A family friend of mine owns a successful cannabis business, but banking has been a big headache (and it sounds like that’s common across the industry).
I was thinking, why not use a structure like what we do in regular consumer goods? In my industry, it’s common to set up a multi-entity structure to simplify things and limit liability.
Example:
Entity A)
handles operations
has the employees
sells products
Entity B)
owns the intellectual property (IP)
Entity A then pays royalties to Entity B for using the IP, which keeps Entity A at net zero, and Entity B pays all the necessary taxes.
This way, if someone wants to buy one of the brands, it doesn’t mess up everything since IP and operations are separate.
Would a structure like this make a cannabis business more “bank-friendly”? The bank would be dealing with a licensing company, not a cannabis company, while the cannabis business transacts in cash with the licensing company (all properly documented and taxed).
I’m not an expert on the cannabis industry, but does this sound like something worth discussing with a lawyer? I imagine a graphic designer who makes a logo for a cannabis company wouldn’t get banned from banking for that connection, right?
Edit: I’m guessing a bank might still avoid this setup, saying something like, “even if it’s a valid corporate structure, we’d rather not take the risk due to federal regulations.” But maybe there are specific rules about servicing clients with cannabis connections?
The business might still be classified as cannabis-related if its income mainly comes from cannabis companies. Some banks do offer services for the cannabis sector, though it can be pricey. There are likely banking options out there.
If a bank knows the licensing company is linked to a cannabis business and funds are flowing from there, it’s basically the same thing from the bank’s perspective.
The big issue is that cannabis is still federally illegal, putting banks in a tough spot even in states where it’s legal. Some banks do offer cannabis industry services but with specific limits.
A different corporate structure doesn’t change the source of funds or the compliance concerns banks have.
Cannabis banking is very costly and has unique challenges. Unlike other sectors, compliance requirements are intense, with extra staff needed for due diligence, separate insurance because FDIC doesn’t cover it, and often an entirely separate entity just to handle it. It’s complex and high-risk.
Just to clarify, it’s not just about FDIC being “unfriendly” to cannabis. It’s because cannabis is still illegal federally, so banks could actually face federal charges. Setting up a different structure doesn’t lower that risk because the funds still originate from a federally illegal source.
There are some banks and credit unions that specifically serve the cannabis sector, but most big banks struggle to align their existing risk policies with the cannabis industry’s needs.
Two banks I worked with considered a cannabis banking program but eventually decided against it. Even though we had a tentative nod from our primary regulator, the costs and issues made it unworkable.