How to Legally Start a Marijuana Business in California

With the legalization of marijuana for adult recreational use in California, it’s an exciting time for the state’s business community. The law brings many opportunities for entrepreneurs interested in producing and selling cannabis and cannabis products.

CorXec is working with aspiring cannabis business owners in California. We’ve found many are struggling to “weed” through what they need to do to legitimately start their companies. And I’m not surprised. There’s a lot of information out there, and much of it is confusing!

Are you facing the same challenge in starting a marijuana business in California?

Before filling out forms and making commitments, consider talking with an attorney for legal guidance and an accountant for financial and tax insight. It’s also helpful to do some self-study to better understand the many considerations involved in starting a cannabis business. To help you get a jump start on your research, we’ve assembled this guide that covers a spectrum of considerations cannabis business owners will want to address as they pursue their dreams of entrepreneurship.

Our cannabis startup guide will teach you what you need to know to start a marijuana business in California. This how-to guide covers everything from obtaining the licenses and permits to creating a business plan to getting a new venture funded.

This guide will help you gain a basic understanding of the many tasks and responsibilities marijuana business startups encounter. It does not offer legal or accounting advice. Please be aware that government rules and regulations may change over time, thus affecting the requirements that need to be met when starting and operating a commercial cannabis company.

Overview of California’s Marijuana Law

Below, I’ve shared some highlights from the law that new cannabis entrepreneurs might find helpful. Note that the law is complex and lengthy, and what I’ve provided equates to just the tip of the iceberg. Budding marijuana business owners can read it in its entirety on the State of California website. They should consider consulting a business attorney to ensure they interpret it correctly and understand their legal obligations.

After two decades of the evolving law regarding the use and sale of medical marijuana in California, the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) was approved on November 8, 2016, legalizing adult recreational use of marijuana starting on January 1, 2018. In June 2017, Senate Bill 94 was signed into law as The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to merge AUMA and the Medical Cannabis Regulation and Safety Act (MCRSA). MAUCRSA provides a streamlined state law governing both medicinal and adult recreational use of cannabis.

The Act allows adults 21 years of age and older to possess, privately use, give away up to one ounce (28.5 grams) of cannabis, and cultivate a maximum of six plants for personal use in their homes. It has also legalized the production, commercial sale, and distribution of cannabis for adult use at state-licensed facilities. City and county governments can override state law and restrict or ban cannabis businesses in their local jurisdictions.

MAUCRSA does not affect employers’ rights to have policies that prohibit the use of cannabis by employees or the rights of landlords and other private parties from forbidding or restricting cannabis use on their private properties.

California’s 1996 medical marijuana law, Proposition 215 remains in effect for the medical use of cannabis by patients with a physician’s recommendation.

Types of Cannabis Businesses in California

The Department of Cannabis Control (DCC), established in 2021, licenses and regulates commercial cannabis activity in California which includes:

• Cannabis Cultivator – Cannabis cultivation refers to planting, growing, harvesting, drying, curing, grading, or trimming cannabis. Types of cultivation environments include indoor and outdoor using natural light, artificial light, or a combination of the two.
• Cannabis Manufacturer – A cannabis manufacturer is a business that carries out any of the following processes in the production of cannabis products: compounding, blending, extracting, infusing, packaging or repackaging, labeling or relabeling, and holding or storing.
• Cannabis Retailer – A cannabis retailer is a business that engages in the retail sale and delivery of cannabis or cannabis products to customers. A retailer must have a physical location from which it conducts its business and follow all California dispensary rules that apply to selling marijuana on a retail basis. Cannabis may be purchased by adults of age 21 or older for recreational use and by medicinal patients of age 18 or older with a physician’s recommendation. Retailers must check a customer’s ID to verify the person’s age before selling products to them. Valid forms of identification include a passport, government-issued photo ID (such as a driver’s license), or military photo ID card. Licensed marijuana retailers may sell the following types of cannabis products if they have met testing and quality assurance requirements: packaged flower, pre-rolls, topicals, and edibles. They may also sell branded merchandise and cannabis accessories such as t-shirts, hats, rolling paper, vape cartridges and batteries, pipes, etc.
• Cannabis Distributor – A cannabis distributor is a business that transports cannabis and cannabis products. Distributors (unless licensed as “Transport Only”) also arrange for testing of cannabis products, and they check to make sure labeling and packaging meet applicable requirements.
• Cannabis Microbusiness – A cannabis distributor is a business that transports cannabis and cannabis products. Distributors (unless licensed as “Transport Only”) also arrange for testing of cannabis products, and they check to make sure labeling and packaging meet applicable requirements.
• Cannabis Testing Laboratory – A cannabis testing laboratory is defined as a facility or entity in the state of California which performs or offers tests of cannabis or cannabis products.

