Any business owner assumes financial risks the moment they open their doors, and cannabis businesses, in particular, face a minefield of complex liabilities. Asset protection for the cannabis industry involves careful, well-thought-out strategies to ensure that your hard-earned wealth does not fall subject to the government’s ever-changing laws.
With more states legalizing recreational and medical cannabis, more litigation enters the cannabis industry on the state and federal levels. To prevent your cannabis business from losing everything to a lawsuit, you need to construct your assets in a way that protects you.
Why Is Asset Protection Important in the Cannabis Industry?
Asset protection for the cannabis industry is important because failing to follow all the changing regulations around cannabis can quickly lead to major consequences for your business. Take a look at the following common litigation areas:
- Class action lawsuits relating to product liability claims
- Deceptive trade practices
- Infringements on patents or trademarks
- Broken legal agreements between partners or investors
- Products not meeting their stated quantities on package labels
- False claims causing FDA consequences
- FDA supply seizures from false claims on cannabis plants
- Real estate liens or seizures from tax or licensing complications
Proper and thorough asset protection can safeguard your current and future finances.
What Are Some Common Asset Protection Strategies for the Cannabis Industry?
So, what does asset protection for the cannabis industry involve? An asset protection attorney can help you prepare your company using the following strategies for problem prevention:
Your business entity affects its liability protection, debts, and complex paperwork requirements. Choosing the right structure for your business size and industry is critical in avoiding litigation.
The critical aspect here is choosing a new, appropriate entity just for your new business rather than rolling over previous ones that could come with baggage from the past. We’ll discuss entity structuring options in depth below.
Intellectual Property Protection
Intellectual property protection includes trademarks or patents on any business or product names, items, or creative ideas you develop. Protecting your intellectual property correctly is far more complex than it seems, as you must ensure that you’re not infringing upon other trademarks when you create your own. You could accidentally enter a class action lawsuit with a major corporation with a logo similar to yours without even knowing they existed.
Compliance and Risk Management
State and federal governments, including organizations like the FDA, enforce endless restrictions and compliance codes on the cannabis industry. Compliance and risk management strategies ensure that you stay current with all requirements before accidentally failing to meet one.
For example, your business must have the proper licensing, including sales tax registrations, to operate in states where cannabis is legal. Along with that, your cannabis products must adhere to certain quantity controls, transparent label requirements, and more.
Insurance coverage is your business’ safety net. While the above strategies can prevent some avoidable problems, they cannot prevent all unforeseen accidents. A business insurance policy can include fire coverage, liability protection, company vehicles, and more.
Which Business Entity Is Right for Asset Protection in the Cannabis Industry?
The business entity you choose will impact your liability protection in the cannabis industry. Every business entity has its pros and cons, depending on your company’s size, protection preferences, taxation requirements, and more:
- Limited liability companies (LLCs): An LLC offers limited liability protection, meaning that you, as the owner, typically won’t assume penalties beyond suffering investment losses for company debts or liabilities. Unlike corporations, which require officers, directors, and other complex operational members, LLCs offer a simple operational structure and flexible taxation options. In general, LLCs can work well for many cannabis companies, though they may not provide enough protection if you wish to go public or act as a holding company.
- Corporations: Corporations provide the opposite of simplicity in terms of operational affairs. On the plus side, corporations come with tax benefits and an easy structure for raising capital, making them the preferred choice for public or holding companies.
- Sole proprietorships: Sole proprietorships are non-incorporated businesses that place no legal distinctions between the business owner and the business, hence offering little-to-no asset protection.
- Partnerships: Partnerships are a broad term for when multiple business owners create their own shared company. A general partnership offers the same protection and legal standing as a sole proprietorship, just with multiple people.
How Can LLCs and Corporations Protect Assets?
LLCs and corporations each provide necessary asset and liability protection for business owners in the cannabis industry. The entity structures protect business owners by preventing them from assuming debts or liabilities that the company faces.
For example, if someone slips and falls at your facility and your company faces hundreds of thousands in litigation, you may lose your business investment. In addition, the debt collector could take attempt to pierce the corporate veil and your family home, car, retirement accounts, etc.
How Can Offshore Trusts Be Utilized for Asset Protection in the Cannabis Industry?
While your business entity can offer some level of protection for your personal assets from debt collection, the structure will not prevent collectors from seizing business assets and accounts. To protect valuable business assets, many cannabis companies set up offshore trusts.
An offshore trust works like any other trust, but you set it up in a foreign nation, which makes it more complex for creditors to place liens on the account or seize the assets. Essentially, you retitle business assets from your name or the business name into the trust’s name, where it can sit in an overseas account. Offshore trusts offer the following benefits when created correctly and legally:
- Asset protection
- Investment freedom
- Reduced banking regulations
- Tax benefits
- Simpler estate planning
What Legal Factors Should Be Considered When Using Offshore Trusts?
An offshore trust can offer excellent asset protection for the cannabis industry when created in the right way. To do so, you must carefully consider numerous factors, including the following:
The nation you choose to put your trust in will have its own legislation that you must follow. You will likely want to select a country with modern, easy-to-understand laws so you don’t create more problems than you resolve. Selecting a nation that creates its legislation from English Common Law is a popular choice.
Privacy and Confidentiality
Different jurisdictions require you to divulge varying degrees of details when creating your trusts. Depending on your situation and comfort level, you may prefer a location with better privacy and confidentiality.
The nation you select to create your offshore trust will directly impact how well it protects your assets. Some of the more popular options include the following:
The type of trust structure you create will impact your control over its assets, flexibility level, and more. For example, revocable trusts allow you to revise terms or cancel at any point, but offer no asset protection. Irrevocable trusts offer asset protection and can still allow a lot of flexibility over the assets.
When choosing the country in which to set up your offshore trust, consider that country’s tax laws. Depending on your account size and the types of assets you hold, you may benefit from choosing a nation with favorable policies.
What Are the Benefits of Asset Protection for Business Owners?
Asset protection for business owners offers the following benefits:
- Reduced personal liability
- Risk prevention
- Improved financial stability in the event of business failure
- Decreased risk of being targeted in a lawsuit
- Asset security from debt collectors
- Separation of personal and business assets
- An insurance safety net in the event of litigation
How Can Potential Risks to Cannabis Assets Be Identified?
Common risks in the cannabis industry include theft, product tampering, and failure to adjust to new compliance regulations. You can identify such risks by investing in security equipment or on-site personnel, purchasing incident management software to track incidents, training employees on theft or product tampering protocols, improving record-keeping, and staying up to date on compliance updates. You can also protect your business from financial risks by creating an asset protection strategy with a dedicated asset production lawyer.