Cannabis legalization continues to expand. This industry has come a long way since California became the first state to approve the use of medical marijuana in 1996, driving innovation and growing acceptance.

According to Statista's market insights, the cannabis industry is expected to reach $42.98 billion this year and $49.59 by 2029, with an annual growth rate of 2.89%.

For entrepreneurs and business owners, this surge represents a valuable opportunity. The market is still in its early stages, but it offers ample room for new ideas, products, and services.

Although this industry seems like fertile ground to grow a cannabis business, there are still many challenges. Due to the complex regulatory environment, limited access to funding and banking, and the stigma surrounding marijuana, getting into this market requires knowledge, strategy, and resilience.

This comprehensive guide on how to get into the cannabis business will equip you with the information and tools you need to overcome such obstacles, leverage the unique opportunities the industry offers, and start a successful venture. Read on!

Understanding the Cannabis Industry Landscape

Why is the cannabis industry becoming more and more attractive? Does it really provide great opportunities to grow a business and thrive? Let's dive into the current state of the market to answer these questions.

Types of Cannabis Businesses

Different types of businesses make up the cannabis industry, including the following:

Cultivators: The ones growing cannabis plants for medical or recreational use.
Processors and manufacturers: Those who create cannabis-derived products, such as oils, edibles, and topicals.
Distributors: Businesses that transport cannabis products from cultivators and manufacturers to retailers.
Retail dispensaries: Stores and establishments that sell cannabis-derived products directly to customers.
Delivery services: Companies that deliver cannabis products directly to consumers' homes.
Ancillary services: Businesses offering products or services that support the cannabis industry without directly handling the plant, such as packagers, legal counselors, and software developers.

Every business is different, has its own opportunities, and faces unique challenges. To choose the right type, you must assess your skills or interests and your location's regulations.

Current Regulatory Environment

The U.S. cannabis industry operates under a complex and often contradictory regulatory framework. Marijuana is still classified as a Schedule I controlled substance, meaning it's illegal under federal law. However, many states have legalized cannabis for medical or recreational use.

This discrepancy makes it even more difficult for cannabis business owners to remain compliant. Operators have to navigate state regulations, but federal laws are still important and cannot be overlooked. This contradictory situation impacts banking, taxes, and interstate commerce.

Each state has a unique set of laws regarding cannabis production, sale, and use. Every cannabis business is subject to strict regulations related to licensing, security, packaging, marketing, product testing, and more. Additionally, these regulations may differ between different states and intrastate localities.

Importance of Staying Informed

Given the ever-evolving nature of cannabis laws and regulations, anyone entering this industry must stay up to date on legal changes, market trends, and best practices. Therefore, it's recommended that operators:

Join industry associations
Attend cannabis business conferences and seminars
Follow reputable cannabis news sources and publications
Engage with legal and financial professionals specializing in the cannabis industry
Use a comprehensive cannabis ERP system, such as Distru

Getting to Know Distru

With a robust cannabis ERP system, such as Distru, you can streamline operations to save time and avoid errors, optimize tracking and reporting, and stay up to date with regulatory changes, which are key to ensuring compliance.

From real-time inventory tracking to METRC integration, Distru is equipped with all the tools you may need to implement industry best practices, quickly adapt to market changes, and comply with state and federal regulations.

Steps to Get Into the Cannabis Business

Wondering how to start a cannabis business? Below are the steps you'll need to take!

#1 Choose Your Business Type

The first step is to decide the type of business you'll start. Consider the following factors to make the right decision:

Your skills and experience
Your long-term plans
Capital requirements
State and local regulations
Market demand in your area
Competition

For example, if you've already worked in the retail sector, opening a dispensary may be a good idea. Similarly, a cannabis cultivation business might be a better fit if you have experience in agriculture. That's why it's important to consider your skills and expertise.

Additionally, you should keep in mind that some states require vertical integration, which means you must control multiple stages of the supply chain, from cultivation to production and sale. Be sure to check local regulations to avoid legal issues.

#2 Develop a Solid Business Plan

For any new venture in any market, you'll need a comprehensive and detailed cannabis business plan. However, this document is especially important in the cannabis industry due to the unique challenges and regulatory requirements you'll face.

A well-crafted business plan should include the following elements:

Executive summary
Company description
Market analysis
Organization and management
Product or service line
Marketing and sales strategy
Funding requirements
Financial projections
Appendix with the respective supporting documents

As we mentioned above, cannabis businesses don't have easy access to funding like other companies. Additionally, operating in this industry comes with higher costs and taxes. Thus, you'll need to pay close attention to your financial projections when crafting the plan to open your cannabis business.

If you need help creating yours, check out our guide Cannabis Business Plan: Your Roadmap to Success, where you can find in-depth information about each component you should include in this document and industry-specific insights to write a compelling one.

To streamline your planning process, we offer free, downloadable cannabis business plan templates tailored to each specific license type.

