Cannabis Operating Agreements
What Should Be in Your Cannabis Company's Operating Agreement
An Operating Agreement is the contract of your cannabis company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization for LLCs, and even an end, called a dissolution. The Operating Agreement is a long contract that explains how your company is managed, how new owners come into the business, how existing owners leave the business, and more. Here’s an article all about operating agreements for your cannabis company.
Cannabis Company Operating Agreements are Flexible.
We have done scores of operating agreements, many for cannabis companies. Cannabis companies often require additional care in drafting their operating agreements because of the amount of money and free cash flows that they kick out during their operations. Therefore, it is very important to review and understand your cannabis company’s operating agreement. Please read yours with a lawyer or advisor that is experienced in them and ask questions until you understand everything about how your cannabis company operates – hence the term Operating Agreement.
What are the elements of a cannabis company’s Operating Agreement
Operating agreements, for any company – not just cannabis businesses – have different sections, or articles. Like chapters in a book, articles in an operating agreement break down the contract into logical subgroups where specific things are discussed. The common sections, or articles, in operating agreements that we use include:
- Formation of Company
- Members & Units
- Management of the Company
- Rights & Obligations of Members
- Actions of Members
- Contributions to the Company and Capital Accounts
- Allocations, tax and distributions
- Issuance of Membership Interests
- Dissolution and Termination
- Books and Records
- Miscellaneous Provisions
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Cannabis Company Operating Agreements Basics
You may not know it, but your business is just a ball of contracts with all the rights of a person, from owning property, to entering into contracts, and even suing in court, but does not include the right to vote in public elections, but you can spend money on supporting the people running for office. Don’t be so upset, America itself is basically a large corporation – most municipalities are actually corporations. See these useful informational tidbits? – everything you’ve come to expect from…
learn all the differences between corporations and LLCs that may have huge impacts on your business if it raíces money, or just its day-to-day operations.
This is another of our Fundraising. If you are getting into the cannabis industry and you are under a million dollars for your dispensary team, or under 4 million for your craft or micro grower team – then this is the content for you,
You may not know it, but if you are in a LLC for your cannabis company, or on its application, then this is how your company as a legally fictional person literally operates. It is the owners’ manual for your company – which basically means it is like the one for your car – in the glove box and probably not really read too closely.
That is a mistake – corporate entities – whether LLCs or corps – can only do what their contracts say they can do. So it is not only quite crucial – but expletive deleted important to know how your company runs its operations and distribution’s of profits – to raising capital – to diluting your shares.
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Why are LLCs so popular now instead of corporations?
Because LLCs are flexible – you can have an operating agreement between the owners, called members of the LLC, that literally governs the whole life trajectory of the business. We are going to discuss several different permutations of operating agreements depending on the goals of your business venture.
Remember that LLCs are flexible? What does that mean?
from reading you cannabis company’s operating agreement I can tell:
- If it was set up to be sold to the highest bidder
- If it was to be a family business for generations
- If it was to operate a real estate business
- If it was to operate a big one time deal and then have parties part ways
- If the parties did not care what the other owners did
- If the the parties wanted specific duties to the business
- If it was to hold control in very specific ways – this could be a social equity operating agreement.
- If it was to be taxed as the business owner, an s-corp or a c-corp.
- If the profits interest went to different things despite the ownership percentages
- How it would die – dissolution
- How the owners get in or out
- And that’s more than enough points to tell you about how flexible this contract is.
Isn’t that amazing one contract can be set up in almost any number of ways for your unique business situation – so please get your tax guy involved immediately and your corporate consultant and lawyer and discuss it to suit your company’s needs. We can talk about your company’s needs to see what your objectives are – what your exit is – a big check list of things that if you want to get. LLCs are great because not only do they have the flexibility to do whatever your business really needs, they also have relaxed formalities and greater restrictions on transferability of ownership interests.
You probably know that corporation’s ownership is referred to as “shares” in the company while LLCs have “units” of membership in the company. So why are these LLCs so popular – because about 50 years ago some business people in Wyoming asked, “Wouldn’t it be great if you can get all the protections of the corporate shield but not have to follow all the rules?” Heck Yeah – it would. Only in America.
In an LLC you can set it up so that owners, shareholders in corporate speak, or members in LLC jargon, have no duty to one another. Just be like – I did this – deal with it. That could be a part of the business. We have an operating agreement that we like to call the fugghetaboutit – because not only does it allow you to have the least amount of duties to your partners as a matter of law, but the freedom to leave the business on a moment’s notice, dissolve the business and leave it in the past. It’s the LLC for the deal when you got just one little thing to do.
Then you got the protect yah neck, son – that’s just a single member LLC – The operating agreement basically gives the liability shield and very little else. I have seen these be just a few pages, but you get more people involved and watch the operating agreement grow into the dozens of pages, maybe over 100 depending on the exhibits attached.
Then we have another operating agreement that I like to call the flip – this company is basically on a mission to be sold – the LLC comes with an exit so you are almost for sale from the day you go into business on the terms set by the operating agreement. In this format, we use the tag-along-drag-along clause as a term of the operating agreement to provide protections to the minority owner of the company the “tag along” to be “dragged along” in the full sale of the company, or substantially all of its assets. So you can see, both the minority owner and the majority owner are in agreement as to what will happen when the offer to buy comes along.
Then I have one called the generational wealth – where you have the business being able to have rights of first refusal to retain ownership – often inside a family owned business. It is a sticky wicket to get into or out of – and that’s the point.
There are so many variants that we can make up a new type of operating agreement that we could make, like a ‘give it to the people’ where the company agrees to an ESOP to become an employee owned company at a certain point in time in the future. I guess we could set that one up for you. We’d have to research it though.
As you can see LLC Operating agreements are so flexible that you can adapt them for any situation your company needs – even compliance with certain social equity aspects of some state’s cannabis laws.
Remember that your company is just a ball of contracts related to a statute – a legally fictional person that gets to generate you money – but you’re responsible for bearing the risk as the entrepreneur.
We set up operating agreements to checkoff the statutory requirements of social equity in Illinois and even built in additional distributions for employees and the community to build our social equity operating agreements.
The reason you need an operating agreement when raising capital is because it tells your prospective investors exactly what your company is legally obligated to do.
That is the plan – the operating agreement spells out how it will all go down. From management, to new owners, to getting out of your ownership, dissolution of the company, everything.
can you run your LLC like a corporation?
In corporation terms, an operating agreement blends shareholder agreements and bylaws all together – but in theory, an LLC could do bylaws separately – in theory. And as we get to the intersection of these two different type of corporate entities businesses have at their disposal, we can finally answer of the question, can an LLC be run like a corporation?
So you can see that – yes, you can structure a LLC like it is a corporation – but it will be much more expensive than the couple page single member LLC operating agreement. The operating agreement has to blend agreements about new owners, types of owners, officers and directors, voting rights, tax consequences – so many things.
Conclusion on LLC Operating Agreements
So why not just start with a corporation? You can, but they have greater formality, less flexibility, and easier exchange of your shares. An LLC can become a corporation – so if your first 5 years are expected to be you and your core team operating the business before it is geared up and sold, or who knows. Then you can start to set up the corporation as best you can, but borrower the flexibility and lack of formality that the LLC has, plus get more restrictive ownership, to keep your team together until you are ready to become a full on corporation that ends up getting sold for stock – a corporation can still buy an LLC.
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