Corporate Documentation for Cannabis Businesses
If you’re setting up a cannabis business in New Mexico, following the recent legalization of recreational cannabis, it’s an exciting road ahead.
But it’s also a challenging one. Many horses will fall at the first, second, or third hurdles.
The businesses that survive and flourish will be those that have planned and prepared for a bright future by creating a strong foundation for the business. It’s not just about having the best products and marketing team.
It’s also about dotting the i’s and crossing the t’s during the startup phase when applying for a license and beyond.
You need to ensure that your business operates legally and prepares all of the correct corporate documentation to keep your business protected and the state authorities happy.
That’s difficult without industry knowledge and legal know-how. The cannabis industry is an exciting one but it’s also heavily regulated and fraught with danger unless you approach it with your eyes open to the multitude of risks.
The main corporate documentation challenges for cannabis businesses
Planning, drafting and filing all of the necessary paperwork according to state laws and in a way that protects your business for the future is no small task.
Cannabis businesses require careful preparation and know-how to comply with the regulations. It’s highly advisable to avoid using the types of templates often used in other, less-regulated industries. Most business owners will need the assistance of a cannabis industry attorney.
Whether you are setting up a limited liability company (LLC) operating agreement or a shareholders’ agreement and bylaws for a corporation, some specific points need to be addressed in corporate governance documents for cannabis businesses.
Specifically, the following four requirements need addressing…
The cooperation of company members for licensing purposes
To secure a cannabis industry license in New Mexico, get used to the fact that you will need to submit a lot of paperwork.
The authorities do not make it easy for cannabis businesses to get a license approved and to operate legally according to all the regulations.
For starters, all members of an LLC and all corporate shareholders must go through criminal and financial background checks and may need to submit personal history information, including their residential and employment history as well as any criminal history.
Each member may be required to comply with demands for full disclosure of assets and liabilities.
Additionally, you will need to submit documents that cover the following aspects of your cannabis business:
- Product offerings
- Security policy
- Overall operational plan
- Details of bank accounts that finance the business
The requirement for so much information (including personal information) means that when you set up your corporate documentation, you may need to include a clause that commits all LLC members or corporate shareholders, and all corporate officers, to cooperate fully with such licensing requirements.
It can create delays or difficulties if there are individuals in the company who object to providing the necessary personal information to obtain the license.
Regulatory violations due to criminal convictions
In New Mexico, ownership of shares in a cannabis business is strictly prohibited for anyone convicted of a felony crime.
All members and shareholders are expected to comply with this requirement not only during the license application process but after the business is operational.
So, for instance, if a member of the LLC or a shareholder is charged and convicted with a felony while the cannabis business is operational (after a license has been granted) and does not exit the business, technically you are committing a regulatory violation.
Unless you specifically address this eventuality in your corporate governance documentation, it can create severe problems for a cannabis business. Nothing forces a member or shareholder convicted of a felony to resign their position.
Your documentation should make it clear that a member or shareholder in such a position is either expelled or bought out by other members. This arrangement is easier to enforce in an LLC agreement than in a shareholder’s agreement.
Confidential arbitration as a dispute resolution method
If you mandate in your corporate documentation that arbitration rather than litigation is the dispute resolution method, it can save many headaches for cannabis businesses.
Arbitration reduces the risk for an operational cannabis business that a contract will be dismissed by a court. It can also bind the parties concerned to confidentiality.
Public court battles with shareholders are expensive in more ways than one, often severely damaging a business’s reputation in addition to driving up legal costs. The public turmoil can be used as a “bargaining chip” by unscrupulous shareholders with a grievance against the business.
You need to protect against this possibility by mandating in your corporate documentation the use of arbitration to resolve disputes.
The distribution of inventory upon dissolution of a company
It’s not a subject that any cannabis business entrepreneur wants to contemplate when starting up but corporate documentation needs to address the possibility of the business being dissolved.
Usually, when a business winds up, its non-cash assets are distributed to its members or shareholders in proportion to their holdings. The business may liquidate assets and distribute cash or members may take hold of assets, including inventory.
There are complexities involved with cannabis businesses. Most obviously, it would be illegal for individuals to possess the quantities of inventory that a cannabis business typically holds or to transfer inventory outside of the licensed system.
Therefore, in your business operation or shareholder’s agreement, it is essential to address the issue of cannabis inventory distribution in the event of business dissolution.
It may make sense to state in the agreement that any non-liquidated inventory is valueless – but talk this over with an experienced cannabis business attorney first.
Get help setting up your cannabis business in New Mexico
As one of the most heavily regulated industries in New Mexico, cannabis businesses face many obstacles to growth.
To flourish, you need to plan, prepare and protect your businesses from the many challenges ahead, including drafting the right cannabis corporate documentation from the start.
If you have a legal issue concerning setting up your cannabis business, call (505) 445-4444 to talk to a knowledgeable cannabis lawyer at Legal Solutions of New Mexico in Albuquerque.
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