(And Why Too Many Cannabis Founders Are Screwing It Up From the Start)
And to be honest—we understand why this feels so overwhelming. From the most real place possible, let’s just say it: there’s usually no roadmap to this space. Most of us are bumping around, trading advice in DMs, whispering horror stories in Facebook groups, or getting half-baked insight from someone’s cousin’s lawyer. It’s all word-of-mouth and instinct. North Star? Try north-ish. And we get it. Because we’ve been there too, bruised from the same blind spots.
This isn’t business school theory. This is the decision that could either bulletproof your future—or blow up your bottom line. Structure wrong, and you’re paying for it in back taxes, missed investment, and legal nightmares. So let’s cut through the smoke and get honest.
The Cannabis Industry Loves to Skip the Basics—At Its Own Risk
Every dispensary owner has a vision board, a favorite font for packaging, and a social media strategy… but ask them if they understand double taxation or IRC 280E’s impact on LLCs vs. C-Corps?
Cue the blank stare.
It’s not their fault. Most content out there assumes you’ve already filed the paperwork. But if you’re still hovering between entities—or worse, picked one without truly knowing why—this is your moment to pause, breathe, and build your business on the foundation it deserves.
Let’s break it all the way down.
LLC: The Laid-Back Option That Might Haunt You at Tax Time
Forming an LLC (Limited Liability Company) is like choosing the starter home in a neighborhood where you think you’ll stay forever. It’s flexible, affordable, and offers personal asset protection. Your business income flows through to your personal tax return, and you avoid paying corporate income tax.
But here’s the catch: if you're in cannabis, you’re already fighting uphill against 280E, the IRS regulation that disallows standard business deductions. As an LLC owner, this tax burden becomes personal—literally.
While an LLC works for tight operations or early-stage founders keeping things in-house, it can become a trap when you grow. You can’t issue equity. It’s harder to attract major investors. And your tax burden? That thing stacks like inventory in a vault during harvest.
LLC in summary:
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Pass-through taxation = all profit taxed as personal income
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Self-employment tax applies
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Zero stock options = limited scalability
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Relatively simple to form and manage
Best for: Lifestyle dispensaries, small local shops, bootstrapped founders just getting started.
S-Corp: The Middle Child Who Really Knows the Tax Code
An S-Corp isn’t a separate legal entity—it’s a tax status that LLCs or corporations can elect. And for cannabis entrepreneurs who want a little more tax control, it can be a game-changer—if you’re eligible.
S-Corps let you pay yourself a reasonable salary and take the rest of the business profits as distributions—which aren’t subject to self-employment tax. That can equal thousands in annual tax savings. But S-Corps are fussy. You must be a U.S. citizen or resident, and you’re limited to 100 shareholders.
And don’t forget the formalities. S-Corps require structure—board meetings, bylaws, and record-keeping. You’ll also need to stay on the IRS’s good side by setting that “reasonable salary,” which isn’t always as straightforward as it sounds.
S-Corp in summary:
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Saves on self-employment tax with salary/distribution split
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Still a pass-through entity, so 280E hits your personal return
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More compliance responsibilities
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Not ideal for multi-state growth or large investor pools
Best for: Operators scaling moderately with a small number of owners and solid CPA guidance.
C-Corp: The Heavyweight With Teeth and Paperwork
A C-Corp is the classic big business structure. It’s a completely separate entity from its owners, taxed at the corporate level. And yes—this means double taxation. Once when the business makes money, again when it pays shareholders.
But for cannabis companies, C-Corps can offer critical tax planning flexibility. You may be able to limit 280E’s sting by isolating some deductions under cost of goods sold (COGS) at the entity level. Plus, C-Corps can issue multiple classes of stock, have unlimited shareholders, and open the door to serious funding.
If your dreams include franchising, expansion, or outside investment—this is your playing field. But be warned: compliance is no joke. You’ll need corporate governance, legal support, and an accountant who knows cannabis like a sommelier knows wine.
C-Corp in summary:
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Corporate tax rate of 21%, then taxed again on dividends
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Offers flexibility around COGS under 280E
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Unlimited shareholders = investor magnet
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Complex filing and governance responsibilities
Best for: High-growth operators, MSOs, investors, and businesses planning long-term expansion or exit.
The Horror Stories No One Wants to Talk About
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A dispensary operating as an LLC gets audited and hit with six figures in back taxes because their accountant didn’t flag 280E implications.
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A cannabis delivery brand structured as an S-Corp gets denied investment because their shareholder cap is maxed out—and they can’t reclassify without costly restructuring.
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A grow operation chooses a C-Corp but doesn’t plan for double taxation, leaving the founder with huge dividend tax bills and bitter investor relationships.
Moral of the story? Picking the wrong structure isn’t just inconvenient—it can be catastrophic.
Ask Yourself These Questions Before Filing Anything
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How big do I want to grow—really?
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Will I be seeking investment in the next 12–24 months?
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Do I need the ability to offer equity to team members or partners?
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Can I afford (or manage) the administrative burden of a C-Corp or S-Corp?
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Do I understand how 280E will impact my entity choice?
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Who is my accountant—and do they know cannabis law, or just assume it’s “same as any other business”?
If your answers reveal gaps, good. This is where clarity starts.
FAQs: We Hear These All the Time
Q: Can I change my structure later?
A: Technically, yes. But it’s expensive, messy, and may create tax or legal complications. Choose carefully the first time.
Q: Which is cheapest to set up?
A: LLCs are generally the least expensive upfront. But S-Corps and C-Corps may save you far more in taxes or investor traction down the line.
Q: What if I’m a legacy operator going legal—what should I pick?
A: Often, an LLC works to start. But plan for the future. If you're scaling or bringing in partners, you'll outgrow it fast.
Q: Will investors even look at me if I’m not a C-Corp?
A: Some will, but most want the familiarity, stock flexibility, and legal clarity that comes with a C-Corp. If money’s the goal, it’s often the cost of entry.
Suggested Next Steps (You Can Do These Today)
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Book a consult with a cannabis-specific CPA or accountant—ask about 280E and your future tax strategy.
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Use a cannabis entity comparison tool or worksheet.
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Interview a lawyer who’s worked in cannabis—if they start with “it’s the same as any business,” run.
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Audit your business goals: Are you building for lifestyle, impact, or exit?
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Join a cannabis founder forum or Reddit thread—ask real operators what they chose and why.
Resource List
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IRS Section 280E Overview – https://www.irs.gov/businesses/small-businesses-self-employed/internal-revenue-code-section-280e
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Cannabis Legal Entity Comparison Tool – GreenGrowth CPAs
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NORML Business Network – https://norml.org
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Leafwire Cannabis Business Forum – https://leafwire.com
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NCIA (National Cannabis Industry Association) – https://thecannabisindustry.org
Final Word
You can outsource your payroll. You can hire someone to run your books. But you cannot afford to phone it in when it comes to the legal skeleton your entire business hangs on.
Choosing a structure isn’t just paperwork. It’s a declaration. A financial philosophy. A signal to investors, regulators, and your future self about how seriously you’re taking this.
The worst-case scenario isn’t theoretical—it’s already happened to plenty of cannabis operators: blindsided by tax audits, iced out of funding rounds, or stuck trying to reverse-engineer compliance after scaling too fast with the wrong foundation.
If that sounds like a future you’re trying to avoid, good. That means you’re ready to lead—not just survive.
So ask the annoying questions. Challenge the assumptions. Find the structure that doesn’t just match where you are, but where you’re going.
Because cannabis doesn’t need more brands—it needs more builders who do it right the first time.
