24 Aug LLC., Subchapter S, C Corp. or Partnership? Which is the best for my cannabis enterprise?
I’m often approached by people starting a dispensary/cultivation facility and asked to either incorporate them or help them figure out the right structure. Recently, I was asked by a cannabis entrepreneur what corporate form would be the best for her new venture. She told me her attorney brother in law said “Definitely an S Corp.”
Gulp!!! If double taxation and risking your personal assets seems like a great way to start the New Year, jump right in. The right answer for now until IRS 280E changes, is an LLC. Why? If you have an S Corp. you are exposing both your personal assets and accepting any tax liability PERSONALLY. If any tax issues or audits create a tax liability, you’re on the hook for it if you have an S Corp. Period. Elvis has left the building, but you’re holding his unpaid laundry ticket.
S Corporations are mandated by the IRS to pay corporate owners a “reasonable wage”. So, you’re going to be taxed when that paycheck arrives. Since you’re selling cannabis, the paycheck is not deductible on your corporate return. Now, you owe the government more money because it’s not deductible, and your gross revenue can only be reduced by your cost of goods sold. Consequently, you now have paid payroll taxes as well as extra corporate taxes on the paycheck. LLC owners don’t have to pay salaries, instead they can take distributions which if you’re a smart owner, will be worked into cost of goods sold as management oversight, etc.
Bottom line – unless your brother in law the hot shot attorney knows corporate structures involving the cannabis business, only use his services when someone runs over your foot in the supermarket.