How to Start a Cannabis Business- A Step-by-Step Guide

The legalization of medical and recreational marijuana has opened avenues of opportunities for starting cannabis businesses.

Do you also see this industry as a potential business opportunity?

Well, we don’t blame you. After all, the profits are attractive, and the market seems to be promising.

However, to stand apart and increase your chances of starting a successful cannabis business, you need to put in a lot of homework.

Let’s ease the first step for you. We have answered the most important question about how to start a cannabis business in great detail.

From choosing a business model to acquiring licenses and permits and sorting out the financial requirements—we have covered it all for you.

Sounds good? Let’s dive right in.

How much money do you need to start a Cannabis Dispensary?

The cost of starting a dispensary in the USA varies between $187,000-$1,174,600. However, the cost can extend up to $2 million depending on factors such as state federal law, dispensary licenses, lease deposits, remodeling expenses, and liquid asset requirements.

Pros and Cons of Starting a Cannabis Business

Many cannabis businesses emerged in the US market space with the expectation of making huge money. However, like every business, there are pros and cons to starting a cannabis business.

Understand the pros and cons? Now, let’s discuss a way to start your cannabis business.

Step-by-step Guide to Start a Cannabis Business

Let’s equip you with a step-by-step guide to start your own cannabis business in the marijuana industry. Let’s get started. 

1. Understanding the Cannabis Industry and Market

Ever since its legalization in the States, the cannabis industry has been growing by leaps and bounds presenting endless opportunities to business enthusiasts trying to tap into this market.

It’s wise to look at the latest trends and market statistics circling the cannabis world before setting up your business.

Let’s check out these unmissable stats:

• Market size: The legal cannabis market in the US was valued at $30 billion in 2022. It is expected to grow by $35 billion by 2030.
• Growth Rate: From 2022-2027, the global cannabis market is expected to grow at a CAGR of 24.3%.
• Number of Users: As of 2023, nearly 55 million American adults have tried cannabis at least once in their lives.
• State legalization: Ohio, Oklahoma, Pennsylvania, and Minnesota are considering the legalization of adult-use cannabis in the upcoming year.
• Fastest-growing states: Arizona’s legal cannabis market is expected to grow by 580% between 2021-2026, making it the fastest-growing state with maximum opportunities.
• Acceptance amongst people: According to a report by the Pen Research Center, 91% of US adults are in favor of marijuana legalization.

Now that you have a fair idea about market trends, let’s pick the most suitable cannabis business for you.

2. Select a Cannabis Business Type

Now, growing, manufacturing, and retailing a cannabis product is not the only way to get into the cannabis industry. Depending on multiple factors, however, mostly your risk-taking ability and legal landscape in your state, you can select businesses in one of these two categories:

Plant-touching Cannabis Businesses

Plant-touching businesses are involved in the direct handling of cannabis products like cannabis plants, buds, edibles, oil, etc. Given that marijuana is still illegal federally, these businesses operate in a high-risk environment with strict regulatory policies.

Every state has different legalization rules. So before you choose your business type, check the guidelines of your state.

For instance, marijuana is fully illegal in the states of Idaho, Kansas, South Carolina, and Wyoming. According to the Office of Drug Policy, it is illegal for any person to manufacture, deliver, or possess marijuana with an intent to sell in Idaho.

Now, if you belong to one of those 23 states where plant-touching businesses are allowed, here are a few options for you to consider.

• Cultivation: Such businesses undertake the task of breeding, growing, and harvesting of cannabis plants.
• Manufacturing: These businesses will manufacture cannabis products such as CBD oil, edibles, topicals, cartridges, etc.
• Dispensary: Dispensaries sell recreational and medical cannabis depending on their license.
• Lab testing: Such businesses test the products and determine their THC levels. They ensure whether a product is safe for consumption or not.
• Distributors: Cannabis distributors are involved in the point-to-point distribution of marijuana products.

The licensing process for these businesses is quite lengthy. Moreover, the requirements are stringent and vary substantially between each state. So consider these factors before finalizing your business type.

Ancillary Cannabis Businesses

An ancillary cannabis business is not involved in the testing, manufacturing, breeding, or selling of cannabis products. But they are indirectly related to cannabis companies by playing a supporting role.

The entry barriers for ancillary businesses are quite low compared to cannabis businesses and so are the legal requirements. They complement the main cannabis market and are quite easy to get started with.

You can choose one of these ancillary businesses considering the demand and market size in your area:

• Cannabis product packaging
• Professional services, i.e. professional advisors, legal counsel, digital marketing, and accountants.
• Cannabis accessories, i.e. vapes, grinders, ashtrays, storage boxes, etc.
• Cannabis technology, i.e. seed-to-sale POS system, security system.
• Construction of facilities
• Harvesting and manufacturing equipment

Now, do your research and ensure that the business you want to start is legal in your state.

3. Brainstorm a Cannabis Business Name

It’s all in the name, right? Before you start a cannabis business finalize the legal and do business as (DBA) name of your business.

Brainstorm different names and pick something that resonates with your business idea.

Here are some ideas to help you brainstorm the names:

• Choose a name that’s catchy and easy to remember.
• Choose easy to pronounce and spell the business name.
• Choose a generic name that will stay relevant as you expand, i.e. LeafLife Dispensary
• Don’t choose a name that is too specific. i.e. Arizona cannabis store.
• Try using keywords in your business name. This will help boost the SEO.

