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Risk v. Reward: Thinking of Starting a Marijuana Dispensary or Delivery Startup?

marijuanaWith the flurry of nationwide activity loosening restrictions for the purchase and use of marijuana for medical purposes, entrepreneurs and investors interested in cannabis-based businesses generally wonder the same thing: is the risk and expense worth the profits that a new marijuana dispensary or delivery service could bring in? In California, the answer generally is, “it depends.”


The Law. Since 1996, California has exempted certain patients and their primary caregivers from criminal liability for possessing or cultivating marijuana when these activities are conducted pursuant to an approved medical recommendation. These illnesses commonly include cancer, anorexia, AIDS, chronic pain, glaucoma, arthritis, migraines, or “any other illness for which marijuana provides relief.” In 2004, the Medical Marijuana Program expanded the access to medical marijuana and permitted caregivers to allow qualified patients to possess, cultivate, and transport small amounts of marijuana, including up to eight (8) dry ounces, six (6) mature plants, or twelve (12) immature plants, unless more are authorized. The problem is, that marijuana is considered a controlled substance barred by federal law.

Opening a Dispensary / Delivery Service.  Opening up a marijuana startup is similar to founding any other type of startup, but it has a few more hoops and hurdles than more straightforward businesses.  To startup a marijuana business:

  • Collective/Cooperative / Non-Profit. The business has to be founded as a cooperative or collective, as a non-profit mutual interest corporation.
  • Seller’s Permit.  To sell marijuana, a seller’s permit must be obtained from the California State Board of Equalization.
  • EIN. You will need a federal tax ID number.
  • California Employment and Labor Laws.  In order to have employees run your shop, you will need to comply with California’s various wage and hour laws, including payroll, state, and federal employment taxes.
  • Business License & Zoning Permits / Reviews. Depending on where and how you want to sell, you will be required to obtain a business license and/or zoning permits and reviews.
  • Membership Regulation. California law requires you to prove that you are not distributing marijuana for anything other than medical purposes, so you will need an application process to ensure that patients are authorized by their recommending physicians to use.
  • License Verification. The patient’s medical marijuana card and license must be verified.
  • Documentation. You must retain and keep proper documentation of all of the foregoing.
  • Patient Agreements. You should have contracts in place that require your customers/members not to use the marijuana or distribute it for anything other than medical purposes. You must take steps to enforce these requirements, such as terminating their memberships if they violate these rules.
  • What to Charge? To remain a non-profit, you must have some sort of mechanism for pricing the marijuana you will be selling, which is often done through a membership fee, or fees that are reasonably calculated to cover overhead and operating expenses.
  • Signage and Physical Location. If you want to have a storefront/store,  you will need to comply with rules/regulations about how the store is advertised, so as to not be too obtrusive or attract unwanted attention, and have proper security in place to avoid robberies or other criminal activity.
  • Local County and City Laws. In addition to the previously-mentioned state laws, each county and city in California has its own rules governing marijuana dispensaries, stores, and services.
  • Intellectual Property. You may decide you need trademark protection for your slogans, logos, or other business assets.
  • Insurance. You will also need comprehensive general liability (CGL) insurance, as well as fleet auto insurance coverage if you are running a delivery service.
  • Employee background checks. You should also perform employee background checks for those who you hire as employees.

Even assuming you are completely compliant with California state and local laws, there are news stories from time to time reporting on raids conducted by the federal government on local marijuana businesses.

In Los Angeles, for example, Proposition D bans all but 135 dispensaries in Los Angeles that registered prior to a 2007 moratorium. Enforcing the regulation has been challenging, however, as new dispensaries open every week. In March, 2014, the City of Los Angeles hired a team of attorneys to focus exclusively on prosecuting dispensary owners that violate local laws.

On the other hand, some locales are expanding rights for medical marijuana sales.  In December, 2014, Orange County began accepting applications from individuals opening up medical marijuana facilities subject to zoning and other regulations.  The City of Long Beach, for example, is currently in the process of drafting a medical marijuana ordinance, as part of a continuing effort to replace the 2010 regulations struck down by a California Court of Appeals.  The latest trend is for medical marijuana businesses to operate delivery services — eliminating the need for storefronts and the problems associated with leasing.

AXIS Legal Counsel’s Business and Corporations Practice provides legal advice to numerous startups at the pre-seed, seed and growth stage, including investor-backed ventures.  AXIS  can help with formation matters, governance, co-founder’s agreements, insurance, licensing, and assist with investment agreements, convertible notes, tax elections, and numerous other matters that startups deal with, including startup formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management / insurancelabor/employment matters, intellectual property, healthcare, crisis management, directors/officers, private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents California and Delaware startups, C Corps, S-Corps, LLCs, LLPs, Partnerships with a wide variety of legaltasks. AXIS represents businesses, corporations, LLCs, LLPS, partnerships, and startups in need of a corporate lawyer, for business legal matters as well as business litigation, such as disagreements, non-solicit agreements, non-competes, trade secrets, cyberlaw, intellectual property, and others. We are also experienced in providing assistance to business clients concerning business contracts, corporate formation matters, contracts and transactions, business litigation, business legal advice for Corporations, LLPs, LLCs, Partnerships, Small Business, Startups, and others involving corporate law.

For information on retaining AXIS Legal Counsel to represent your startup in connection with any legal matter, contact [email protected] or call (213) 403-0130 for a confidential consultation. Axis’ managing attorney Rabeh M. A. Soofi is ranked as one of the “Top Women Lawyers of Southern California” by SuperLawyers Rising Stars, and is a Los Angeles Startup Lawyer representing businesses and start-ups throughout Los Angeles and California.