For MMJ Companies, It’s Better To Be Formal
Marijuana companies are similar to other companies in that a lack of formality can be fatal
The Irish poet and dramatist Oscar Wilde once said, “You can never be overdressed or overeducated.” There were no cannabis companies in those times, but the idea that a little formality never hurt anyone holds true today. In the context of running a pot venture, Wilde’s aphorism remains particularly useful as a matter of policy. So, this is a post about cannabis companies doing things right.
We represent a large number of marijuana companies up and down the west coast. Though they are all eager to comply with state and local laws, some of our clients are dangerously informal regarding company structure and documents. These companies may suffer from inexperience, budgetary constraints, practical hurdles (i.e. lack of banking services), or lack of discipline. In nearly every interaction we have with informal businesses, we admonish them to get some basic paperwork in order. Today.
Marijuana companies are similar to other companies in that a lack of formality can be fatal. Take your standard C-corporation, for example. At a minimum, this type of company should have bylaws, a shareholder agreement, stock certificates, subscription agreements and articles of incorporation that comport with state statutes. When key company decisions are made, they should be documented through consent resolutions. Company funds should be kept separate from personal funds, and actions by directors and officers should be taken in their official capacities. Failure to follow these touchstones will expose shareholders to both legal and tax liability (through “piercing the corporate veil”). Often, lack of basic documents defeats the purpose of having a company altogether.
Long-time marijuana entrepreneurs are accustomed to informality. Historically, these individuals come from black and gray markets, and are used to operating underground. New market entrants tend to be more cautious, but as a general matter, they too have a belly for risk, given the status of federal law. But, although federal illegality is a difficult risk to mitigate, running an unstructured and improperly documented business is wholly unnecessary. It is taking risk for risk’s sake, and it is unwise.
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