Starting a cannabis business can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful cannabis business.
Importantly, a critical step in starting a cannabis business is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
14 Steps To Start a Cannabis Business:
- Choose the Name for Your Cannabis Business
- Develop Your Cannabis Business Business Plan
- Choose the Legal Structure for Your Cannabis Business
- Secure Startup Funding for Your Cannabis Business (If Needed)
- Secure a Location for Your Business
- Register Your Cannabis Business with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Cannabis Business
- Buy or Lease the Right Cannabis Business Equipment
- Develop Your Cannabis Business Marketing Materials
- Purchase and Setup the Software Needed to Run Your Cannabis Business
- Open for Business
1. Choose the Name for Your Cannabis Business
The first step to starting a cannabis business is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your own cannabis business:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your Cannabis business.
2. Develop Your Cannabis Business Business Plan
One of the most important steps in starting a successful Cannabis business is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your cannabis business.
- Company Overview – this section tells the reader about the history of your marijuana business and what type of cannabis business you operate. For example, are you a dispensary, cultivation center, or product manufacturer?
- Industry Analysis – here you will document key information about the legal cannabis industry. Conduct market research and document how big the marijuana industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how old are they? Where do they live? What do they find important when purchasing products like the ones you will offer?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract customers to your cannabis business? For example, you might decide to use pay-per-click advertising, public relations, search engine optimization and/or social media marketing.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your cannabis business make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business?
3. Choose the Legal Structure for Your Cannabis Business
Next you need to choose a legal structure for your Cannabis business and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole proprietorship
A sole proprietorship is a business entity in which the owner of the cannabis business and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a cannabis business together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a cannabis business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a cannabis business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your cannabis business, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Cannabis Business (If Needed)
In developing your cannabis business business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a cannabis business to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a cannabis business that they believe has high potential for growth.
5. Secure a Location for Your Business
When ooking for a location to set up your cannabis business, there are a few things you’ll want to keep in mind.
First, you’ll need to make sure the location is legal for cannabis businesses. You can check the state’s regulations online or by contacting your local licensing authority. Second, you’ll want to find a location that’s accessible and visible. It should be in a place your customers can easily find. Third, you’ll want to make sure the site is spacious enough for your business. You may need room to grow, process, and store cannabis products, depending on the scope of your operations. Finally, you’ll want to make sure the location is affordable. You don’t want to overspend on rent or lease payments.
Use these tips to find the perfect location for your cannabis business. And always consult with local authorities to ensure you’re following all the regulations.
6. Register Your Cannabis Business with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your cannabis business’ name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your cannabis business to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
The most important license for any cannabis business is a license from the state government. This license is required for all businesses involved in the production, sale, or distribution of cannabis products. In addition, most local governments also require a license to operate a cannabis business within their jurisdiction.
Nearly all states, counties and/or cities have additional license requirements including:
- General Business License: getting your Articles of Incorporation as discussed above
- Sales Tax License or Seller’s Permit: for selling products
- Zoning Approval: typically at the city or county level, this provides authorization for construction or use of a building or land for a particular purpose
- Food Service, Processing and/or Warehouse Licensing: to ensure safe food preparation
- Health Facility Licensing & Certification: to ensure safe rendering of healthcare services
- Fire Department Approval: a process by which the local fire department reviews and approves the installation of a fire alarm system.
10. Get Business Insurance for Your Cannabis Business
There are various types of insurance that are necessary to operate a cannabis business.
Some business insurance policies you should consider for your cannabis business include:
- General liability insurance: This covers accidents and injuries that occur on your property. It also covers damages caused by your employees or products.
- Auto insurance: If a vehicle is used in your business, this type of insurance will cover if a vehicle is damaged or stolen.
- Workers’ compensation insurance: If you have employees, this type of policy works with your general liability policy to protect against workplace injuries and accidents. It also covers medical expenses and lost wages.
- Commercial property insurance: This covers damage to your property caused by fire, theft, or vandalism.
- Business interruption insurance: This covers lost income and expenses if your business is forced to close due to a covered event.
- Professional liability insurance: This protects your business against claims of professional negligence.
