How to convert your cannabis nonprofit into a for-profit (and put more money in your pocket)

There’s more big news for cannabis businesses as we roll closer to 2018 and the start of legal cannabis in California! Existing cannabis nonprofits who wish to convert to a for-profit entity can file with the California Secretary of State to do so starting January 1. 

Why would you consider converting a non-profit to a for-profit? There are two big drawbacks to being a non-profit to consider:

• First, a non-profit cannot take a distribution as profit. So, for example, if you make $100,000 in profit after taxes in one year, you must re-invest that money back into your business, rather than keeping it for yourself.
• Second, you cannot take an ownership stake in a non-profit company. For example, if you own an edibles company that gains a significant following, you can never sell that company to a larger brand or competitor (because you never actually owned it).  

Therefore, if you’re interested in building a business and selling it, or making a profit that you don’t need to reinvest back into your business, a for-profit would be the way to go. 

Sound like a promising model? Here’s what you need to know to convert your cannabis non-profit into a for-profit.

Who does this apply to?
First, remember that everyone starting a cannabis business in California needs to file with the Secretary of State. Specifically, entrepreneurs seeking to start a cannabis-related business in need to register their business entity, as well as any trademark or service mark. 

Next, if you’re an existing nonprofit -- a mutual benefit corporation or a cooperative corporation -- and you wish to convert to a for-profit entity, you must register this change with the Secretary of State starting January 1, 2018. This applies to any businesses looking to become a Corporation, Limited Liability Company (LLC), Limited Partnership (LP) or limited Liability Partnership (LLP). If you’re a new business, you are required to register with the Secretary of State before applying for any license(s) with other local and state agencies. 

Not sure what business structure is right for you? Luckily, there’s a guide for that. The California Secretary of State has this overview of the different forms your canna-business can take. Of course, if you have any questions about the differences between a corporation, LLC, LP, or any of the other options, GreenGrowth CPAs are here to help. 

Steps for Registering Your Cannabis Business
The office of the Secretary of State has set up an online portal to make the process of registering your business relatively straightforward. (And if you like Cheech, there’s a great PSA to go with the new site that you should definitely watch.)

Follow these simple steps to get your business registered correctly.

1. Decide what type of entity you wish to form. This affects your tax obligations, ability to transfer assets and ownership, how you manage and run your business, and the licenses you will need to obtain. This is a big first step, and you may wish to consult with some experts if you’re forming a new business.
2. Next, file the documents in accordance with the type of entity you are registering with the California Secretary of State and pay the appropriate fees. You can find all the forms -- with samples and instructions -- for most entity types on the California Secretary of State website. Here are the types of businesses required to register with the Secretary of State’s office:
   1. Required to register: Corporations (including for profit and nonprofit); LLCs; LPs and LLPs. Beginning January 1, 2018, Cannabis Cooperative Associations (CCA).
   2. Businesses that may register: General Partnerships are not required to register with the California Secretary of State, but may choose to if desired.
   3. Businesses not required to register: Sole Proprietorships
3. Once you’ve registered (or not), the next step is to register a business name. You can register a fictitious business name at this point. Why? Because in some instances, a business may choose to use a different name that its legal name, or it may be required to do business under a different name to obtain business licenses and permits. File for this alternate name with the county clerk/recorder where your business is located.
4. NOTE: once you’ve filed organizational documents with the Secretary of State (step 2), you still need to get the appropriate licenses to operate a cannabis business in California. Not only will you need state-level licenses, but you also need city, county, city AND county, and other permits before operating legally. Start with this quick overview on seller’s permits and then check with your local city and county for their permit and license requirements.
5. Know your employer responsibilities! If you’re planning on hiring, register for a federal Employer Identification Number (EIN). This will help you be compliant with payroll taxes, wage withholding requirements, matching employer withholding requirements, worker’s compensation, insurance, and more. Here are some quick resources to help you learn more:
   1. IRS -- How to Apply for an EIN
   2. California Franchise Tax Board -- Business Filing Information
   3. California Employment Development Department -- About Payroll Taxes
6. Research your tax obligations! Of course, this is where GreenGrowth CPAs can give you a helping hand, but here are some more resources to review:
   1. The Internal Revenue Service (IRS) for federal taxes
   2. The Franchise Tax Board (FTB) for California’s personal income tax and corporation tax 
   3. The Employment Development Department (EDD) administers four state payroll taxes
   4. The California Department of Tax and Fee Administration (CDTFA) is responsible for all business permits and taxes
   5. The California Board of Equalization (BOE) reviews and adjusts assessments for property taxes
   6. And finally, the California Tax Service Center is a partnership of tax agencies aiming to improve taxpayer resources and educational programs
7. Making the switch to for-profit? Every corporation and LLC is required to file a Statement of Information with the Secretary of State within the first 90 days of registering (and then every year thereafter).
8. Last, but not least, register your trademark with the California Secretary of State’s office. This helps identify and distinguish the source of the goods or services of one party from those of another (and will be important for any marketing or branding you wish to do). Here’s how to start that process.

This is a lot information to take in, and if you’re feeling overwhelmed, GreenGrowth CPAs are here to help. Get in touch with any questions and we’ll guide you through the registration process.