With these templates, you can create a professional and comprehensive cannabis business plan that addresses the aspects of the cannabis industry to present a strong case to potential investors and stakeholders.

But remember that you must customize your business plan to reflect your unique vision, local regulations, market conditions, and specific goals. If you need further help refining this document, don't hesitate to seek advice from industry professionals.

#3 Understand Legal Requirements

Before opening a cannabis business, you need to thoroughly research the legal requirements that are currently in place in your state or locality, which typically include the following:

State licensing requirements
Local zoning laws
Security requirements
Product testing and labeling regulations
Advertising restrictions

An attorney specializing in cannabis laws can help you ensure you're fully compliant with all relevant regulations.

#4 Secure Funding

The federal prohibition we mentioned above makes it challenging for cannabis businesses to secure funding, as many traditional funding sources aren't available to companies operating in this industry.

If you want to open a cannabis business, you can consider the following options:

Self-funding
Friends and family investors
Angel investors
Cannabis-focused venture capital firms
Private equity

A comprehensive cannabis business plan can help you demonstrate that you understand the industry, are ready to overcome its challenges, and have what it takes to secure long-term success, which will make your project more attractive to parties providing funding.

#5 Establish Your Business Entity

The next step is to choose and register an appropriate business structure for your cannabis venture. The following are the most common options:

Limited Liability Company (LLC)
Corporation (C-Corp or S-Corp)
Partnership

Each business structure offers unique advantages and disadvantages when it comes to liability protection, taxation, and regulatory compliance.

If you want to choose the right one, you can consider an experienced attorney and a seasoned accountant to make an informed decision based on your specific situation.

#6 Obtain Necessary Licenses and Permits

Securing funding may not be easy, but the most challenging part of this process is acquiring the licenses and permits you need to open your cannabis business. It can be time-consuming and tedious, as you'll need to complete the following steps:

Submit a detailed application
Pay application and licensing fees
Undergo background checks
Demonstrate compliance with all relevant regulations
Secure necessary real estate

Depending on your state's regulations, the licensing process can take anywhere from several months to over a year. Be patient and prepare for each phase to avoid further delays.

#7 Comply with Tax Regulations

Many of the challenges cannabis businesses face have to do with taxes. For example, Section 280E of the Internal Revenue Code prohibits companies "trafficking" controlled substances from deducting ordinary business expenses.

This rule applies to all businesses that grow, sell, or distribute cannabis because it's considered illegal under federal law and any related operation is seen as "trafficking."

As a result, cannabis cultivators, processors or manufacturers, distributors, and retailers are subject to effective tax rates of up to 70%.

To navigate these complexities, cannabis businesses must:

Maintain meticulous financial records
Seek advice from tax professionals with experience in the cannabis industry
Understand the expenses that can be included in the Cost of Goods Sold (COGS), as these can be deducted from taxes
Design and implement tax planning strategies to minimize tax burdens

#8 Build Your Team

To succeed in the cannabis industry, you need to assemble the right team, including the following key roles:

Compliance officer
Security personnel
Budtenders (if you'll open a dispensary)
Cultivators (for growing operations)
Marketing and sales staff
Financial and cannabis accounting professionals

Ideally, the people who join your team should have demonstrable experience in both their specific roles and the cannabis industry. Plus, they must meet certain requirements to work in this industry, including age restrictions.

Make sure all your employees undergo the required background checks and training.

Business Setup, Structure, and Recordkeeping for Cannabis Companies

All successful cannabis business ideas require proper setup and meticulous recordkeeping. Both aspects are essential for any company, whether you plan to operate with medical or recreational cannabis.

Let's go over the key considerations:

Selecting the Right Business Structure

As we explained above, the business structure you choose can significantly impact your cannabis venture's taxation, liability, and regulatory compliance. When selecting one, it's important to compare all the available options.

For example, LLCs are popular among cannabis entrepreneurs because they offer personal liability protection and tax flexibility. Additionally, these companies are usually easy to set up and maintain.

Corporations, on the other hand, often involve more complex paperwork and potential double taxation (especially for C-Corps). However, they provide strong liability protection and can be beneficial for entrepreneurs who need to raise capital.

Remember that an experienced business attorney can help you determine the best structure for your specific situation, project, and location.

