Dear Cannabusinesses: Cover Your Assets
The ethical and moral debates on cannabis continue to fill the news, yet another divide continues to exist in the United States. Legal for recreational and/or medical use in the majority of states, marijuana remains a Federal crime. The conundrum of legality between the state and federal governments gives rise to a domino effect of challenges to growers and dispensaries. While cash is king , is it always a good problem for “cannabusinesses” to have, or do too many kings ruin an army?
Law synopsis. Under Federal Law, cannabis is treated as a Schedule I controlled substance. (Schedule I drugs are considered highly addictive and to have virtually no medicinal value.) As such, these crimes carry consequences all the way through to banking system.
Banking. Banks are regulated by the federal government. Even when the dispensary is within a state which has legalized marijuana, banks have historically turned away money from grower and dispensaries, fearing federal charges, including money laundering. In 2018, measures initiated through both the Senate and the House to protect financial institutions from providing services to dispensaries and growers each have failed.
Not only do the cannabiz have limited places to put their money, they have an abundance of cash from the start from the tender received by their customers. The majority still only accept cash.
Neither credit cards nor debit cards are accepted at most dispensaries. Accepting “plastic” necessitates a bank account for deposits. Credit cards are issued by banks, but the way credit cards function, a credit card does not instantly transfer funds from bank to vendor. At any point after the purchase, the consumer may reverse the transaction, forcing the credit card company to then investigate a transaction associated with a Class I narcotic.
Exposure. Few cannabiz have found small community financial institutions or credit unions willing to provide limited services. The cannabiz society as a whole is left grossly unserved by financial institutions. As a result of the inability to accept anything other than cash and an inability to use banks, owners deal mostly in cash. The expenses of suppliers, employees, and others are paid out in cash. Owners are walking around with literally duffle bags of cash.
Credit. Another part of banking is credit. Although dispensaries and growers deal in cash, their line of work would not on its own merit be a fundable line of business, should a line of credit or equipment loan be desired. Although it is unimaginable a business owner with so much cash would every want a line of credit, capital expenditures are necessary in lines of work for expansion. Buildings, greenhouses, lights, parking facilities, improvements are just some of the areas where a cannabiz may wish to seek a line of credit. Laws may change forcing a business to invest in unexpected ways. For example, in Colorado, although the 70-30 vertical integration rule is being phased out, it serves as an example of how law changes can create a need for capital expenditure, when requiring dispensaries to also grow a percentage of their own supply. Credit may be unobtainable. The result is paying cash for capital assets.
Target-rich. Word travels fast within the community that dispensaries are likely to house large sums of cash. An unfortunate barrage of stories has flooded the media all with a similar theme – dispensaries are targeted by criminals and have become victims of crime, theft, and violence.
Asset-rich. The combination of a scarcity of lenders willing to extend credit and bags of money results in paying cash for capital assets. The result is unencumbered assets—assets free of debt. These assets may alleviate most people as free of debt and repayment schedule . These assets may not fit as easily as cash in the pockets of your average thief, but to a potential litigant, they may be much more difficult to “hide,” absent to proper planning.
Accident-prone. In a litigious society, all assets are at some level of risk. When a business is open to the public at large, there is always a risk of an accident. When that establishment also sells a state-altering substance, it can be argued that risk increases. Insurance can mitigate some risk. But, in a litigious society, using an asset protection plan including tools such as proper entity structure strategies increase the chances of a business surviving a catastrophic event such as an injury.
Further, in this litigious society, asset protection plans can send a message thereby further deterring frivolous lawsuits as well. According to the National Federation of Independent Businesses, a frivolous lawsuit costs an average of $100,000 to defend. Those filing suits seek out who they perceive to be ill-prepared, easy-targets, and have deep pockets.
A Real Catch 4:22 (a-hem, Catch 22). Business owners who are wrongfully sued, or even sued with some responsibility, find themselves in what is seemingly an unwinnable situation. What is the answer? Settle or fight? The temptation of business owners frequently subjected to lawsuits is to settle quietly: deter others from filing a lawsuit against me if I get rid of this wrongdoer quickly. Of course, no one can deny using a cost benefit analysis of anticipated costs to defend versus the cost to settle is a sound way to approach a business decision. However, has the consideration been giving to the message the quick payout does send to other potential wrongdoers? The answer is really the third secret choice: do not allow your business to become victim of a wrongful suit. Send all wrongdoers this message—-my business is not an easy target, find your “easy money” elsewhere! Move on to some other place. Don’t just lock the doors on your business, build a brick wall, a moat, and every night, pull up the legal drawbridge. Tell them to move onto the easier target. Most criminals are looking for an easy target! An asset protection plan accomplishes this task.
Hiding assets. Asset protection may sound like a clever way of stuffing money in a mattress when bad guys are looking the other way. The difference is – if a successful judgment is filed against a company that merely “hid” its assets, and those assets are subsequently found, those assets can be used to satisfy that judgment. With an asset protection plan in place, if those assets are found, the assets may be protected from the judgment. When properly maintained, asset protection can create a legal firewall between the business assets and the operations of the business. Therefore, those assets can continue to operate the business after the lawsuit.
Mitigating risk. A comprehensive asset protection plan aids a Cannabiz in multiple ways such as the following:
- Deters initial wrongdoers,
- Limits asset loss/exposure for potential judgment creditors,
- Provides tax opportunity, and
- Protects personal assets from business operations.
Although there may be similarities within the community, all businesses are uniquely situated. An asset protection plan commences with examining the circumstances of any particular Cannabiz including the following:
- Line of work,
- Grower/Dispensary,
- Other lines of business,
- Ownership,
- Location,
- Location of clients/customers,
- Assets composition, and
- Future intentions for the business.
Asset protection/Future planning. Although not the focus of this article, another obstacle faced by the dichotomy of federal and state laws surrounding cannabis are Federal taxes. An asset protection plan can help a Cannabiz also restructure to set up the best possible way to maximize after-tax profits. Although not the only one step in an overall Strategic Plan, entity structuring is one of the many pieces of a strategic plan to help maximize after-tax profits.
To be blunt. It may be a dream of most business owners to always have an abundance of cash. But certainly, protection goes beyond mattresses and safes. Properly researched and customized asset protection plans can deter wrongdoers from viewing your Cannabiz from being an easy target of a frivolous lawsuit and protect your business from a single catastrophic event taking everything you have built. Remember, asset protection is different than hiding your assets – once found, hidden assets are exposed – and no one wants their assets exposed. Utilizing all legal tools available to build a legal moat, drawbridge, and brick wall around your business and personal assets can protect you from wrongdoers. Cover your assets!
