Management Companies & Multiple Legal Entities
If this you, reach out anytime…….
For a variety of legal and tax reasons, many are asking about setting up management companies over their cannabis empires.This may have merit for a variety of personal and business reasons.
If you have many dispensaries or cultivation sites, there is value in setting up a parent or holding company and having those separate businesses and locations in their respective legal entities and having a management company has legal and tax merit.
One of the reasons, though, that is often asked of me, and often I am being told, and told in a way that is basically suggesting that I help them create a management company, is that they want to deduct all of their expenses.
This idea is a myth.A myth that has the risk of not only an audit going poorly, but the risk of tax fraud.
Evading taxes through a multitude of legal entities is not a good idea.Maximizing deductions, where legitimate, absolutely yes; but evading, absolutely no.
Said a different way, if own a cannabis business and have multiple entities, which you own in whole, in a partnership, or corporation where you control all facets of each legal entity, the IRS can deem your legal entities as just “one” tax entity. Which means all of the expenses deducted to escape 280E will be consolidated and disallowed to fit the essence and spirit of 280E.
If you are creating a management company, it does have to perform legitimate, active business operations.
Creating a management company to simply do accounting entries is not going to end well.
Other crafty ideas flowing too is the idea of branding and intellectual property entities. We all have a brand, but setting these up to avoid taxes, which has come to my attention, are riskier ideas are not prudent for tax purposes. For managing your brand, legally, and if you see the cost/benefit you will defend any branding or intellectually property rights, that may make sense.
Administering these entities too, and doing the proper accounting is key.The cost/benefit may be there, and it may not.Some small cannabis-touching entities may not realize the cost/benefit of these more complex legal structures.Again, without going into further detail, this may be an avenue to consider in structuring your business.
I can’t reiterate enough, and from our own experiences and in multiple industries, including large corporations I worked at early in my career, if you simply believe these professionals are just additional “costs,” you either have the wrong professional support or you haven’t had the chance to hear the benefits many professionals may provide.
The key is finding professionals who admit that, and say to you that “if we don’t have the answer for you, we will investigate it for you.” Regardless of the cannabis industry, having a curious attorney and a curious CPA who want to help you thinkthrough a variety of alternatives will allow you to make the best decisions for your situation.