New Cannabis Business Law Practice

We are pleased to announce that we have added a new Cannabis Business Law Practice to our firm. Now that Ohio has legalized the sale of medical cannabis, and California has legalized adult-use and medical cannabis, we have extended our service offerings to this fast-growing segment. Companies and entrepreneurs operating in the cannabis market need legal counsel with the right kind of experience in the business and corporate law issues they face. We already have been representing cannabis companies at various levels of the value chain for several months, including cultivators, manufacturers, processors, and retailers. This hands-on experience gives us the industry-specific insights and knowledge that cannabis companies need.

Our focus on transactional business and corporate law work for startups and small businesses translates closely to this new area of law. Here are some of the areas in which we can help your cannabis business:

  • Entity formation, including choice of entity (LLC vs. corporation)
  • Business financing through private placements
  • Contracts with vendors, suppliers, downstream customers, etc.
  • Commercial lease negotiation for industrial and retail space

If you would like to discuss your cannabis industry business, please contact Paul H. Spitz at phs@spitzbusinesslaw.com.

Please note that the cultivation, distribution, and possession of cannabis for any purpose is still illegal under federal law. We can only advise you with respect to compliance with Ohio’s medical cannabis program, and California’s medical and adult-use cannabis programs.

THIS IS AN ADVERTISEMENT

New Company Formation Service Available

Customers for legal services are increasingly segmented, just like customers for any other product or service. Many consumers of legal services like to do things themselves, on their own schedule. In recognition of this fact, we now offer online company formation services for DIY-oriented consumers. You can now form an LLC or corporation online in any state, through our website.

Also, you will get a one-hour consultation with me, where you can ask questions about forming and running an LLC or corporation. Other online company formation services may not provide such an opportunity.

One thing to keep in mind is that this service is limited – you get your company formed, but essential post-formation documents are not included. For example, if you are forming an LLC, you really should have an operating agreement, particularly if you will have co-founders. Similarly, with a corporation, you will need resolutions appointing directors and officers, you will need bylaws, and other post-incorporation documents may be necessary. We can provide all of those, customized to your needs, but they aren’t included in the online formation pricing.

We also offer registered agent services in all 50 states, as well as compliance services in those states where annual report filings may be required (such as Delaware and California).

Ready to get started? Simply go to our Business Formation page.

Medical Marijuana Now Legal In Ohio

Ohio’s new medical marijuana law recently took effect, on September 8, 2016. This law, passed by the Ohio legislature, followed a failed ballot initiative that would have legalized marijuana in Ohio for recreational use, as well. The new law permits doctors to prescribe marijuana as treatment for a lengthly list of ailments, but patients will not be able to purchase smokeable marijuana. Instead, the treatment must either be ingested via an edible product, absorbed through a skin patch, or “vaped.”

There is an extensive list of qualifying conditions: AIDS, Alzheimers, amyotrophic lateral sclerosis (also known as ALS and Lou Gehrig’s Syndrome), cancer, epilepsy, fibromyalgia, glaucoma, hepatitis C, multiple sclerosis, parkinson’s, chronic or intractable pain, HIV+, post-traumatic stress disorder, sickle cell anemia, spinal cord disease or injury, traumatic brain injury, ulcerative colitis, and inflammatory bowel disease, among others. There is also a mechanism to add diseases and conditions to the list.

Physicians must obtain a special certificate from the state medical board in order to recommend medical marijuana. Doctors also must have a bona fide doctor-patient relationship with persons for whom they write prescriptions. Doctors must provide an annual report describing their observations of the effectiveness of medical marijuana on their patients, and will have immunity from prosecution for recommending medical marijuana.

There is an extensive regulatory scheme set up for all parts of the value chain – retail dispensaries, growers, distributors, and laboratories.

Initially, the Ohio Supreme Court’s Board of Professional Conduct issued an opinion ruling that because marijuana was still illegal under federal law, attorney’s could not advise clients on how to properly set up and operate a business under the state medical marijuana law without violating their professional ethics. Since that opinion was issued in August, the state Supreme Court has amended the Rules of Professional Conduct to allow attorneys to advise clients on compliance with the new law.

Because marijuana is still illegal under federal law, new medical marijuana businesses will face difficulties with financial transactions. Banks may be reluctant to allow such businesses to open accounts, and the businesses may not be able to take payment by credit cards. This means a variety of transactions will necessarily be cash transactions. In addition, the IRS requires payroll taxes to be paid electronically, which will present a problem when paying employees. While the Department of Justice has said that its policy is not to interfere with medical marijuana if state law is effectively regulating the market, that may not be enough for traditionally conservative and risk-averse banks and merchant card processors.

Why Should I Use You Instead of Legalzoom or Clerky?

“Why should I use you to set up my business, instead of Legalzoom or Clerky? You cost more money.”