Required Licenses and Permits in California

State Licenses

Businesses must obtain and renew the cannabis licenses required for the type of cannabis-related activities they will engage in. They must also comply with local ordinances regulating commercial cannabis activity. A separate license is required for each premise where a business engages in cannabis activities. State licenses are valid for 12 months and must be renewed annually.

Businesses operating as cultivators, processors, manufacturers, retailers, distributors, and microbusinesses must register with the California Department of Tax and Fee Administration (CDTFA) to obtain a seller’s permit. This is a prerequisite for applying for their state licenses. Also, distributors must obtain a cannabis tax permit from the CDTFA, so they’re set up to report and pay the two new cannabis taxes.

Also, counties and local municipalities have rules and permit requirements for cannabis businesses. Some cities and towns do not allow commercial cannabis activities, so it’s vital that entrepreneurs check with their local governments to verify if it’s legal to operate a cannabis business.

Cannabis entrepreneurs must apply for and renew licenses through the Department of Cannabis Control. CorXec can assist them in determining all their business licensing needs (beyond those that are cannabis-related) and applying for the required licenses and permits.

Anyone selling marijuana without a license could face a punishment of up to six months in county prison and a fine of up to $500. Before issuing a marijuana business license, the state and many local jurisdictions require a cannabis business to post a surety bond of at least $5,000 (or some other amount if required by the county or city) for each license application. Entrepreneurs often obtain surety bonds from insurance companies or surety companies.

Licenses for the Retail Sale, Distribution, and Testing of Cannabis and Cannabis Products

The Bureau of Cannabis Control issues the following types of licenses:

• Type 10: Store Front Retailer – A business that sells cannabis products at its premises or delivers its goods to customers. A retailer must have a physical location where it conducts its commercial cannabis activities.
• Type 9: Non-Storefront Retailer – A retailer that sells cannabis goods only through delivery.
• Type 11: Distributor – A business that transports cannabis and cannabis goods between cultivation, manufacturing, or distribution premises; transports cannabis goods to retail locations; provides storage services to other cannabis licensees; arranges for laboratory testing of cannabis and cannabis goods.
• Type 13: Distributor Transport Only – A business that transports cannabis goods between cultivation, manufacturing, and distribution premises.
• Type 12: Microbusiness – A business that cultivates cannabis on less than 10,000 square feet of property, manufactures products via mechanical extraction or infusion using non-volatile solvents, and distributes and/or sells cannabis or cannabis goods.
• Type 8: Laboratory – A ISO/IEC 17025 accredited laboratory, facility, or entity in the state that offers or performs tests of cannabis goods. Provisional licenses may be issued to testing laboratories while they obtain ISO/IEC 17012 accreditation if they meet all other requirements for licensing.

License application fees are currently $1,000. Annual license fees vary depending on gross annual revenue.

Cannabis Cultivation Licenses

The required license for cultivating cannabis depends on the type of production and lighting used and either the number of plants grown or the size of the canopy:

• Outdoor licenses , For growing cannabis outside without using artificial lighting or light deprivation techniques on mature plants.
• Indoor licenses , For growing cannabis, using at least 25 watts of artificial light per square foot, in a permanent structure.
• Mixed-light licenses , For growing cannabis in one of the following (or similar) structures: greenhouse, glasshouse, hoop-house, conservatory, hothouse. Mixed-light cultivation is considered “Tier 1” if using up to 6 watts per square foot of artificial light. “Tier 2” is when using 6 to 25 watts per square foot of artificial light.

