Oklahoma legalized medical cannabis in June 2018, and since then, the market has exploded with dispensaries and grow operations.
By our count, the Oklahoma market has more than 1600 growers, 436 processors, and 947 dispensaries – a very competitive landscape for anyone wishing to enter the lucrative cannabis market.
With only 43,000+ licensed patients, this number of cannabis operators far outpaces the potential customers seeking to purchase medical cannabis.
On the bright side, Oklahoma officials did not establish a list of qualifying medical conditions for people to get medicinal cannabis. This has led to a flood of applications for personal licenses.
As the state continues to process these applications, demand will slowly catch up with supply. In the meantime, cannabis operators must set up their business to compete and outlast other businesses.
Here are some strategies to help keep you business on track as Oklahoma’s cannabis market matures.
Work with a Cannabis CPA firm
All small businesses have difficulties and obstacles when getting started, but cannabis companies face particularly complex regulations and compliance requirements. Especially when it comes to understanding your tax responsibilities, sorting out the federal tax return with the Oklahoma state return is burdensome.
Cannabis operators in Oklahoma that work with a general or inexperienced accounting firm are making a big mistake.
The IRS audits 10-20% of existing cannabis companies, a much higher number in comparison with other business types. An audit can kill your business’s growth and momentum by draining your resources. Protect your business and make sure the firm you hire has experience working with cannabis regulations and tax compliance issues. There’s too much information and detail in the laws to leave it up non-industry specific professionals.
Likewise, you don’t want to an accounting firm to be learning about this industry at your expense. Hiring a non-cannabis specific firm can lead to accidental errors or oversights that may cause BIG penalties down the road. For more on what to look for in a CPA firm, check out our guide.
Consider the tax implications of different business structures
The type of business structure you establish has tax implications that can affect your long-term growth prospects. Savvy cannabis operators take these pros and cons into consideration when setting up their cannabis business.
We don’t typically recommend establishing your business as a nonprofit – however attractive that may have been in the past. This is because a non-profit cannot take a income from their profit. If you make $100,000 in profit after taxes, you must re-invest that money back into your business. If you’re interested in building a business and selling it, or making a profit that you don’t need to reinvest back into your business, a for-profit would be the way to go.
One person owns and operates the cannabis business. While this is a relatively straightforward way to set up your business, you do take on a lot of personal risk. Should the business fail, your personal assets may be treated as business assets.
General and Limited Partnerships
Here, two or more people are running the cannabis business and jointly share responsibility for the business’s obligations. This type of structure still has a lot of personal risk, but at least it’s distributed between multiple individuals.
LLCs and LLPs
Register as a business, and then individual members are protected from liability as long as the cannabis company obeys state regulations. Partners are not liable for the behavior of other partners, however, members of the LLC must pay a self-employment tax for Medicare and Social Security.
This is the form many businesses take. The cannabis company is owned by individual shareholders who have stock in the company. Shareholders vote on how to run and grow the business, and a Board of Directors makes the final decision. The downside is that this type of entity faces double taxation from business and personal income tax.
The S-Corporation is a tax election, meaning that a corporation, LLC, or LLP is created at the state level and then elects to be taxed under the S-Corps heading. These businesses avoid the double taxation, but typically have higher legal and tax service costs.
Not sure which is right for your company? Talk to some of our experts who can help guide you.
Practice excellent bookkeeping and inventory management.
Anticipate ahead of time what the IRS or state tax authorities will look for when they process your tax return. These common bookkeeping mistakes trip up cannabis companies all over the country.
For medical cannabis companies, Oklahoma will also be closely scrutinizing your inventory management – it’s also one of the biggest things investors look for when deciding whether or not to fund a cannabis business. Tight inventory management controls can have a big impact on your bottom line, and keep you running profitably in today’s competitive market. Reduce costs, stay compliant, and run your business efficiently with strong checks and balances.
Find a Long-Term Investor
As we’ve seen in states across the country, medical cannabis is usually the gateway to full-legalization. If you want to go the distance in Oklahoma’s cannabis market, now is the time to start courting investors. It takes a significant amount of cash to enter the recreational market, as we’ve seen in California, Washington, and Colorado. Check out this guide for how to find a investor for your cannabis company.
There are some big questions you need to answer first:
- Should you do debt or equity financing?
- Is going public an option for you?
Whatever questions you have, our experts can help you sort through the many options. Book a free consultation today.