How to Start and Choose the Right Entity for a Hemp Business

In recent years, the hemp industry has blossomed into one of the most exciting and lucrative sectors in agriculture.

It has transformed from a long-stigmatized crop into a powerhouse of economic potential and sustainability.

But before you plant your seeds and watch your dreams grow, you must know how to build a strong foundation to thrive in such a volatile market.

In this blog, you will learn everything about starting your hemp business—from navigating complex regulations to selecting an entity that aligns with your vision and goals.

Luckily, you can lay the groundwork for success by setting up the right entity and ensuring compliance with doola’s Business Formation Services.

Whether you’re an aspiring entrepreneur crafting artisanal CBD products or a seasoned pro looking to branch out into hemp production, get ready to cultivate clarity on how to launch your venture with confidence!

Introduction to the Hemp Industry

The hemp industry has rapidly grown over the past few years, presenting a lucrative opportunity for entrepreneurs interested in starting their businesses.

The 2018 Farm Bill, which legalized hemp in the United States, has sparked interest and investment in this versatile plant.

Hemp is a variety of the Cannabis sativa plant species explicitly grown for industrial uses.

Unlike marijuana, hemp contains very low levels of tetrahydrocannabinol (THC), the psychoactive compound responsible for giving users a “high.” 

This makes it a viable option for various commercial applications without mind-altering effects.

Hemp has long been valued for its strong fibres, which can be used to make durable textiles and rope. Therefore, it is clear that this plant has many other valuable components.

For example, hemp seeds are rich in essential fatty acids and protein and can be used to make nutritious foods like milk alternatives or protein powder. The oil extracted from hemp seeds is also highly sought for its health benefits and use in skincare products.

Moreover, research on cannabidiol (CBD), another compound found in high concentrations in certain strains of hemp plants, has shown promising results for treating various medical conditions such as chronic pain and anxiety.

This has increased demand for CBD products such as oils, tinctures, edibles, topicals, and more.

According to Grand View Research Inc., the global market for industrial hemp is expected to reach $26 billion by 2025, making it an attractive industry for entrepreneurs looking to enter a growing market with diverse opportunities.

Differences between a Hemp Business and Other Businesses

When starting a hemp business, some key differences set it apart from other companies. Understanding them can help you make the right decisions when choosing the entity for your hemp business.

1. Legal Regulations

Hemp is still heavily regulated at both the federal and state levels, which means that there are strict rules and requirements for starting and operating a hemp business. These include obtaining proper licenses and ensuring that products contain less than 0.3% THC.

2. Banking Restrictions

Due to its association with marijuana, many banks are hesitant to work with hemp businesses and may even refuse services altogether. This makes it more challenging for entrepreneurs in this industry to secure loans or open a business bank account for their business operations.

3. Limited Marketing Options

While traditional companies have access to various advertising platforms, such as Google Adwords or Facebook ads, advertising restrictions on cannabis-related products limit the options for promoting a hemp business.

4. Potential Stigmatization

Despite being legalized, there is still some stigma attached to the cannabis industry – including hemp businesses – due to its association with marijuana.

As such, entrepreneurs in this field may face challenges related to public perception and acceptance of their products.

5. Taxation Differences

The tax laws surrounding a hemp business also differ significantly from those of traditional companies since it is classified as a controlled substance by the federal government.

This can result in higher taxes for hemp businesses, significantly impacting their bottom line.

Most Popular Hemp Businesses

The hemp industry in the US offers a diverse range of business opportunities, such as farming, manufacturing, retail, etc.

With the increasing acceptance and demand for hemp products, entrepreneurs can enter this industry and have many options.

However, before starting any new venture in the hemp industry, it is crucial to understand the legal requirements and select the proper entity structure that aligns with your business goals.

1. CBD Products

The CBD (cannabidiol) compound derived from industrial hemp has gained widespread attention for its potential health benefits without causing psychoactive effects.

Therefore, CBD products like oils, tinctures, edibles, topicals, and pet treats are widely in demand.

2. Hemp Clothing

As consumer interest in sustainable fashion grows, so does the demand for clothing made from natural fibers like cotton or hemp.

Many fashion brands have incorporated hemp into their collections as an eco-friendly alternative to traditional fabrics.

4. Hemp Building Materials

Another emerging sector within the hemp industry is building materials from natural fibres such as industrial hemp stalks or hurds. These materials are lightweight yet strong, resistant to pests and mould, and can even improve indoor air quality.

5. Hemp Beauty Products:

Hemp seed oil, rich in essential fatty acids and antioxidants, is popular for its moisturizing and anti-inflammatory properties. From lotions and serums to lip balms and shampoos, a wide range of hemp-based beauty products are available.