California cannabis cultivation licenses apply to:

• Specialty Cottage Outdoor – Outdoor cultivation sites with up to 25 mature plants
• Specialty Cottage Indoor – Indoor cultivation sites with up to 500 square feet of canopy
• Specialty Cottage Mixed-Light Tier 1 and 2 – Up to 2,500 square feet of total canopy
• Specialty Outdoor – Up to 50 mature plants or up to 5,000 square feet of canopy
• Specialty Indoor – 501 square feet to up to 5,000 square feet of canopy
• Specialty Mixed-Light Tier 1 and 2 – 2,501 square feet up to 5,000 square feet of canopy
• Small Outdoor – 5,001 square feet up to 10,000 square feet of canopy
• Small Indoor – 5,001 square feet up to 10,000 square feet of canopy
• Small Mixed-Light Tier 1 and Tier – 2 5,001 square feet up to 10,000 square feet of canopy
• Medium Outdoor – 10,001 square feet up to 1 acre of canopy
• Medium Indoor – 10,001 square feet up to 22,000 square feet of canopy
• Medium Mixed-Light Tier 1 and Tier 2 – 10,001 square feet up to 22,000 square feet of canopy
• Nursery – Cultivation sites that operate solely as a nursery, conducting activities like cloning and seed propogation
• Processor – Cultivation sites that only trim, cure, dry, grade, package, or label cannabis
• Large – Not available until January 1, 2023

Cultivation license application and license fees are based on the size and type of production or lighting.

Cannabis and Cannabis Product Manufacturing Licenses

Various licenses exist to give manufacturers the authority to do certain types of activities performed and use certain chemicals during extraction and after processing (refinement). There’s also a special license for manufacturers working in shared-use facilities (facilities where multiple Type S manufacturers share space and equipment on a rotating schedule).

California cannabis manufacturing licenses apply to:

• Type 7: Volatile Solvent Manufacturing – Licensed manufacturers may do any of the following: use volatile solvents (that produce a flammable gas or vapor, such as butane, heptane, hexane, or propane) or non-volatile solvents (see below) for extraction or refinement of cannabis extract, use mechanical methods (such as rosin presses or dry ice) for extraction, create products through infusion, package and label cannabis products.
• Type 6: Non-Volatile Solvent Manufacturing or Mechanical Extraction – Licensed manufacturers may do any of the following: use non-volatile solvents (chemicals that do not produce a flammable gas or vapor, such as ethanol, carbon dioxide, cooking oils, and butter) for extraction or refinement of cannabis extract, use mechanical methods for extraction, create products through infusion, package and label cannabis products.
• Type N: Infusion of Products – Licensed manufacturers may make cannabis products through infusion (mixing cannabis extract or plant material with other ingredients) and package and label cannabis products.
• Type P: Packaging and Labeling – Licensed manufacturers may only package and label cannabis products.
• Type S: Manufacturers Operating in a Shared Use Facility – Licensed manufacturers working in a shared-use facility may extract cannabis using butter and cooking oils, use infusion to make cannabis products, package and label cannabis products.

The manufacturing license application fee and license fees vary according to the type of manufacturing license and gross annual revenue.

Cannabis Event License

Anyone who wishes to host a cannabis event where cannabis goods are sold and consumed must have two licenses from the State:

• Cannabis event organizer license
• Temporary cannabis event license (at least 60 days before the event begins)

Key points to note:

• Event licenses do not authorize the license holder to cultivate, distribute, manufacture, or sell cannabis or cannabis goods.
• Events may last up to four days at a location approved by the city or county.
• Event organizers must coordinate all facets of their event and comply with all state and local laws and regulations.

The event license application fee is currently $1,000. The annual license fees are based on the number of events an organizer plans to hold during the year.

Permits for Cannabis Businesses

Businesses operating as cultivators, processors, manufacturers, retailers, distributors, and microbusinesses must register with the California Department of Tax and Fee Administration (CDTFA) to obtain a seller’s permit. This is a prerequisite for applying for their state licenses. Also, distributors must obtain a cannabis tax permit from the CDTFA, so they’re set up to report and pay the two new cannabis taxes.

