By Rick Schettino • December 7, 2018

Ultimate Guide to Building a Scalable Cannabis Business — Part 2: Regulatory and Legal Compliance

This is Part II of a 5-part, in-depth series with valuable information for those who wish to start or grow a cannabis business.

In Part I, we presented an overview of this rapidly growing industry including offering some growth statistics and breaking down the various segments of the industry.

In future posts, we will discuss the various ways to finance a cannabis business, considerations involved in planning a successful cannabis business, the latest, cutting-edge technology in enterprise resource planning, point-of-purchase sales, and the latest seed-to-sale systems designed especially for the cannabis industry.

Let’s get started.

The first and most important step in building or expanding any cannabis touching business is to fully understand the regulatory systems that you’ll be required to work within in the state, or states, in which you’re planning on doing business.

Although many states have similar regulatory systems, each state has its own particular set of rules that must be followed in order to remain in compliance and avoid potential consequences of non-compliance.

Not following the rules — or even breaking them accidentally — can mean huge financial losses which could spell the end of your business, and can result in serious legal jeopardy.  

Each category of plant-touching business has its own particular set of rules to follow starting with where the business is allowed to be located and operate, as well as what the business is allowed to do under its operating license, how it is allowed to advertise and market its products or services, what it is allowed to sell, the conditions under which the product is produced or sold, who is allowed to work in the industry, and so on.

The fact that the continued existence of your company depends on working in compliance with your state’s regulations cannot be overstated.

Some of these rules apply to all businesses while others apply to particular operations. For example, growers must follow rules stating what methods they are allowed to implement and what supplies they are allowed to use such as fertilizers and pesticides.

Manufacturers must follow rules for packaging and labeling. Labs must follow rules for testing and reporting. Distributors must follow rules on storing and transporting cannabis products. And retailers must follow rules that dictate to whom they can sell and how much, where they are allowed to operate, and so on. These are just a few of a vast list of details that must be completely understood and internalized.

Regulatory Issues

Understanding regulations, building them into your business, and working within them is not a practice where you should be reinventing the wheel. You may be an unmitigated business genius, with many prior successes, but if you’re not intimately familiar with the regulations in your state and how to remain in compliance, going it alone means you’ll be navigating unfamiliar and often treacherous waters.

Some of the questions you’ll need to consider as your business grows include:

  • What is it really going to take to be awarded a license?

  • What is our company allowed to do under our current license(s)?

  • What other licenses will we need in order to scale up, if any?

  • How do regulations impact our plans to expand the size of our operation?

  • What specific actions need to be taken before scaling up?

  • What systems will we need to implement in order to remain compliant as we scale up?

  • How will we audit and document our compliance?

Hiring The Right Legal Team

As mentioned above, understanding and following regulations is not an area where you want to be reinventing the wheel. And it’s an even worse idea to hire a law firm that is reinventing the wheel. It’s extremely important that you work with a team that is intimately involved in the cannabis industry in your state.

Almost all aspects of running a business are impacted by regulations from how you set up your business entity to how you deal with employees right on up to how you pay your taxes.

A lawyer or legal team which is not familiar with the cannabis industry regulations may miss some important details which could trip you up somewhere down the line, resulting in potentially devastating consequences.

A cannabis-focused legal team, on the other hand, can assist your company with all aspects of compliance from the business structure, to location and design of your facilities, to operating and reporting, and much more. They can help you complete an application that is more likely to be approved.

And when it’s time to expand and scale up, they can help you understand the ramifications regulations could have on your plans. For instance, some states have a tiered system for growers under which a separate license is required for various operation sizes. In some states, small grows play by different rules than large grows. It’s important to not be caught running a grow operation that’s bigger than your license allows.

Also, in some states a business is allowed to be vertically integrated, both growing and selling cannabis products. In other states, vertical integration is forbidden.

It’s also important to hire a tax attorney who is well versed in both state and federal tax structure as it applies to cannabis businesses. In particular, they need to be familiar with Section 280e of the federal tax code which states that no deductions are allowed on any income generated “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances.”

Compliance and Reporting

It’s not enough to know that you’re in complete compliance with regulations. Each state also wants to confirm that its cannabis businesses are in compliance. Reporting for compliance is just as important as being in compliance.

Every state has compliance reporting considerations. Some are more complex than others. You have to be able to demonstrate your compliance if regulators start asking questions. And you have to be able to audit and document your compliance efforts.

This is no easy task. It can’t be done with clipboards. And it’s another area where you definitely don’t want to be reinventing the wheel.

The most important tool for tracking, documenting, and reporting for compliance is cannabis industry-specific business process management software, also known as enterprise resource planning software, or an ERP. A cannabis industry ERP system consists of integrated applications which are used to manage all aspects of your business.

A proper ERP will allow you to track and document everything from back-office functions to human resources to production, tracking of sales and finances, and reporting. And it must also be fully integrated with state compliance and tax reporting requirements.

A cannabis-dedicated ERP will include a seed-to-sale module which will allow growers to track every aspect of growing including tracking each individual seedling and clone right up to harvest. It will allow you to track environmental factors such as hour-by-hour temperature and humidity changes, water, and nutrient use and cost, pest mitigation activity and costs, yields, and so on up until the point when the product leaves your company.

Obviously, a cannabis-focused ERP is valuable for far more than just regulatory documentation. It can help your company be more organized in general, as well as to track expenses, increase yield and quality, boost sales, increase profits, manage employees and payroll, and much more.

Other areas where an ERP’s importance comes into play is in procuring and maintaining proper insurance and paying taxes.

TIP: When properly used and maintained, a properly integrated ERP can dramatically increase the value of your business when you’re ready to sell it.

Because ERPs extend to many areas outside of just compliance, later on in this document, we’ll cover ERP’s many uses in more detail.

In the next installment of this five-part series, we’ll discuss financing a cannabis business or expansion plants.

 

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