Before You Pivot Your Company into Cannabis, Consider These 5 Issues

The cannabis green rush has everyone interested in diving into the weed business. However, consider these key issues before you jump.

As a business coach and cannabis business podcast host, I have worked with many cannabis companies and have interviewed over 100 cannabis entrepreneurs and business experts. I have learned first hand what makes the weed industry different from others.

The cannabis industry continues to grow both in the U.S. and internationally. Many entrepreneurs are interested in starting a business and many existing businesses are looking to expand into the industry. While there is opportunity, there are also significant risks you need to consider.

While many states have legalized the use of cannabis for medical and adult-use, cannabis still remains federally illegal. This odd legal and regulatory context means that you need to be highly aware of federal law. You also need to carefully plan your future strategy since laws, enforcement, and regulation are likely to change over time.

Here are five key factors about the cannabis industry you need to understand if you want to get into the business. While the details and implications of each will depend on the nature of your business, they will all impact you directly or indirectly whether you touch the plant or not.

1. Be ready for banking issues.

Because dealing in cannabis is a federal crime, the majority of banks will not give you an account, or may even close your current accounts. Technically, they can provide services, but the requirements for them to bank a company that is dealing in illegal activity is generally cost-prohibitive.

Even non-plant touching companies are at risk. Some of these companies lose their merchant accounts, have payments flagged, and have fees applied to their accounts because they do business with weed companies. Be sure to clear your business plans with your current bank or switch to a cannabis-friendly bank.

2. Many business expenses are not deductible.

After a Minneapolis drug dealer successfully sued the IRS in 1981 to be able to deduct his car, scales, and baggies as "business expenses" on his tax return, Congress passed legislation to ban companies dealing in illegal drugs from deducting anything except their costs of goods sold. As a result, companies that deal in cannabis can be taxed at a rate of 70 percent or more.

If you're plant-touching, the key is to allocate as much of your expenses as possible to your cost of goods sold, rather than your general business overhead. If you're not plant-touching, you need to be aware of your customers and partners who do. While there is proposed legislation to change this, it has yet to come into full force.

3. Crossing state lines can get you in trouble.

Interstate commerce is controlled by the federal government so transporting cannabis across state lines is illegal, even if you are transporting between two cannabis-legal states. It is also illegal to transport funds intended to further activities that violate federal law. While the DEA isn't setting up checkpoints, these activities can create problems for many businesses.

Each state is its own micro-industry and you need to carefully separate your business operations by state based on the legal ramifications. Since each state has its own set of laws, regulations, and enforcement procedures, the dynamic complexity of these can be significant if you are operating in multiple states.

4. Your trademarks and intellectual property may be at risk

Another implication of cannabis being federally illegal, is that the United States Patent and Trademark Office (USPTO) will refuse application for cannabis-related products and services. You can register trademarks at the state level, but this becomes extremely complicated.

Many companies avoid these issues by submitting applications that are not cannabis-specific and make more general claims of use and application outside of cannabis. However, this will need to be addressed when cannabis becomes federally legalized. All of the companies I work with have contingency plans for how they will respond to federal legalization to protect their assets.

5. Forget about advertising on the big platforms

If you mention cannabis, pot, or weed in your promotion, you cannot advertise on Facebook, Google, and many other platforms. Most will allow you to post content that promotes cannabis products and services but paid advertising is generally off limits. While cannabis is a thriving market, these companies don't want to risk the rest of their business by getting into legal trouble.

There are domain-specific complexities in all industries that business owners must navigate, but those in cannabis are particularly complicated and come with more severe risks. You need to consult your lawyer for details on how your specific business will be impacted and how you can operate legally.

Despite the challenges, there are huge opportunities for those who get the details right, manage their risks, and navigate the changing landscape. Like any emerging industry, those who can survive and successfully build thriving businesses can reap significant rewards.