6 Ways to Lose Your Shirt in the Cannabis or Hemp Industry
Operating any small business can be a difficult task, but working in the cannabis or hemp industry can be particularly daunting.
Cannabis and hemp business owners are faced with many issues that others will never have the misfortune of dealing with. Difficulty getting a loan, minimal tax breaks, inconsistent city ordinances, and terrible zoning laws are just a handful of the potential problems.
But it’s the disparity between state and federal laws that creates a very unique dilemma encountered by those in the cannabis and hemp industry. The fact that cannabis is still federally illegal gives the DEA (Drug Enforcement Agency) authority to raid these businesses, even if they’re fully compliant with state laws. And even though hemp is actually legal throughout the entire U.S., its resemblance to cannabis, especially in smokable flower form, makes it a target of legal action too.
DEA raids can lead to a whole slew of other problems including a criminal record and civil asset forfeiture. Below are some of the most common ways things can go awry in the cannabis industry.
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Those looking to come up on some quick and easy cash in the cannabis or hemp industry, should probably just look elsewhere. The cannabis industry is just like any other and should be approached with planning and organization. Yes, the green rush is huge and it’s outpacing the dot-com boom, but that doesn’t mean failure isn’t commonplace. Those who succeed do so because they have a financial strategy, marketing skills, and discipline, among many other qualities.
2. Internal Revenue Service
The two most common reasons dispensaries draw the attention of the IRS: obtaining a bank account under false pretenses, or failure to pay taxes. Lying to your bank about what kind of business you’re operating might be tempting at first. But despite how difficult it is to get an account or loan for a cannabusiness, it’s important to stay persistent and find a financial institution that’s willing to work with you under open and honest circumstances. If you lie to the bank and they find out, that could warrant a federal investigation on your account.
Even though cannabis is federally illegal, that doesn’t mean the IRS doesn’t want their cut still. Taxes for cannabis businesses are very steep, and those in the industry aren’t allowed to claim the same deductions as other small business owners. Due to that and the uncertainty that often follows marijuana, some business owners fail to pay their taxes, or don’t file correctly. Tax evasion can carry penalties such as expensive fines and even imprisonment.
3. Civil Asset Forfeiture
Civil Asset Forfeiture is when law enforcement confiscates personal assets in connection with drug-related arrests and certain other crimes. Keep mind in that says “arrests” not “convictions.” Meaning that if a dispensary owner is arrested and later found innocent of all charges, in most cases they still will not get any of their seized items back.
Civil asset forfeiture extends way beyond confiscation of flowers, extracts, and product directly related to cannabis or hemp. It can covers any items that can be used to facilitate crime, which can include cars, houses, and many other personal items as these things often have very much overlap.
The FBI claims that asset forfeiture “undermines the economic infrastructure of illegal business” and effectively reduces crime. But as it stands now, law enforcement agencies are mostly targeting small business owners in the cannabis and hemp industry then basically stealing everything they own, whether they are found guilty or not.
Any cash, bonds, and even personal savings accounts that are found will be taken by law enforcement; and any cars, houses, or other valuable items are auctioned for profit. This can be a huge motivator for underfunded police departments to intervene with the dispensaries.
Whether frivolous or not, the possibility of a lawsuit is an unfortunate reality for any business owner. Naturally, if you’re in the ever-changing cannabis or hemp industry, you’re going to want liability insurance and a good legal team at your fingertips.
However, even if a business wins litigation or settles out of court, any news about the lawsuit could damage their reputation and drive clients away. News spreads fast these days with social media. That, coupled with the possibility of expensive legal fees, could be very bad for business.
5. City ordinances and zoning issues
It’s vital to keep close track of the local city laws, not only state legislation. Just because cannabis is legal in a state, doesn’t mean every city within that state will be accepting of these changes. Shortly after Prop 64 passed in California legalizing recreational cannabis, multiple cities started passing moratoriums to delay or even ban sales. There are still numerous cities were cannabis business are not allowed to operate in the Golden State.
Local ordinances like zoning, land use, additional permitting or licensing, or time, place, and manner restrictions, have been known to wreak havoc in the lives of cannabis and hemp business owners. Being just on the wrong street or block could lead to your business getting shut down. And if the city decides to put say, a new school, within a certain number of feet from your business, you’ll be the one forced to close your doors and jump ship.
Closing the doors and being forced to relocate can break a business. Not only is it costly to obtain a new property, get the required licenses, and file the appropriate documents, but it could also cause the loss of regular clientele.
6. DEA and arrest/convictions
The Drug Enforcement Agency (DEA) is always an area of concern for those in the cannabis industry, particularly growers and dispensary owners. Ever since medical dispensaries started appearing, the DEA has been called in to unravel these operations. Even in the tamer hemp industry, the threat of arrest still looms.
After these dispensaries are raided and all the assets are seized, the owners and growers are arrested. Sometimes, they can get away with probation and fines, but they can also be convicted of drug trafficking and be sentenced to prison. In addition to incarceration being a huge disruption in one’s life, they will also have charges on their record, making it difficult to find work and obtain loans in the future.
How to protect yourself
All these issues can be rather scary and intimidating. But of course, there are a few basic things you can do to protect your business and yourself:
- Don’t jump in with both feet. Make sure you’ve given a lot of thought to your business strategy and financial goals.
- No money secrets. Be honest with your financial institution and pay your taxes.
- Pay attention to the laws. State and federal laws, as well as city/county ordinances are something to monitor closely.
Unfortunately though, you can do everything right and still find yourself facing new regulations that negatively impact your business, harassment from law enforcement, and civil asset forfeiture. That being said, getting a good lawyer and an irrevocable trust fund could make those hits a great deal lighter. An experienced attorney will be able to help you navigate any litigation issues you may face in the cannabis or hemp industry.
“The states that have legalized and heavily regulated marijuana have sought to ensure that only responsible business people participate in those programs. Despite the hard work of those states, the federal government reigns supreme. And so long as marijuana remains a Schedule I drug, marijuana businesses will continue to experience difficulties stemming from conflict with federal laws. So long as marijuana remains federally illegal, true security will not be possible for anyone in the cannabis industry,” says Hilary Bricken, Attorney at CannaLaw Group.
Which leads us to another important point, a trust fund. While a lawyer can help keep your record clean, amongst many other things, you will still need money to pay any legal fees and support yourself in the meantime. An irrevocable trust fund is essentially an “Artificial Legal Person” that protects and manages your assets. Assets can only be seized when they exist in your name or a revocable trust. According to Rocco Beatrice, CPA, MST, MBA, and Managing Director at UltraTrust.com,
An irrevocable trust asset protection plan is the best way to protect your assets without going offshore and without risking trouble with the IRS and government. In response to continued uncertainty, many cannabis and hemp business owners are using irrevocable trusts from them as a way to protect themselves and their families’ financial future.
Don’t be deterred by the obstacles
Yes, the risks are there, and the risks are greater for cannabis businesses than other entrepreneurs. However, with proper planning, a good legal team, and an irrevocable trust fund, you can keep your business safe and successful.
Regardless of how many dispensaries get raided or what crazy things politicians come up with in an attempt to prohibit its sale, hemp and cannabis has come too far to stop now. The more they push, the more we push back, and that’s exactly how big changes come to fruition.
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