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Marijuana Club Startup Guide

Choosing a Form of Business


You will need to choose a form of business. Your options are:

Sole Proprietorship
In a sole proprietorship, you are the sole owner and the income of the business is considered to be your income for tax purposes. As a sole proprietor, you are also completely liable for all the debts, obligations, and liabilities of the business.

A partnership is the same as a sole proprietorship, except there is more than one owner. If you operate as a partnership, the first thing you will need will be a partnership agreement. The partnership agreement will define the various percentages of ownership and the responsibilities of the partners in running the business. Don't assume that you would be able to draw up such an agreement with your friends without the help of an attorney. There are simply too many legal pitfalls.

If you operate as either a sole proprietorship or a partnership, and you use a name for the business that is not your own name, then you will need to file a DBA notice. This is a simple legal notice, published in any local newspaper, that John Doe is now doing business as InterGalactic Marijuana Store. This DBA notice will be required before you can get a bank account in the name of the business.

If you operate as a corporation, you must file articles of incorporation with the Secretary of State and pay a fee for filing. It is a straightforward process of filling in a few forms and sending them in with the fee. There are various online services that will do it for you. In California, it typically costs about $1,000 per year to maintain a corporation.

A corporation is considered to be a separate legal "person". Therefore, it produces various effects on your taxes, potential liabilities, and other issues. The biggest effect is on taxes. It could produce a double taxation on your revenue. That is, when the corporation earns the money, it is taxed once. Then, when the corporation pays you your paycheck, you pay income taxes on it. The difference can be quite large.

You can avoid this problem with a Subchapter S filing with your Federal tax return. A Subchapter S filing allows you to treat all the income of the corporation as if it was your personal income. This avoids the tax at the corporate level.

Non-Profit Corporation
You can operate as a non-profit 501(c)3 corporation. These are so named because they are defined under section 501(c)3 of the Internal Revenue Service regulations. Non-profit organizations are not supposed to make a profit and they have various other special rules. Compared to operating a regular corporation, they can be an administrative pain in the butt.

Some clubs have chosen to operate as non-profits because of their understanding of SB420 which says that caregivers are entitled to "reasonable compensation". There is some argument that "reasonable compensation" does not include "profit" and some attorneys will recommend a non-profit as a method of providing additional legal protection.

Consult an Attorney
Your form of business is not something you should choose lightly for this kind of business. There are many issues and ramifications that are far beyond the scope of this web site. The money you pay the attorney will be good insurance against problems later.


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