I get that question occasionally from clients, and I usually answer by explaining that all those sites do is provide documents, which may or may not suit your needs. You may not know whether the documents are good quality, and nobody is available to explain every single sentence in the documents, much less make changes. I, on the other hand, provide legal services. And those legal services that I provide include advice on what is best for your business, as well as providing customized documentation to ensure that we are meeting your needs.

Well, last week a prospective client asked me that question, and as I started to formulate an answer, I went to the website of the document provider – incorporate.com, to see what it offered. In this case, we were talking about forming a multi-owner LLC. Incorporate.com didn’t specify as to whether the operating agreement was designed for a single-owner LLC or a multi-owner LLC. There’s a big difference in complexity, as well as in the kinds of issues you need to address, so it was a significant area of confusion on the website. Then I notice a convenient live chat function, so I decided to dig deeper. Here’s the transcript, and I think you’ll find it quite illuminating.

Thank you for choosing incorporate.com. A representative will be with you shortly. You are now chatting with ‘Jaron’

Jaron: ‪Hello, how are you?

you: fine, thanks. So I’d like to know, for your LLC formation package, is the operating agreement a single-member or multi-member operating agreement?

Jaron: ‪The operating agreement can go either way

you: Well, which is it?

Jaron: ‪Is this something you are looking to have set up today?

you: maybe

Jaron: ‪It is whatever you need it to be

you: and does it include transfer restrictions?

Jaron: ‪like heir to heir?

Jaron: ‪Or ownership?

you: like a right of first refusal if my co-owner wants to sell to an outside party

Jaron: ‪Yes, you can include that in the operating agreement. We also provide a guidebook with further instruction on that as well.

you: and all of this is the same price, regardless of what I want included? regardless of whether it’s a single-member or multi-member?

you: all for $385.95

Jaron: ‪YEs

you: How many drafts of it will you do for me, to ensure it’s the way I want it?

Jaron: ‪I can also provide priority handling at no extra charge.

Jaron: ‪Yes

you: how many?

Jaron: ‪Let me double check. Bare with me [spelling error his, not mine – another nice touch from the experts]

you: double check on all those questions, please

Jaron: ‪Sure… one moment [long delay]

Jaron: ‪You can supply the operating agreement after writing it out. We provide the template. You can update it at anytime with written consent. The only time there is a fee is if you have a third party update it

you: So you provide a basic template, and I have to make all the changes? You don’t write these in for me?

Jaron: ‪We do not. You will write them up, we will file them internally

you: So the transfer restrictions and all that aren’t in the agreement you provide. I have to write all that up for you?

Jaron: ‪Correct. We file it for you, you provide the structure that you want.

you: What do you mean, you file it? [note: you don’t file an operating agreement with anyone; it’s a contract between the business owners and the LLC]

Jaron: ‪You will supply us with the language and draft of the operating agreement. Once you notarize it and send it in, we can update it to your liking at anytime [another tip – you don’t have to notarize an operating agreement]

you: Well, if I have to write the operating agreement, why do I pay you?

Jaron: ‪We provide the template. If you want to submit it yourself without our template, than I can customize a package for you to save you money without the operating agreement

you: I want the operating agreement, but you told me you could customize it with whatever I want, and now you are saying that you can’t, that I have to provide the customized language. Is that correct?

Jaron: ‪Yes, meaning you can make the operating agreement anyway you want it. There is no structure that you are stuck to.

Jaron: ‪If you need to update or make changes, we can do that. No fee

you: But I provide the language

Jaron: ‪Yes

Jaron: ‪We provide a template. You can use it if you wish

Jaron: ‪Or provide your own language [kind of like going to a restaurant, but bringing your own ingredients and cooking them yourself]

you: One last question. On your website, you say the Ohio LLC filing fee is $125 plus a $5 document retrieval fee. But the LLC filing fee in Ohio is $99. Why the difference?

Jaron: ‪I will get you the breakdown, one moment [long delay]

Jaron: ‪Sorry for the delay

you: Yes?

Jaron: ‪$125 is the LLC filing fee of for Ohio anywhere

you: Not according to the Secretary of State’s website.

Jaron: ‪You will have to go to the Secretary of State yourself to retrieve the documents without the $5 fee in addition

Jaron: ‪Yes I see the $99

you: I’m not talking about that. I’m asking why you charge $125 for the basic filing fee, when according to the Ohio secretary of state website, the filing fee is $99 [note: the Ohio Secretary of State actually lowered the filing fee from $125 to $99 several months ago, something other states should consider doing. I’m talking about you, Illinois, Texas, and Massachusetts]

you: so please explain

Jaron: ‪I am really sorry about the confusion. I am not sure why the fee is more. All of the service companies charge the $125 rate… I honestly do not know why but I will happily discount it for you.

you: No, I’m just concerned that you wouldn’t know what the correct fee is. Aren’t you the experts?

