Entity selection is a vital component when setting up a hemp business. Also known as choice of entity, Entity selection involves finding the right structure for your hemp business. This will solidify how your operations are run, who bears what responsibilities, and the legal and tax obligations of the company.
There are different business types, aka: business entities or business structures, that you can choose for your hemp business, and they will be determined by the size of your business and other legal factors. You should bear in mind that whatever entity you select will determine the liability attached to the business. This article details the factors in play when choosing an entity for your hemp business.
Legal Structures for Hemp Companies
Your hemp business can either be a for-profit entity or a non-profit entity. The structure of a non-profit hemp business is completely different from that of a for-profit. In the past there were a number of benefits that came with setting up your business as a non-profit, but things have changed and now it is more beneficial to set up your business as a for-profit.
There are five entities that a hemp business will typically use, and they are as follows:
- Sole proprietorship: In this model, the hemp business is under one person who owns and operates the business. The sole owner bears full responsibility and liability for the business, and attains all profits from the business. Setting up this entity requires minimal paperwork and the legal structure is thin. This works well for small hemp businesses with minimal investment and turnovers. At the same time, it has one major disadvantage, which is that the owner bears all liability for the business. In the case of financial liability, the owner’s personal assets can be used to offset what is owed by the business.
- Limited partnerships: In a limited partnership, the business is owned by two or more people who run the business jointly, and share responsibilities and profit. In this model, liability is spread between the partners, reducing the risk. However, in the case of financial liability, each owner takes on personal risk.
- LLCs and LLPs: Most large-scale hemp businesses are registered as LLCs or LLPs. Each must be registered by the state and adhere to state regulations. In this model, the owner(s) of the business is exempt from business liability, and does not bear personal risk in the event of any legal issues incurred by the business.
- C-Corps: This type of entity is suitable for large hemp businesses that have a significant capital investment. In this model, the business is owned by many shareholders who invest capital in the business and are rewarded with stock value. The shareholders elect a board of directors to run the business, and this board is accountable to the shareholders.
- S-Corps: This is a more advanced level of C-Corps, wherein the business is registered at the state level and is taxed separately under the S-Corps. This entity cannot have more than 100 shareholders.
How To Find The Right Entity For Your Hemp Business
Before selecting the best entity for your business it is crucial to talk to accounting experts who will break down the tax and legal implications of each entity. Factors that will push you in the right direction include:
- Number of business owners
- The size of your business
- How you plan to raise funds
- How much risk you are willing to incur at a personal level
- The projected growth of the business
Lastly, you need to bear in mind that different states have different laws that govern how hemp businesses are run. The rules also govern the issuing of hemp licenses process of transferring them. These laws vary based on the structure that you choose. With this in mind, it is important to work with legal and accounting experts who are familiar with laws in the hemp industry. You can also opt to start with a basic entity such as sole proprietorship, and switch it to a company with limited liability once the hemp business grows to a certain level.