You will need money to get off the starting line. So the company must be capitalized from the start. This of course requires that your corporate documents are in order and the shareholders and investors have a clear understanding and their duties and obligations.

• Develop a marketing plan. Depending on the specific nature of your hemp and CBD business you will need to develop a quality marketing plan. In fact, at least an outline of your marketing plan should be included as part of your original business plan. You will need to make decisions about your primary marketing methodologies, for example, if you are starting a retail hemp an CBD business with a brick and mortar storefront you will need to follow some traditional retail marketing strategies. Almost every marketing strategy will require an online marketing component including an attractive and functional website. Also develop a pricing structure, sales plan, special promotions program and the like.

A Note About Hiring Employees.

At some point you will need to start hiring employees. An alternative might be for some time you may outsource work to independent contractors. But if your business grows and is successful, you will need to hire employees. This is a subject for a whole other set of articles. Just be aware that in California especially, there are many regulations and laws that work in the favor of employees and cost employers a lot of money. Do not underestimate the costs of maintaining employees. A good rule of thumb is that every employee will cost your company the employee’s base salary plus at least 50% of that base salary cost. In many cases, an employee could have a financial footprint on the company that equals their base salary plus 100% of that base salary.

Where to go for More Information.

For more information or for a free consultation, call the expert cannabis, hemp and CBD attorneys at Goyette & Associates at (916) 851-1900 or email us at [email protected].