Surety Bonds for Cannabis Businesses

A surety bond of $5,000 (or some other amount if required by the county or city) must be posted by cannabis business licensees before they are issued a license to conduct business in the State of California. Entrepreneurs often obtain surety bonds from insurance companies or surety companies.

Licenses and Permits Recap

I realize it can get a little confusing trying to pull all the pieces together regarding all of the business licenses and permits a specific type of cannabis business might need. The below chart should help make sense of it all. Contact the state and your local government to verify that you have all your bases covered. Requirements may change as the laws evolve.

Business Type	Permit Requirements	License Requirements	Issuing Agency
Cultivator	Seller’s Permit	Cultivator	California Department of Food and Agriculture
Distributor	Seller’s Permit, Cannabis Tax Permit	Distributor	Bureau of Cannabis Control
Manufacturer	Seller’s Permit	Manufacturer	California Department of Public Health
Microbusiness	Seller’s Permit, Cannabis Tax Permit	Microbusiness	Bureau of Cannabis Control
Nursery	Seller’s Permit	Cultivator	California Department of Food and Agriculture
Processor	Seller’s Permit	Cultivator	California Department of Food and Agriculture
Nursery	Seller’s Permit	Cultivator	California Department of Food and Agriculture
Retailer	Seller’s Permit	Retailer	Bureau of Cannabis Control
Testing Facility	Possibly a Seller’s Permit	Laboratory	Bureau of Cannabis Control

 

Cannabis Business Taxes

Cannabis businesses have many of the same tax obligations as businesses in other industries. Which taxes a business must pay and the rates that apply will depend upon the business’s legal structure, income level, and other factors.

Common business taxes include:

• Income Tax (Federal, State, and Local)
• State Franchise Tax
• Alternative Minimum Tax
• California State Sales Tax
• State Use Tax
• Property Tax
• Payroll Taxes (if hiring employees)

Also, two types of cannabis-specific taxes went into effect on January 1, 2018, and include a cannabis excise tax and a cultivation tax.

Cannabis Excise Tax

The cannabis excise tax is a 15 percent tax (applied to the gross receipts of the retail sale) that retailers must collect from buyers that purchase their cannabis and cannabis products. The state requires that retailers separately show the excise tax amount on their sales invoices or issue the following statement: “The cannabis excise taxes are included in the total amount of this invoice.”

If the transaction is an “arm’s length transaction” (i.e., wholesale transaction from a distributor, manufacturer, or cultivator to a retailer), the wholesaler must calculate and charge excise tax to the retailer based on the “average market price.” Average market price refers to the retailer’s wholesale cost of the cannabis or cannabis products, plus a markup of 75 percent (as of July 1, 2022).

Cannabis Cultivation Tax

The cultivation tax is a tax on all harvested cannabis entering the commercial market. Marijuana cultivators must pay the tax to either their distributor or their manufacturer.

California Cannabis Cultivation Tax Rates Effective January 1, 2022
Plant Description	Tax Amount	Applicable Usage
Cannabis flowers	$10.08	Dry-weight ounce that enters the commercial market
Cannabis leaves	$3.00	Dry-weight ounce of cannabis leaves that enter the commercial market
Fresh cannabis plant*	$1.41	Ounce

*Unprocessed cannabis must be weighed within two hours of harvesting to qualify as a fresh plant.
The cultivation tax does not apply to seeds and immature plants (including clones).

Creating a Marijuana Business Plan

A marijuana business can benefit from having a business plan to use as its roadmap. A business plan lays out how a company will be structured, its mission, what products and services it will provide, who will manage it, what its financial projects are, and other aspects of operating the business. What a marijuana business plan includes will depend on the company’s activities and whether it intends to seek funding from a lender or investor.

Here are some of the details that businesses often include within the individual business plan sections.

