Cannabis remains a Schedule I controlled substance under federal law. This creates unique legal, tax, and banking challenges. Operating a cannabis business carries inherent federal risk regardless of state licensure.
DCC License Types & Fees
California Department of Cannabis Control (DCC) offers various license types based on business activity
Retailer (Dispensary)
Storefront or non-storefront (delivery-only) retail sales to consumers. Requires local authorization and extensive security measures.
Distributor
Transport, store, and arrange for testing of cannabis goods. Required link between cultivators/manufacturers and retailers.
Cultivator
Indoor, outdoor, or mixed-light cultivation. License tiers based on canopy size (up to 1 acre+). Processor license may be included.
Manufacturer
Extract, infuse, or package cannabis products. Type 6 (non-volatile), Type 7 (volatile), or Type N (infusion only).
Testing Laboratory
Required testing for potency, pesticides, heavy metals, microbials. ISO 17025 accreditation required.
Microbusiness
Combine cultivation (up to 10K sq ft), manufacturing, distribution, and retail under one license. Cost-effective for small operators.
Local Authorization Process
You must obtain local approval BEFORE applying for a state DCC license
Over 60% of California cities and counties have banned commercial cannabis operations. Research local ordinances carefully before investing in real estate or business planning.
Research Local Ordinances
Identify cities/counties that permit your license type. Review zoning restrictions, sensitive use buffers (schools, parks, churches), and license caps.
1-4 weeksSecure Compliant Real Estate
Find property in properly zoned area, meeting all buffer requirements. Negotiate lease with cannabis-friendly landlord. Many landlords refuse cannabis tenants.
1-6 monthsSubmit Local Application
Apply for Conditional Use Permit (CUP) or local cannabis permit. Includes detailed business plan, security plan, community benefit agreement, and often neighborhood notification.
2-6 monthsPublic Hearing & Approval
Many jurisdictions require planning commission or city council approval. Prepare for public comment and potential opposition from neighbors.
1-3 monthsApply for State DCC License
With local authorization in hand, submit state application through DCC's online licensing system. Include proof of local approval, owner background checks, and operational plans.
2-6 monthsIRC Section 280E Tax Trap
Cannabis businesses face the most punitive tax treatment of any legal industry
IRC Section 280E prohibits deductions for expenses related to trafficking Schedule I substances. Cannabis businesses can only deduct Cost of Goods Sold (COGS), not rent, payroll, marketing, or other normal business expenses.
Cannabis Retailer (280E)
280E Mitigation Strategies
Banking & Financial Services
Federal illegality creates significant banking challenges for cannabis businesses
Major banks refuse cannabis accounts due to federal money laundering concerns. However, options exist through credit unions and specialized cannabis banking providers.
Recommended Entity Structures
Choose the right business structure for liability protection and tax optimization
C-Corporation
Traditional corporate structure
- ✓ Unlimited shareholders
- ✓ Easier investor fundraising
- ✓ Can retain earnings
- ✗ Double taxation
- ✗ No pass-through losses
- ✗ More formalities
California LLC
Flexible pass-through entity
- ✓ Pass-through taxation
- ✓ Operating flexibility
- ✓ Loss pass-through to owners
- ✓ Fewer formalities
- ✗ CA $800 min franchise tax
- ✗ Self-employment tax issues
Multi-Entity Structure
License holder + management + real estate
- ✓ 280E mitigation
- ✓ Asset protection
- ✓ Investor flexibility
- ✗ Higher complexity
- ✗ Multiple filings/fees
- ✗ IRS scrutiny risk
S-Corps are generally not advisable for plant-touching cannabis businesses. The 280E limitations make pass-through losses less valuable, and S-Corp ownership restrictions limit investor options.
Ongoing Compliance Requirements
Maintain your license with proper recordkeeping and regulatory compliance
METRC Track & Trace
All cannabis must be tracked from seed to sale in California's METRC system. Every plant, package, and transfer must be logged. Non-compliance can result in license suspension.
Security Requirements
24/7 video surveillance with 90-day retention, alarm systems, limited access areas, employee background checks, and detailed visitor logs.
Testing & Labeling
All products must pass state-licensed lab testing for potency, pesticides, heavy metals, and microbials. Compliant labels with required warnings.
Employee Training
Staff must complete responsible vendor training. Verify customer age (21+) for every transaction. No sales to visibly intoxicated persons.
Financial Recordkeeping
Maintain detailed financial records for 7+ years. Track all cash transactions. Prepare for potential IRS audits (common in cannabis).
License Renewals
Annual license renewals with updated documentation. Report any ownership changes, premises modifications, or operational changes to DCC.
Cannabis Platform Terms & Privacy Reviews
Understand the legal risks of cannabis tech platforms before building your business on them
Cannabis businesses rely on platforms like Leafly, Weedmaps, Dutchie, and Jane for discovery, menus, and ordering. These platforms have terms that can terminate your account instantly and may share purchase data with third parties. Review their policies before integration.
ToS Watchdog: Cannabis Tech
Expert reviews of Terms of Service for Leafly, Weedmaps, Dutchie, and Jane. Understand termination clauses, federal law disclaimers, and liability limitations before signing up.
Privacy Watchdog: Cannabis Tech
Privacy policy analysis covering purchase history retention, location tracking, law enforcement data sharing, and medical card data handling across major cannabis platforms.
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