Once you have your top picks, check the state database and ensure that the name is not taken by some other business in the cannabis space.

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4. Write a Cannabis Business Plan

A well-structured cannabis business plan offers answers to every question you have regarding how to start a cannabis business. It helps in establishing a legally compliant business and operating it successfully.

Here are important sections to include in your business plan:

• Executive summary
• Company Overview
• Market analysis
• Products and services
• Sales and marketing strategies
• Operations plan
• Management team
• Financial plan

Writing these sections requires utmost attention and precision in detailing. It’s definitely not an easy task.

Pro-tip

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5. Register Your Cannabis Business

Remember, how you brainstormed and finalized the cannabis business name. It is now time to legally register your business with the state.

You can register your cannabis company with a generic name and choose an alternate doing business as (DBA) name for operational purposes.

Choose from different business entity options like a sole proprietorship, limited partnership, LLC, or limited corporation. Finalize the business structure and register your company accordingly.

To register an LLC or limited corporation, you would have to file an article of incorporation with the state.

Lastly, get an Employer Identity Number (EIN) number from the Internal Revenue Service (IRS). EIN is required for filing taxes and even when opening a business bank account. And, also register with the tax agencies for different state, federal, and local taxes.

The business registration process and requirements for each state are different. Conduct your own research to understand the requirements or hire a special help who can undertake this entire registration task for you.

6. Figure out Tax Obligations

According to IRS section 280E- Federal Controlled Substances Act, marijuana is a Schedule 1 drug. This restricts the cannabis companies from deducting business expenses that are otherwise deductible.

Not only that, compared to other industries, the cannabis industry has the highest tax rate and taxation challenges.

The average tax rate applicable to cannabis businesses is 55% which is otherwise 30% for other industries.

Wait, wait, wait! This is not it.

You also need to figure out specific laws applicable in your state. Certain states impose an additional excise duty over total sales for dispensaries.

For instance, if you are operating a cannabis dispensary in Washington state, you owe a 37% excise tax on all sales.

Too many obligations right?

This is because cannabis remains illegal at a federal level making it a grey-scope industry.

As a business owner, you need to figure out this complex tax structure and ensure compliance to avoid legal troubles.

7. Apply for Cannabis Business Licenses and Permits

The cannabis industry is heavily regulated by the federal government. It’s therefore essential to acquire essential permits and licenses for your business to ensure its legal compliance.

Now, the licensing requirements for marijuana businesses vary substantially from state to state. These states have their unique qualifying requirements as well. Check the official state’s website and get updated information before starting the application process.

The licensing fees vary between $150-$15,000 and more depending on your state. Some states even impose the requirement for minimum capital and liquid assets to qualify.

Consider these requirements and the state’s application process as you prepare the documents. Practice extra caution as some states won’t allow you to reapply on rejection.

8. Get Business Insurance

Consider getting robust insurance coverage to withstand the constantly evolving legal landscape of the cannabis industry.

To begin with, identify the state laws and requirements to get all-around coverage for your business. Also, consider special insurance requirements for your plant or ancillary businesses.

Here are a few insurances you should consider getting for your cannabis business:

• General liability insurance
• Commercial property insurance
• Product liability insurance
• Workers compensation insurance
• Crop and property insurance

Depending on the type of business model, you can also get extra coverage for uncovered areas. For instance, testing labs require an Error and omissions policy to offer coverage against potential claims of negligence.

Because of the high-risk nature of cannabis businesses, only non-admitted insurance providers work with cannabis companies. This will potentially increase the insurance costs for your business.

9. Hire Cannabis Staff

Next up, you need to start hiring employees to run your cannabis company.

Check that business plan to understand what type of employees are required in your specific cannabis business. Depending on the type of business, you may require budtenders, cultivators, lab technicians, research scientists, etc.

Consider hiring people from diversified backgrounds. The diversity will help you establish relevance amongst the larger target audience.

Once you assemble a basic team, you can move ahead and plan the opening of your cannabis company.

10. Consider Your Financing Options

Limited financing options are one of the greatest challenges for cannabis companies. They don’t have easy access to traditional loans and credit facilities like businesses from other industries.

Moreover, the unclear federal policy makes large banks and financial institutes averse to the high risks involved in cannabis businesses.

This leaves you with one of the few financing options to consider:

• Bootstrap the capital using personal savings and loans from friends and family.
• Seek funding from angel investors and venture capitalist firms.
• Seek small business loans if available.
• Acquire the capital through startup accelerators and incubators.

Despite being illegal federally, the cannabis community is growing strong. Wealthy individuals are seeing a promising growth prospect in the cannabis market and are looking for investment opportunities.

With a promising business plan, you stand a good chance to raise the startup capital and acquire essential funding.

Conclusion

That pretty much will get you started on the right foot. Easier said than done, right?

Well, at least now you have a pretty clear understanding of how to start a cannabis company.

Now, use Upmetrics’ cannabis business plan template to write an actionable business plan and ensure that you cover every little aspect that goes into launching a successful business.

We hope this was a pleasant and informative read for you.

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