Here are some important issues to consider.
Recreational cannabis is legal in New Mexico and the state government is currently working to set out regulations to begin legal sales. At the latest, recreational sales will begin on April 1, 2022. So, what do cannabis entrepreneurs need to know as New Mexico moves to open a legal cannabis market?
The Federal Government
Despite cannabis being legal in New Mexico and 17 other states, the federal government still maintains cannabis prohibition through the Controlled Substances Act. Cannabis prohibition creates numerous challenges for new cannabis businesses.
According to the federal government cannabis businesses are still criminal enterprises. While LLCs cannot offer full legal protection, cannabis business owners should set up different LLCs for different aspects of their businesses, e.g., different LLCs for the medical and recreational businesses. This protects business owners in the event that the federal government starts enforcing existing laws which ban cannabis. For the same reason, business owners should keep personal financial assets and cannabis business assets separate. Failure to separate these assets could make business owners targets of RICO laws.
In addition to the problems created by current federal law, many businesses will not do business with cannabis distributors because of the federal status of cannabis.
Major national banks do not work with cannabis businesses, but some local banks do. Cannabis businesses, thus, need to find a local bank who will accept the industry. Businesses should work with their bank to understand evolving regulations and make sure they are secure.
The majority of credit card companies do not currently allow cannabis transactions because of federal prohibition. This restricts the ways in which cannabis companies can receive payment to cash, checks, and cryptocurrency. Of these options, cash is the only “sure thing”. Checks come with their own hassles /headaches while some cryptocurrency vendors are not secure.
Some accountants and landlords are also hesitant to work with cannabis businesses because of the issue of federal illegality. Nonetheless, cannabis entrepreneurs can still succeed because not all accounts and landlords are opposed to working with the industry. Some advertisers are also hesitant to host cannabis content as a result of federal prohibitions. Cannabis businesses can still advertise their product with willing advertisers but can also do so by other, less traditional means. One untraditional way cannabis businesses can advertise is by drawing media attention. Thus they are not officially “advertising,” but by appearing on the news are raising the profile of their business.
Internal Business Risks – And how to Avoid Them.
Although it faces unique challenges, the cannabis industry is, in many ways, like any other business. In some instances, however, the risks faced by other businesses are simply amplified in the cannabis industry.
Working with lawyers from the start is helpful for business owners to insure they follow all rules and regulations. Hiring knowledgeable individuals with a thorough understanding of the industry is extremely important. The cash heavy nature of the cannabis industry causes it to be more susceptible to fraud, so hiring trustworthy employees is especially important.
Cannabis businesses need to be more judicious than other businesses in making sure that business records are pristine. If a cannabis business is called to court, their business records are admissible as evidence. Because courts already tend to be more skeptical of cannabis businesses, keeping neat and precise records gives them more confidence that a business owner is competent.
Some landlords are reluctant to allow cannabis businesses to use their properties in part because of federal illegality, but many who do include terms which require businesses to manage the distinctive smell of cannabis.
The federal government taxes income. It does not care whether income was legally obtained; it just taxes whatever income citizens report. Most taxpaying businesses in the United States are allowed to take tax deductions on business expenses, but a federal law called IRC 280E prevents cannabis businesses from taking that exemption. 280E officially prohibits business deductions for businesses which deal in controlled substances, of which cannabis is still one.
Considering starting a CBD based business in New Mexico? Set up your business correctly from the start. Contact Business Law Southwest today for a consultation.