Cannabis Business C Corp Election

One thing we get many questions about from our cannabis clients is: what is the best way for me to save money on my cannabis business taxes?

Following up on our Navigating Minnesota’s Cannabis Industry webinar we did with our wonderful friends from Blunt Strategies, Point Seven Group, Budding Operations, and Happy Gnome HR, I’ve given this question a lot of thought.

Spoiler alert: it’s almost impossible to save money on taxes entirely when you’re in the cannabis industry. (Unless you’re evading taxes, in which case, we cannot help you.)

But, there are some preferred ways to elect into more advantageous tax treatments. Right now, the prevailing thought in the cannabis accounting industry is that electing into a C Corp is the best entity election available.

I could start telling you the reason why we do that in a dry, legalese way that would put you to sleep immediately. (Maybe you’re nerdy enough like we are to be excited about that, but probably not. And good for you.)

Instead, I am going to leverage our good friend, ChatGPT, to explain “Explain Why I Should Elect To Be Treated As A C Corp Like A Five Year Old”.

Okay, here it goes. It looks like ChatGPT is using a superpower metaphor here, at least initially. I’m not a huge fan of mixing metaphors like this, but it will do.

  1. What’s a C Corp?
    • Imagine a C Corp as a big, strong shield that protects a company. It’s a legal structure that separates the business from its owners.
  2. Why Would You Want to Be a C Corp?
    • It gives you superpowers! Well, sort of. Being a C Corp can mean lower taxes in some situations. Plus, it can make it easier to raise money from investors because they like the way C Corps are set up.
  3. Taxes: The Big Difference
    • Here’s the cool part: When you’re a C Corp, you pay taxes separately from your own personal taxes. It’s like having a separate piggy bank for the company’s money.
  4. Investor Magnet
    • Investors love C Corps because they can easily buy and sell shares of the company. It’s like collecting trading cards – but with a piece of a business!
  5. More Paperwork
    • Being a C Corp means more rules to follow and more paperwork to do. It’s like having extra homework sometimes, but it keeps everything running smoothly.

Why Elect As A C Corp As A Cannabis Business – by ChatGPT

So, just like choosing which superhero you want to be, picking to be a C Corp can have its perks. It’s all about deciding what’s best for your business adventure!

DANG! Okay, that was pretty good. I’ll add a few points in red below.

  1. What’s a C Corp?
    • Imagine a C Corp as a big, strong shield that protects a company. It’s a legal structure that separates the business from its owners. Okay, this is actually a great metaphor for a C Corp. On calls with cannabis folks, I’ve explained this as “You get the best protection possible” but I think I will use this shield metaphor going forward. I’d probably clarify that it’s a shield that protects you from things that can hit the company, but that’s neither here nor there.
  2. Why Would You Want to Be a C Corp?
    • It gives you superpowers! Well, sort of. Being a C Corp can mean lower taxes in some situations. Plus, it can make it easier to raise money from investors because they like the way C Corps are set up. Particularly, the current tax rate for C Corps is 21%, while the lowest individual tax rate (which is what you might pay if you were taxed as a partnership, at the lowest rate available, depending on where you land on the progressive tax rate. Okay, this is getting complicated again, so I’ll save that topic for another blog post.)
    • I’d also agree that investors like C Corps better because there is less paperwork for them to deal with, like K1s. Just make sure you get an attorney to review your governing documents to ensure that this is an allowable move. (Yet another blog post topic, maybe for an attorney to cover…)
  3. Taxes: The Big Difference
    • Here’s the cool part: When you’re a C Corp, you pay taxes separately from your own personal taxes. It’s like having a separate piggy bank for the company’s money. Good! And, if your governing documents allow it, and your investors agree, you could request that dividends be paid to you to cover other tax liabilities you may be liable for.
  4. Investor Magnet
    • Investors love C Corps because they can easily buy and sell shares of the company. It’s like collecting trading cards – but with a piece of a business! We’re getting away from the superhero metaphor here, but this is basically the case. Again, investors (and people in general) typically hate waiting for K1s, so being able to participate in a business without needing to wait for that can be an advantage.
  5. More Paperwork
    • Being a C Corp means more rules to follow and more paperwork to do. It’s like having extra homework sometimes, but it keeps everything running smoothly. Yes, like this, there is really no way around extra paperwork. Operating a cannabis business is exceedingly complex. This is just true. That’s why you have accountants!

We will cover why C Corp election can be advantageous for businesses getting ready for 280E to go away in another blog post. For now, keep your mind on that “giant shield” metaphor if you’re looking to start a cannabis business, or looking to make your cannabis business a little easier to manage!