Business structure for startup businesses in the hemp industry.
So you’ve seen the opportunities in the burgeoning hemp industry, and you want to throw your hat into ring. Not so fast. Both owners and operators of a business involved in the hemp industry need to remember that the company is a distinct legal entity, so ignore the click bait and keep reading.
Let’s cover the basics. As with any business in the hemp industry, your company is subject to rules and regulations that govern all hemp businesses. However, as a limited liability company (“LLC”) or a corporation, your business needs to maintain certain formalities, so its standing as a legal business entity is recognized under the law.
Establishing and maintaining the corporate formalities shield business owners from personal liability for the company’s debts, commitments, and liabilities. This post identifies some simple procedures that business owners should implement to maintain the “corporate shield.” Like your new year’s resolutions, these formalities must be addressed annually. But unlike your new year’s resolutions, there are consequences if you fail to maintain these formalities. For instance, your business could lose the protections provided under the law. While each item is important, the items discussed are only a few of the issues that business owners should consider.
Corporations—pomp and circumstance.
If your business is set up as a corporation it needs bylaws, company resolutions, minutes from shareholder meetings (yes, even if it’s just a couple of you), and a stock ledger. While there are more documents that will further demonstrate your business’s legal existentialism, these are the four aces to have up your sleeve.
Bylaws are the rules that govern the company and deal with issues such as the following:
Office locations (go with a P.O. Box over your mom’s garage or basement)
Directors – who they are, numbers, qualifications, and their authority in the company
The process and requirements for actions taken by directors
Corporate officers (e.g., president, vice-president, treasurer, etc.) – who they are, their roles, and their responsibilities
How officers are elected and removed / replaced
Explanation of the corporation’s capital stock and its characteristics
Indemnification provided to directors, officers, agents, or employees by the company
Additional statutory requirements depending on state of incorporation
Your business’s corporate resolutions reflect the decisions made by the directors and, in some cases, the company’s shareholders which are to be implemented by the corporation. Exhibits often accompany resolutions, especially when the action being approved is a commercial agreement (i.e. the contract may be attached to the resolution as an exhibit).
Corporate minutes document the proceedings, actions taken, and items discussed during official corporate meetings with parties associated with the business such as directors and shareholders.
A stock ledger details who owns each share of the company’s stock and the consideration given for each share. Moreover, the ledger tracks all official transfers and cancellations of the company’s stock. Company stock should be issued in accordance with corporate and securities laws.
Limited Liability Companies—hangin’ loose, sort of.
An operating agreement is a must for businesses structured as a limited liability company. Operating agreements should address items including, but not limited to, company management (whether it’s by owners or non-owner parties), authority of managers to make decisions vs. power and control (i.e. veto authority) of owners (who are not managers), the characteristics of equity units, the allocation of profits and losses, distributions of cash flow, allocation of profits and losses.
Whether your company is a corporation or a limited liability company, the business should be treated as stand-alone concern. Personal liabilities and debts SHOULD NOT be paid from company assets. Furthermore, personal assets and business funds SHOULD NOT be commingled…watch Arrested Development for further insight. If you take the future of your company seriously, it should be adequately capitalized. Any and all agreements entered into by the company should be in the company’s name and NOT in the name of an individual.
Merging the typical business entity formalities with terms that are customary for the hemp industry requires knowledge of specific issues and focalized experience. Particular provisions should be included in shareholder or operating agreements for companies in the hemp arena depending on your corporate structure. Further, the regulations for each state vary and must be considered when establishing the structure and formalities of your business to avoid potential liability.
Don’t overlook the obvious but painful truth, hemp business owners face dual compliance issues within each state. Compliance with business entity laws (corporate and LLC laws) and hemp regulatory requirements—which can change based on the dictates of federal, state, or local authorities. Annoying but true…what else is new in this industry? Business owners should maintain an ongoing focus on regulatory compliance while giving due attention to the mundane, yet crucial, legal formalities for LLC’s and corporations.
And should anything happen out there… blame Canada.