Understanding the cannabis regulations and drafting operating agreements that reflect how you want your business to run is essential if you want to capitalize on the recent legalization of recreational cannabis usage in New Mexico.

As the demand for cannabis grows, more entrepreneurs look to enter the market. But the nature of the cannabis industry means that it is tightly regulated. That means that there are more “hoops” to jump through than with most industries before you can start operations.

At Legal Solutions of New Mexico, we can help with the complexities of getting set up by drafting operating agreements that protect your business now and in the future.

What is an operating agreement?

An operating agreement is essentially a contract explaining key information about the running of your business.

Think of it like an “owners’ manual” for your business, describing how the company is managed, the rules for new owners coming into or exiting the business, how decisions are made and how the company is dissolved.

When you set up a cannabis company – or any company – it is seen as having a “life” from its beginning (“articles of organization” for LLCs) and an end (“dissolution”). It has rights and obligations just like a human being.

The contracts you form decide every aspect of your business operations.

The operating agreement covers the “rules” that govern how your company is run while it is “alive”. It is an evolving type of contract that changes as your business evolves.

Because of the nature of the cannabis industry, great care needs to go into preparing such documentation and it generally requires a high level of industry expertise to ensure that it meets the requirements.

The stakes are high, with large investments often on the line. Unlike most owners’ manuals, therefore, you need to pay careful attention to what the small print says as, legally, you have to follow the terms set out in the operating agreement of your business.

Key inclusions in a cannabis company’s operating agreement

The main sections of an operating agreement for any type of business are called “articles”, which are like chapters.

These break down the main content of the agreements into more digestible segments and may include the following types of topics:

• Recitals
• Company formation
• Members and units
• Company management
• The rights & obligations of members
• Actions of members
• Contributions to the company and capital accounts
• Allocations, tax and distributions
• Transferability
• Issuance of membership interests
• Dissolution and termination of the company
• Books and records

Drafting corporate bylaws

Most readers will set up a cannabis company rather than a corporation.

If you decide to set up a corporation, you will have shareholders and may benefit from certain tax laws. You will also require different documentation. Just like with a company, if a corporation is not governed properly, disagreements and disputes among stakeholders can easily result in considerable legal fees.

The corporate documents that govern how the business operates must be drafted properly to ensure that they cover all potential contingencies and issues that typically arise.

Instead of an operating agreement, a corporation requires articles of incorporation, corporate bylaws and other documents to be drafted.

Each document has unique requirements and should be drafted professionally to cater to all key stakeholders.

Much like an operating agreement, corporate bylaws detail a set of rules that the corporation's board of directors adopt, specifying its internal management structure and how the business will be run.

Corporate bylaws may cover areas such as the following:

• Management: member-managed or a centralized management framework?
• Duties of the board of directors
• Frequency of board meetings
• Decision-making processes
• How profits are distributed
• How capital is raised/contributed
• How shares are allocated or diluted (if applicable)
• Policies for the admission of new members, investors or shareholders
• Policies for the withdrawal of members or shareholders
• Voting rights
• Confidentiality, non-competition, non-solicitation, etc.
• Dissolution of the business

Your corporate bylaw documentation will act as a roadmap for the organization if and when unexpected situations occur or questions arise about how to proceed.

Set up your cannabis business the right way in New Mexico

It is inadvisable to create a cannabis business operating agreement without the specialist assistance of an attorney well versed in cannabis industry law.

At Legal Solutions of New Mexico in Albuquerque, our lawyers are intimately familiar with developing cannabis regulations – and with the operating agreements and corporate bylaw documents required by companies and corporations here.

If you would like to discuss your requirements with a knowledgeable cannabis business lawyer, call (505) 445-4444.