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Guest Josh_Colton

When forming a corporate structure for any business a company is generally weighing two factors: 1) What are my tax liabilities? and 2) What are my civil liabilities?

General practice in Michigan for most business owners is to set something up called an LLC (limited liability company). This business has the benefit of being both taxed friendly, as you are only taxed on an individual level, and not as a company, along with the benefit of providing a solid amount of liability protection from being held personally responsible if your company is being sued. This is generally results in a win-win situation for business owners, and as a result is the ideal set-up. 

However, there are certain disadvantages to this set-up, which make it particularly dangerous for those setting of a cannabis business. 

280E to be exact...

If anyone is unfamiliar with this law please feel free to review the last blog post. 

 

This heightened tax liability, that is confusing, constantly changing, and often overlooked so as to avoid massive taxation, has frequently led to audits where cannabis businesses are facing massive audits sometimes as much as hundreds of thousands of dollars. 

So in an L.L.C when your company is determined to owe the IRS $500,000 the IRS will first determine whether the business can cover the debt, but also the Internal Revenue Service will be able to go after the business owner personally for the remainder of the owed taxes. That includes anyone with any portion of ownership in the company. 

So not only does your company stand to be dealt a death blow by a sever tax audit, but your personal finances could ultimately become crushed. 

Now these tax liabilities are most frequently owed by the provisioning side of the licensing and not by the grower, but based on the tax court trending towards more and more taxation it is safe to say that no company is truly safe from the potential wrath of the IRS and therefore it highly recommended when setting up your corporation to avoid taking excessive risk and therefore to avoid setting up as an L.L.C.

-Josh Colton

 

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