Understanding Business Entities

One key decision when starting a business is choosing the right entity type. The most common business entities are sole proprietorships, limited liability companies (LLCs), and corporations. 

Each has advantages and disadvantages, and it is important to understand them to make an informed decision about your hemp business.

Since it is crucial to make the right choice, we recommend seeking advice from legal and financial professionals before deciding.

Sole Proprietorship

A sole proprietorship is the simplest form of business entity. In this form, an individual owns and operates the business independently, so there is no legal distinction between the owner and the business. 

The owner has unlimited personal liability for any debts or obligations incurred by the business. On the other hand, a sole proprietorship offers complete control over decision-making, and all profits go directly to the owner without being taxed separately.

Limited Liability Company (LLC)

An LLC combines elements from a corporation and a partnership. It offers limited liability protection for its owners (known as “members”) while allowing flexibility in management and taxation. 

An LLC can be owned by one or more individuals or entities, making it a popular choice for small businesses such as hemp farms or dispensaries.

One significant advantage of an LLC is that members are not personally liable for any debts or lawsuits against the company.

Corporation

A corporation is considered a separate legal entity from its owners (shareholders). This means that shareholders have limited liability protection – they are not personally responsible for any debts or obligations incurred by the corporation. 

Corporations also offer tax benefits such as deducting employee benefits like health insurance premiums from corporate taxes. However, corporations require more paperwork and formalities compared to other entities.

How to Choose the Right Entity for Your Hemp Business

Choosing the correct entity is one of the most crucial decisions when starting a hemp business. This decision can have significant implications for the success and growth of your business, as well as your personal liability and tax obligations. 

Therefore, it is essential to carefully consider all factors before deciding on an entity for your hemp business. You can also consult with professional lawyers or accountants before deciding.

1. Legal Considerations

Hemp businesses operate in a highly regulated industry, and it is vital to comply with all state and federal laws.

Certain entities may be subject to more stringent regulations than others, so it is crucial to understand the legal requirements associated with each entity type.

2. Liability Protection

As a business owner, you want to protect yourself from personal liability in case of any legal issues or financial losses incurred by the business. Choosing an entity that provides limited liability protection can safeguard your assets in case of lawsuits or debts against the company.

3. Tax Implications

Different entities have different tax structures, which can significantly impact your bottom line. For example, corporations are subject to double taxation – once at the corporate level and again at the individual level when profits are distributed as dividends. 

On the other hand, LLCs offer pass-through taxation where profits are only taxed once at the individual level. It is advisable to consult a tax professional when considering which entity offers the most favourable tax structure for your situation.

4. Ownership Structure

Some entities allow multiple owners or shareholders, while others restrict ownership transferability or require unanimous consent from all owners for major decisions.

Determining how much control you want over decision-making in your business is essential, and choosing an appropriate entity accordingly.

5. Future Growth Plans

Some entities, such as sole proprietorships or partnerships, may limit your ability to raise capital from outside investors.

On the other hand, corporations and LLCs can issue shares or membership interests to attract investors and facilitate expansion.

Pros and Cons of Different Business Entities for a Hemp Business

Choosing the right business entity has become even more crucial when starting a hemp business due to the unique legal and regulatory landscape surrounding this industry. 

Each business entity has its pros and cons that must be carefully considered before deciding which is right for your hemp business. 

1. Sole Proprietorship

A sole proprietorship is suitable for small-scale hemp production or retail businesses that do not require significant capital investment. Its main advantages are its ease of formation and low costs. 

However, there are some downsides to consider as well. As a sole proprietor, you are liable for all business debts and legal obligations. You may also face difficulty obtaining loans or financing without a formal legal structure.

2. Partnership

Partnerships are similar to sole proprietorships but involve two or more individuals sharing ownership and management responsibilities. In a general partnership, all partners have equal rights and liabilities in the business unless stated otherwise in a written agreement. 

Partnerships can benefit hemp businesses by allowing for shared resources and expertise while retaining flexibility in decision-making. However, like sole proprietorships, partnerships also come with unlimited personal liability.

3. Limited Liability Company (LLC)

LLCs combine elements from corporations and partnerships/sole proprietorships. LLCs provide their owners with limited liability protection while allowing them to retain operational control over their businesses’ day-to-day operations. 

This entity type also offers flexible tax options as profits can be taxed at the company level or passed through to individual members’ income taxes.

4 . C Corporation

A C corporation is ideal for larger hemp businesses that plan to raise significant capital through investors or public offerings.

