The cannabis industry is growing rapidly, and with that growth comes new opportunities for entrepreneurs. But starting a cannabis business is not a cheap undertaking – in fact, it can be quite costly. So, how much money do you need to start a cannabis business?
As cannabis accountants, we often get asked this question by clients who are interested in getting into the industry. And our answer is always the same: it depends. There are a number of factors that need to be considered when budgeting for a cannabis business, including the type of business, the location, and the costs of compliance with state and local regulations.
To learn more about how much it costs to start a cannabis business, here's a video from our Buzzkillas series, featuring Perry Salzhauer or Green Light Law Group.
How much money am I gonna need to start this business and be successful? That is probably one of the first five questions I always get. And not to sound like a broken record, this also implicates 280E. So what 280E says at its core is that a cannabis business cannot take standard below the line deductions. You are effectively taxed on gross profit, which is revenue minus cost of goods sold.
I don't want to get into the very specifics of how Cost of Goods Sold can be accounted for in the cannabis business. But it needs to be addressed because as a general matter, what it means is that cannabis businesses will have a much higher effective tax rate than a non-cannabis business and that needs to be taken into account when you put together your pro forma for looking at financial statements.
But because people pay me for my time and they're looking for a quick answer, as a general rule, I have found after 10 years in this industry, you should have 18 months worth of operating expenses in the bank on day one. There's a number of reasons for this. One, you may have to be carrying occupancy charges, whether it's a mortgage, whether it's a lease, for six to eight months before you're even able to generate your first dollar. And you're going to be have to have to be paying salaries, you're gonna have to be paying for a lot of these operational expenses without the ability to generate revenue.
The top three reasons that cannabis businesses fail are one, under capitalization, two, you picked the wrong business partners, and three, you fail to account for 280E from the beginning and you get hit with a massive tax bill and you don't have the cash to pay. To take it back to entity selection, if you feel you are under-capitalized and you may end up with a tax bill that you can't pay, then a C Corp looks pretty good, because the tax liability lives and dies with the corporation and there's the option to bankrupt the corporation, dissolve the corporation, or do whatever you're going to do. And as a general matter, we haven't seen the IRS pursue individual shareholders unless they have a specific reason to do so, such as they suspect fraud, money laundering, etc.
But when you plan your 18 month, forward looking, pro forma budget, it's very important to understand that your tax liabilities are going to be much higher. Maybe you've been running a smoke shop for 10 years and you think that you have a solid understanding of what operational expenses are for a retail operation in this space, but otherwise you really need to get with a cannabis-focused CPA who understands 280E, and more importantly knows how to advise you to structure your business activities in a way that will mitigate its impact.
So again, it's a question that doesn't necessarily have $1 figure answer, more of a set of guidelines that you can use to come up with a figure based on your individual circumstances, and your projections.