Should I Start an LLC for My Medical Marijuana Dispensary?

Starting a limited liability company (LLC) for your medical marijuana dispensary can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a medical marijuana dispensary, lawsuits can arise from things like an inability to meet contractual obligations after a fire destroys your entire stock of marijuana or failure to acquire the proper permits to grow and sell medical marijuana.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your medical marijuana dispensary seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for a Medical Marijuana Dispensary?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Medical Marijuana Dispensary

By starting an LLC for your medical marijuana dispensary, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Medical marijuana dispensaries will benefit from liability protection because of the ever-evolving legal framework surrounding medical marijuana use, as well as general business risks like personal injuries, libel, trademark infringement, and more.

Example 1: As stated in the regulatory reporting requirements, you need to track, trace, and report seed-to-sale inventory movement. You fail to do so, and the regulatory board decides to take action against you for non-compliance. The lawsuit may affect your business if they sue, but you will remain safe.

Example 2: As a grower, fire guts your cannabis plantation, and this loss affects your business. You need help to pay employees' salaries for five months now. Finally, you decide to cut employees but still cannot afford to pay the wages owed. If they sue over it, the settlement will affect your business’s assets and not yours as the owner.

Example 3: After consuming your cannabis, a customer finds himself having psychotic reactions and seeks help in a hospital. He later discovered he had been taking the wrong doses because your supplies were mislabelled. If he decides to sue you for negligence, only your business may be affected, but your LLC status will protect your personal assets.

Example 4: A customer purchases CBD that is contaminated and becomes very ill. The customer sues and wins damages that exceed insurance limits.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Medical Marijuana Dispensary

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

Cannabis retailers must navigate a tax code that considers medical marijuana dispensaries illegal. On the Federal level, cannabis trade is still considered trafficking of a schedule I controlled substance. Subject to 280e tax code, medical marijuana dispensaries are unable to deduct business expenses.

Some medical marijuana dispensary owners choose to form two business structures to reduce tax liability.

Many dispensaries find that forming a structure responsible for productions and distribution and a separate structure that handles management of the business and legal responsibilities (and any non-cannabis infused products) is a good way to mitigate high tax burden. We strongly encourage medical marijuana dispensary owners to seek out expert tax and legal counsel.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an medical marijuana dispensary owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Medical marijuana dispensaries rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Medical marijuana dispensaries need insurance to cover risks such as damage to cannabis plantations and products and lawsuits from employees and clients.

Common Situations Business Insurance May Cover for a Medical Marijuana Dispensary

Example 1: A customer is making a trip to your restroom when he slips on a wet floor and falls to the ground. The impact breaks his arm, and he requires medical treatment. Your general liability insurance policy will likely pay to treat his injuries.

Example 2: One of your employees is carting a stack of boxes filled with edibles from a delivery van into the store when he accidentally hits a customer’s luxury automobile with the dolly. The accident severely dents the side of the car. Your general liability insurance policy will likely cover the cost of repairing the car.

Example 3: One of your customers is excited about some of the new products in your display case and leans too heavily on the glass, causing it to break and their hand to fall through the glass. The customer sustains lacerations that require medical care. The customer files a lawsuit against your business, claiming you are responsible for his injuries. With a general liability insurance policy, your legal costs related to defending yourself from a lawsuit are covered. You also have coverage for the payment of a settlement if you wind up settling the case outside of court.

Other Types of Coverage Medical Marijuana Dispensaries Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all medical marijuana dispensaries should obtain:

Commercial Property Insurance

Commercial property insurance covers the cost of repairing or replacing equipment, inventory, and any owned real estate in the event of a covered event like a fire or severe weather. Even if you don’t own the building that you operate out of, the cost of replacing damaged or lost inventory or equipment out of pocket could be significant.

Workers’ Compensation Insurance

The state that you do business in most likely requires you to carry workers’ compensation insurance if you have employees. With workers’ comp, you have protection for your employees and your business should an employee sustain a work-related injury. In the event of such an injury, your policy will pay for the employee’s medical treatment. It will also help to pay for the wages the employee loses while being unable to work due to the injury.

Product Liability Insurance

Although you do your best to ensure that all of your medical marijuana products are of good quality, there is still a possibility that one of your customers could claim that a product you sold caused them an injury. If the customer thinks that one of your products caused him or her an injury and then files a lawsuit against your business, it could be costly to defend yourself. But with product liability insurance, you have the backing of your insurer. Your policy will pay for your legal fees if you are sued due to a product-related injury, including paying for a settlement if you settle out of court.

Crime Insurance

Medical marijuana dispensaries can become the victim of crime—both crimes committed by outsiders and crimes committed by employees. Regardless of who commits the crime, with crime insurance, you have some financial protection. For example, if someone steals a large amount of your inventory, your crime insurance policy should help to cover some of the cost of replacing it.

Data Breach Insurance

Data breach insurance helps protect your dispensary in the event of cybercrime. For instance, if a cybercriminal were to break into your system and steal customer information, it could cause some of those customers to take legal action against your business. If you have data breach insurance, it will help to cover the cost of your legal fees and any settlements that you may be required to pay.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, commercial property insurance, workers’ compensation insurance, and product liability insurance.

Read our Business Insurance article for more info.

To start a dispensary, you will need to get a license which can cost $5,000 or more, depending on the state. But if you plan to grow your product, you will also need an additional grower license. Generally, the minimum requirement for startup capital can be as high as $250,000.

Visit our How to Start a Medical Marijuana Dispensary guide to learn more about the costs of starting and maintaining this business.

Purchasing the product, rent, utilities, marketing, and payroll are the primary ongoing expenses.

Learn more about running a medical marijuana dispensary.

A medical marijuana dispensary sells cannabis products for medicinal purposes

Learn more about starting a medical marijuana dispensary.

A medical marijuana dispensary legally purchases marijuana and sells it to people with a prescription. Dispensaries consult with doctors to make sure patients receive standard accepted treatments. In addition, their staff is well trained in the different types of marijuana and their medicinal uses.

A well-run medical marijuana dispensary can earn profits of 20% to 50% depending on how long it has been in business.

Learn more about starting a medical marijuana dispensary.