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
11. Buy or Lease the Right Cannabis Business Equipment
In order to run a cannabis business, you will need some specific equipment. This includes a grow light, grow tent, carbon filter, and fans. You will also need to have a secure place to store your cannabis products.
12. Develop Your Cannabis Business Marketing Materials
Marketing materials will be required to attract and retain customers to your cannabis business.
The key marketing materials you will need are as follows:
- Logo: Spend some time developing a good logo for your cannabis business. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website: Likewise, a professional cannabis business website provides potential customers with information about the products you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your cannabis business.
13. Purchase and Setup the Software Needed to Run Your Cannabis Business
To run a cannabis business, you’ll need software that can help with things like:
- tracking inventory
- managing finances
- creating sales reports
- managing customer data
Make sure to research different software options to find one that fits your business needs.
14. Open for Business
You are now ready to open your cannabis business. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How to Start a Cannabis Business FAQs
Is it hard to start a cannabis business?
There is no one answer to this question, as it depends on the specific business and jurisdiction. However, in general, starting a cannabis business can be difficult, as there are many legal and regulatory hurdles to overcome.
How can I start a cannabis business with no experience?
First, you need to do some research to understand the industry and the business model. There are many online resources and cannabis-focused business courses that can help you get started.
You can also join an industry association to connect with other cannabis companies and learn from their experiences. These organizations can provide guidance on how to start a cannabusiness.
Finally, you'll need to find a cannabis-friendly lawyer to help you navigate the complex legal landscape of the cannabis industry.
Starting a legal cannabis business can be challenging, but can also be an incredibly rewarding venture. With hard work and perseverance, you can create a successful cannabis business.
What type of cannabis business is most profitable?
The profitability of a legal cannabis company varies greatly depending on the specific market and region. However, in general, the most profitable types of cannabis business are those that produce and sell cannabis products for medicinal purposes. This is because the demand for medicinal cannabis products is much higher than the demand for recreational cannabis products, and the margins on medicinal products are typically much higher.
In addition to selling cannabis products for medicinal purposes, another highly profitable cannabis business is a dispensary. Dispensaries may sell both medicinal and recreational cannabis products, and typically have high margins due to the fact that they are the only legal source of cannabis products in many states.
How much does it cost to start a cannabis business?
It can cost anywhere from a few thousand dollars to a few hundred thousand dollars to start a cannabis dispensary, depending on the size and scope of the operation. For instance, setting up a small grow operation might cost around $5,000 to $10,000, while establishing a large-scale cultivation and manufacturing facility could run as high as $500,000.
What are the ongoing expenses for a cannabis business?
The ongoing expenses for cannabis related businesses can vary based on the size and scope of the business. Some of the most common expenses include:
- Rent or lease for a storefront or grow operation
- Licenses and permits
- Security measures, such as cameras and alarm systems
- Cannabis-specific inventory, such as buds, oils, and edibles
- Packaging materials
- Marketing and advertising costs
- Employee salaries and benefits
- Operating expenses, such as electricity, water, and gas
It's important to remember that these are just some of the common expenses for a cannabis business. Depending on your specific business, you may have additional costs to consider.
How does a cannabis business make money?
A cannabis business makes money by selling products to its customers. A cannabis business may sell cannabis products such as flowers, concentrates, and edibles or ancillary products and services, such as grow lights and soil nutrients. The business may also provide consulting services to help customers start or improve their cannabis business.
Is owning a cannabis business profitable?
Yes, owning a cannabis business can be profitable. The cannabis industry is estimated to be worth billions of dollars, and there is a lot of room for growth. There are many opportunities for entrepreneurs in the cannabis industry, from growing and harvesting to selling and marketing.
Why do cannabis business fail?
One of the main reasons that cannabis business fail is a lack of planning. Not having a detailed cannabis business plan, not researching the industry, and not targeting the right customers can fail a cannabis business.
A second reason is a lack of marketing and sales skills. A cannabis business may fail if the owners do not create a sales process or have a clear and strong value proposition.
Another reason is a lack of financial management skills. If the business owner does not have a realistic budget, track expenses, and invest enough in the business, it can fail.