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How To Prepare Your Washington Medical Marijuana Business For The New Rules

Store manager Bess Matthews, left, and co-owner Jake Dimmock assist a customer at a medical marijuana dispensary, Tuesday, Jan. 6, 2015, in Seattle.
Store manager Bess Matthews, left, and co-owner Jake Dimmock assist a customer at a medical marijuana dispensary, Tuesday, Jan. 6, 2015, in Seattle.

Washington’s medical marijuana operators face a seismic shift after passage of SB 5052 and HB 2136. Come July 1, 2016, the Washington State Liquor and Cannabis Board (LCB) will be regulating the MMJ market. The below are some of the key questions you likely will need to address in  trying to transition your MMJ business to one that can pass muster under the state’s new highly regulated regime:

How will MMJ be sold under SB 5052? Like recreational cannabis, MMJ will be sold through state-licensed retail stores. These stores will have a medical endorsement from the LCB, which will allow them to sell cannabis for medicinal purposes.

Will I have to apply for a license from the LCB? Yes. Current MMJ operators will be allowed to apply for a license from the LCB. The LCB will give a preference to those who applied for a retail license before July 1, 2014, operated or were employed by a collective garden before January 1, 2013, maintained local licensing as applicable, and paid applicable state taxes and fees.

Will my MMJ store have to operate as a non-profit? No. Those who receive a license will find that they have more options for corporate entity selection under the state’s new cannabis licensing regime. MMJ providers have operated mostly as not-for-profit entities because it was against the law to sell cannabis “for profit.” This significantly limited MMJ entities in that non-profit entities cannot distribute profits to their managers or secure capital from investments, as opposed to donations and loans. Going forward, MMJ owners may consider for-profit entities that will allow them to distribute profits to owners and raise capital through investments. A number of not for profits have already informed our cannabis business attorneys of their desire to become for profit entities because of the increased flexibility that corporate structure will provide them.

Will my new for profit business be liable for the debts of my previous not for profit business? Probably. New businesses that are closely associated with a previous business may face what is called successor liability. Under successor liability a business can be held liable for the debts and obligations of a previous business if the new business is a “mere continuation” of a previous business, meaning the new business is essentially the same as the previous business, despite incorporating anew. Another example is when a “fraudulent transaction” occurs, meaning a person sells or reincorporates a business simply to avoid paying a debt of the old business. Successor liability is also a major issue when it comes to taxes. If your previous MMJ business is behind on its taxes, your new business almost certainly will be stuck holding the bill.

Assuming I pay all debts owed, what will happen to the assets of my non-profit if I transition it to a for profit entity? The answer to this largely depends on the non-profit’s articles of incorporation. In Washington, non-profits can incorporate under the Nonprofit Corporation Act (“NCA”), the Nonprofit Miscellaneous and Mutual Corporation Act (“NMMC”), or the Cooperative Associations Act (“CAA”). These Acts provide different methods to distribute assets upon dissolution, but all three require that the non-profit first pay or settle all liabilities and obligations with its creditors and members. This includes returning any assets loaned to the not for profit entity. What happens to the remaining assets will be based on the particular statute under which the nonprofit was incorporated.

Under the NCA, assets held by the non-profit for certain purposes (e.g., charitable or religious use) must be transferred to another organization engaged in similar activities, with the other assets distributed to members or to other persons pursuant to the articles of incorporation or bylaws.

Under the NMMC and the CAA, assets are distributed to the members, unless the articles of incorporation provide otherwise. Not for profits incorporated under the NMMC or the CAA are generally bound by their articles of incorporation. If your articles of incorporation do not provide for a dissolution that meets your existing goals, you can amend those articles, but you must be very careful in doing so.

Bottom Line: If you have an MMJ business that you want to survive in the world of LCB regulation, you need to start preparing now by, at minimum, getting familiar with SB 5052 and by reading all relevant LCB announcements. You should also review your articles of incorporation to see what they say about what you can do with your non-profit’s assets, and if the articles are not as good or as clear as you would like them to be, get them changed.

Daniel Shortt, for the Canna Law Blog

Associate with Harris Moure’s Canna Law Group