Navigating Business Formation and Registration

After choosing the suitable business structure, you'll need to complete the formation and registration process, which involves the following steps:

Research and comply with your state's specific licensing requirements for cannabis businesses
Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
Define your tax obligations under relevant regulations, including Section 280E
Ensure your chosen location complies with local zoning laws for cannabis businesses
Register your business name with state and local authorities
Obtain all required permits, which may include building, signage, and health department permits

Thorough Recordkeeping and Audit Readiness

To maintain comprehensive and accurate records, stay compliant with regulations, and prepare for potential audits, you need to implement the following practices:

Inventory tracking: Monitor your cannabis inventory at every stage using a state-compliant seed-to-seed tracking system. In most states, businesses must report to METRC, so the right solution should integrate with this software.
Financial records: Keep detailed records of all your financial transactions, including sales, purchases, and operating expenses. By implementing effective cannabis accounting practices, you can ensure your business complies with industry-specific regulations and tax codes.
Compliance documentation: Keep records of all your licenses, permits, employee training, and the measures you take to remain compliant.
Tax records: From your fillings to supporting documents, maintain comprehensive and detailed tax records.
Customer and patient records: Ensure your patient records are detailed and in compliance with the Health Information Portability and Accountability Act (HIPAA) and state regulations. This is essential if you run a medical cannabis dispensary.
Regular internal audits: Conduct periodic internal audits to identify potential issues or areas for improvement and ensure ongoing compliance.
Prepare for external audits: Develop a protocol to respond to regulatory inspections or tax audits, such as organizing relevant documentation and designating responsible personnel.

If you use a robust cannabis ERP system, it'll be easier to ensure your reports are accurate and remain compliant with related regulations.

Distru, for example, is equipped with features for cannabis inventory management, accounting, and seed-to-sale tracking, which promotes data consistency across all aspects of your operations and simplifies compliance.

Overcoming Common Challenges

The country's largest cannabis companies know how to overcome common challenges. That's what has helped these businesses reach new heights.

Fortunately, this isn't a secret anymore. We'll reveal some tips that will help you prepare to navigate such obstacles. Find them below!

Banking Restrictions

Due to federal prohibition, many banks aren't willing to work with cannabis businesses, making it difficult to create bank accounts, process payments, and secure loans.

To overcome this, you can do the following:

Seek out cannabis-friendly financial institutions
Use cashless ATMs or other alternative payment solutions
Implement rigorous cash management procedures
Explore partnerships with credit unions or state-chartered banks
Use cannabis accounting software that can handle the complex financial tracking required in the industry

Marketing Limitations

Cannabis businesses also face tough restrictions on advertising and marketing, which can really impact growth opportunities. However, you can overcome these limitations by:

Focusing on organic social media growth
Using content marketing and Cannabis SEO
Engaging in community events and sponsorships
Developing strong branding and in-store marketing
Leverage customer loyalty programs

Evolving Regulations

As we mentioned earlier, the regulatory landscape for cannabis is constantly evolving, and you need to stay ahead of these changes. Therefore, it's important to:

Join industry associations to stay informed
Consult with a legal counsel regularly
Implement flexible business practices that adapt to changing regulations
Actively participate in discussions about local and state cannabis policies
Use an all-in-one cannabis ERP that is regularly updated to reflect changing regulations and reporting requirements

Competition and Market Saturation

As more states legalize cannabis and the market grows, competition becomes tougher. If you want to stand out among competitors, you should:

Focus on product quality and consistency
Develop unique products or services
Prioritize customer education and experience
Build strong relationships with customers and the community
Continuously innovate and adapt to market trends

Best Practices for Success in the Cannabis Industry

Now that you know how to start a cannabis business, do you want to learn how to thrive in this highly regulated and competitive industry? The following tips can help you!

Emphasize Compliance and Transparency

It's important to strictly adhere to regulations and open business practices by:

Staying up-to-date with federal and state regulations
Using a robust cannabis compliance software
Encouraging your employees to comply with regulations
Being transparent in your business practices to build trust with regulators and customers

Focus on Quality and Consistency

You should maintain high product standards by:

Implementing rigorous quality control measures
Investing in employee training to ensure consistent product knowledge and customer service
Regularly gathering and acting on customer feedback
Researching the latest industry standards and best practices

Build Strong Community Relationships

Networking offers golden opportunities for cannabis business owners. If you foster positive relationships with local communities and stakeholders, it'll be easier to succeed in this industry. That's why it's crucial to:

Engage in local community events and initiatives
Implement corporate social responsibility programs
Educate the community about the benefits and responsible use of cannabis
Foster positive relationships with local law enforcement and regulatory bodies

For more information, you can check our article Cannabis Convention: A Networking Goldmine at Cannabis Events.

Adapt to Industry Changes

To survive in the dynamic cannabis industry, you need flexibility and continuous learning. This means you should:

Regularly review and update your business plan
Stay informed about industry trends and technological advancements
Be prepared to pivot your business model, if necessary
Continuously invest in employee training and development

Final Thoughts

Do you want to get into the cannabis business? This industry offers extraordinary opportunities but also presents significant challenges.

Fortunately, if you understand the complex regulatory landscape, carefully plan each step, and stay up to date with industry changes and trends, you can thrive in the competitive and highly regulated market.

The cannabis industry is still in its early stages, but there's plenty of room for innovation and growth. Be patient, flexible, and adaptable, while prioritizing compliance and quality. That's what will help you leverage the advantages that this emerging market offers.

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How to Get Into the Cannabis Business: A Complete Guide