However, the main disadvantage of a C corporation is double taxation—profits are taxed at both the corporate and individual levels when dividends are distributed to shareholders.

5. S Corporation

An S corporation is similar to a C corporation in limited liability protection but offers pass-through taxation like an LLC. This means that profits and losses are passed on to shareholders’ personal income tax returns, avoiding double taxation. 

However, S corporations have strict eligibility requirements and ownership restrictions, making them less suitable for larger hemp businesses.

Steps to Registering Your Chosen Entity for a Hemp Business

Once you have decided on the perfect entity for your hemp business, it is time to register it properly. Registering your chosen entity will make it official and provide many benefits, such as legal protection and credibility. 

Here are the steps you must follow to register your chosen entity for a hemp business successfully.

1. Choose a Business Name

The first step in registering your entity is choosing a unique name for your business. Ensure that the name you choose is not already taken by another company or trademarked. It should also accurately represent your business and align with your brand image.

2. Determine Legal Structure

Next, you need to determine the legal structure of your hemp business. Each structure has its advantages and disadvantages, so it is essential to research and choose the one that best suits your needs.

3. Obtain Necessary Permits and Licenses

Before registering your chosen entity, ensure you obtain all necessary permits and licenses required by local and state laws to operate a hemp business. These may include cultivation licenses, processing licenses, sales permits, or more.

4. File Registration Documents

Once you have all the necessary documents in place, it is time to file registration papers with the appropriate government agency in charge of registering businesses in your state.

This process may vary depending on where you live but typically involves filling out forms with basic information about yourself and your business.

5. Write an Operating Agreement

If you have chosen an LLC as your legal structure, it is important to draft an operating agreement that outlines how decisions will be made within the company, profit distribution among members, ownership rights, etc.

6. Apply for EIN Number

To open a bank account under the name of your new entity, you must obtain an EIN from the Internal Revenue Service (IRS). This is also required for filing taxes and other financial transactions related to your business.

7. Register for State and Local Taxes

Register for any state or local taxes applicable to your hemp business. Depending on your location, this may include sales, income, or other specific taxes.

Legal Considerations for Starting a Hemp Business

Firstly, it is crucial to comply with federal regulations set by agencies such as the Food and Drug Administration (FDA) and the Department of Agriculture (USDA).

These regulations cover labelling requirements, testing standards for hemp-derived CBD products, and advertising restrictions.

Additionally, businesses must comply with state-level regulations regarding product safety standards and packaging requirements.

Some states have stricter rules than others regarding labeling and packaging for hemp-derived products.

Another critical aspect of operating a hemp business is understanding banking restrictions.

Due to its close association with marijuana, many banks are hesitant to offer services or loans specifically tailored for this industry, creating difficulties for businesses in terms of financing options.

Furthermore, tax implications should also be considered when starting a hemp business. While hemp is federally legal, the IRS still does not recognize it as an agricultural commodity, making it ineligible for certain tax breaks or deductions.

Compliance and Regulations for a Hemp Business

One of the most critical factors in compliance for a hemp business is obtaining proper licensing.

The type of license required will depend on the specific activities your company intends to engage in – such as cultivation or processing – and also vary from state to state.

Additionally, all hemp-derived products must undergo mandatory testing to ensure they do not exceed 0.3% THC content.

This requirement applies at every production stage – from seeds to finished products – forcing businesses to perform reliable testing procedures.

Another aspect of compliance for a hemp business relates to product labeling and marketing claims.

The FDA closely regulates how companies market their CBD or other hemp-derived products since they fall under drug or supplement categories depending on their intended use. 

As such, businesses must be careful with the language of their product labels and avoid any medical claims unless approved by the FDA.

Moreover, strict guidelines exist on where you can sell your hemp-based products. 

While some states allow online sales across state lines without restrictions (as long as both states allow legal use), others require businesses to serve within their state’s boundaries. 

Start Your Hemp Business on the Right Foot with doola

Registering your chosen entity for a hemp business may seem daunting at first. But with doola, you can ensure your business is correctly set up and ready to operate legally and successfully.

With our expertise in the industry, we understand the unique challenges of setting up a legal entity for a hemp business.

Our team of professionals will guide you through every step of the process, from choosing the best business name to handling all necessary compliance matters.

We will handle all aspects of forming your business. We’ll assist with drafting and filing all necessary paperwork, such as the Operating Agreement, obtaining a federal Employer Identification Number (EIN), and registering with state authorities.

So you can navigate the complex world of hemp regulations and set your business up for long-term success. 

Consult our team of experts in tax and business compliance to get started on a good footing!