Executive Summary

• Main goals and objectives of the business
• The mission of the company
• Key success factors (e.g., establishing goodwill within the local community; strong branding initiatives to set the company apart from competitors, etc.)
• Profit forecast
• Market opportunities
• Products and services overview

Company Summary

• When the company will begin (or began) operating its business.
• The business entity type (e.g., LLC, corporation, etc.) the company will operate as
• What business licenses the company will have
• How many employees the business will have
• From where the company will conduct business
• What cannabis activities the company will engage in
• Financial overview
• Market Overview
• Market analysis overview (including a summary of research findings regarding things like market trends and industry outlook)
• Target market (e.g., where the company’s target customers are; research results regarding opportunities within that target market)

Products and Services

• What specific products and services will be made, transported, or sold by the company
• Pricing
• Product and service margins
• From where the company will obtain products it doesn’t make

Marketing and Sales Strategies

• Marketing and advertising channels (e.g., social media platforms, online directories, magazines, newspapers, events, etc.)
• Branding (e.g., logo, tagline, etc.)
• Website development
• Memberships (e.g., trade association memberships, business organization memberships, etc.)
• SWOT analysis (strengths, weaknesses, opportunities, threats that the company faces)
• Pricing strategy
• Sales growth assumptions
• Sales forecast (often provided for the first five years in business)

Operations

• Hours of operation
• Locations
• Security plan (measures to be put in place for meeting the state’s requirements for preventing theft and unauthorized access to cannabis or cannabis products , e.g., video surveillance system, commercial locks, storage of product, alarm system, etc.)
• Transport (if applicable, types of vehicles that will be used; qualifications of the staff that will operate the vehicles, etc.)
• Equipment and technology used to conduct and run the business

Management

• Leadership of company
• Staffing plan
• Training plan

Financial Forecast

• Profit and Loss (P&L) forecast (often for the first five years)
• Cash flow statement
• Balance sheet
• Start-up and ongoing expense estimates (e.g., payroll, rent, mortgage, taxes, equipment needs, insurance, etc.)

Supporting Data

• Additional charts and graphs not used in other areas of the business plan
• Agreements or contracts (e.g., with vendors, key customers, etc.)
• Licenses, permits, trademark documentation
• Management team bios and resumes
• Attorney and accountant contact information
• Credit history
• Detailed studies that support information within other sections of the business plan

Steps for Starting a Cannabis Business

So now you’re probably thinking, “OK, great. Now what?” Whether you’re interested in how to open a dispensary in California or another type of marijuana business, the basic steps are similar to what other types of businesses need to complete.

1. Choose a Business Entity Type

The business entity type you choose for your cannabis business has legal and financial ramifications, so it’s important to understand your options. I encourage you to talk to an attorney and accountant to assess which business structure will be most advantageous to you.

A few of the most popular business structure types for small businesses in California include:

• Sole Proprietor – Operating a business as a sole proprietor is the simplest way to go from a set-up and administrative standpoint. The state of California doesn’t require the filing of any formation documents to start a sole proprietorship. However, sole proprietors in the cannabis industry must still meet all other state and local requirements to legally operate their marijuana businesses. Assets and liabilities of a sole proprietorship are held in the owner’s name. Business profits are taxed as personal income. One downside of operating a business as a sole proprietor is that the owner is usually personally liable legally and financially for the business. That opens the owner’s personal assets (bank accounts, home, car, retirement savings, etc.) to risk if someone sues the business or the business cannot pay its debts.
• Partnership – There are two types of partnerships that a cannabis business in California might consider:
  • General Partnership (GP) – A general partnership is similar to a sole proprietorship; only it has more than one business owner. Owners share legal, financial, and management responsibilities for the business, and owners are usually personally liable legally and financially for the business. A GP’s business profits are taxed as personal income, and those tax obligations are passed through to the owners of the partnership. General partnerships may register their businesses with the state by filing formation paperwork, however it is optional rather than a state requirement.
  • Limited Partnership (LP) – An LP usually limits liability for some partners in the business. For a company to be a limited partnership, there must be at least one controlling partner who is considered a general partner and one partner whose has less involvement in operating the business and whose liability is typically limited to that individual’s participation in the business’s activities. An LP’s general partners assume unlimited personal liability for the business’s legal and financial responsibilities.
• Limited