Jaron: ‪Yes, most times there are things like “Walk in fees” that are built into the price. I think that may be the case here but for some reason it is not listed. Most of our state fees include the full breakdown. I am not sure why Ohio does not. I apologize

you: There’s no walk-in fee. Ohio lowered the filing fee several months ago, and you just don’t take the time to ensure that you are charging the correct amount.

So let’s note a few key things from the chat:

  1. The representative wasn’t very knowledgeable. That’s always a troubling sign.
  2. The representative started out by promising that I could get anything I wanted (at that low price), but quickly had to backtrack when I pressed him on the issue. By the time we were done, I was going to have to write the operating agreement myself!
  3. The company’s website was out-of-date when it came to the Ohio filing fees, and when I asked about it, the representative basically made up an answer out of thin air (or pulled it out of his ###, if you prefer). If I hadn’t forced the issue, they would have overcharged me.
  4. The representative was also completely wrong about the $5 document retrieval fee. Some state’s charge to download documents, but Ohio isn’t one of them. This is an unnecessary and dishonest fee, and you shouldn’t have to pay it.

I hope you have a better idea now of what you get with these document services, and why I charge more money.

Follow me on Twitter @PaulHSpitz

If I Lie To My Lawyer, Will It Save Me Money?

Not a chance. Even so, I occasionally find a client or prospect holding back important information, presumably because they think it will complicate the project and cost them more money. But that’s exactly why it should cost more money – because it makes things more complicated. Let’s see it in action…

First Call

Prospective Client: Hi, I’m working on a startup with a cofounder, and we are ready to move forward. We think the idea is viable. We formed an LLC about a year ago, and now we want to form a Delaware corporation. What will it cost to incorporate with two cofounders?

Lawyer 1: You’ll need to convert the LLC to a corporation. If you are lucky, and you formed the LLC in a state that allows conversion, forming a new corporation and converting the LLC into it will cost $2000, plus about $350 in filing fees. If you formed the LLC in a state that does not allow for conversion, we’ll have to do a merger. That will cost between $2500 and $3000, plus about $500 in filing fees.

Prospective Client: Wow, that’s a lot of money. We’ll have to discuss it and get back to you.

Second Call

Prospective Client: Hi, I’m working on a startup with a cofounder, and we are ready to move forward. We think the idea is viable. We want to form a Delaware corporation. What will it cost to incorporate with two cofounders? [Notice how the client left out that information about the existing LLC?]

Lawyer 2: It will cost you $1500 to incorporate, plus $150 in filing fees.

Prospective Client: Sounds good, let’s do it!

Now let’s flash forward 6 months, when the startup is trying to raise money from investors. They’ve signed a term sheet for an $800,000 investment, and the investors are doing their due diligence check on the company. During the due diligence, the investors discover that a year and a half earlier, the cofounders had formed an LLC, which they neglected to mention to Lawyer B. They also discover that there had originally been three cofounders, and one of them left on bad terms within the first 3 months. Now she’s moving around various hippy beach communities in Thailand, and doesn’t even have a cellphone. Even worse, it isn’t clear whether everyone signed intellectual property assignments, and Gone Girl happened to have developed the most important part of the code that is the startup’s product. Making a bad situation worse, the cofounders used Legalzoom to form their LLC, and even if they got an operating agreement, there isn’t a chance in Hell that it contains vesting provisions that would allow them to recapture Gone Girl’s unvested ownership interest in the LLC.

Here’s what it all adds up to:

  • The corporation doesn’t own most of the software code and other IP that is the core of the business. That belongs, at best, to the LLC, if everyone signed IP assignments.
  • If everyone signed IP assignments, that’s not going to help much, because they still need to convert (or merge) the LLC into the corporation. But they need Gone Girl’s approval to do so, and she was last seen on a beach in Bora Bora, smoking weed with an actor who may or may not have been in Titanic.
  • If there are no IP assignments, then it really doesn’t matter whether they can convert the LLC into the corporation, because Gone Girl owns the core of the business. And when word gets out that the business is worth $1.2 billion, guess who’s going to show up with some very mean lawyers in tow?

Of course, the truth of the matter is, that company will never be worth $1.2 billion, because the cofounders were too cheap to do things right. They thought that if they withheld important information from their lawyer, they could save a few hundred dollars. Instead, that little lie is going to cost them $5000 to $10000, at best, in legal fees to try and sort out the mess. At worst, the lie will cost these guys the $800,000 they were hoping to get from the investors, who are now walking away and looking to invest in a business run by someone with brains.

So the moral of the story is, keeping information from your lawyer will not save you money, it will cost you much much more.

Follow me on Twitter @PaulHSpitz