A Sad Reality: Finalizing the closure of a cannabusiness

Every
year, countless aspiring cannabis entrepreneurs consult with my office. I
thoroughly discuss the ever-changing laws, the politics of the industry and the
various financial and criminal risks associated with starting any
cannabusiness. I review business plans, including budget and funding issues,
and I help craft strategies for growth. I attempt to connect every client to
all of the resources they will need. I believe that my success is intrinsically
linked to the success of my clients, and I am dedicated to making sure each one
succeeds.

However,
the sad reality is that sometimes businesses fail. It is rarely for lack of
effort or passion. Despite best efforts, sometimes things just don’t work out.
Businesses fail for all sorts of reasons. The challenging tax laws of the
cannabis industry, lack of business acumen or insufficient capital can lead to
a business ultimately having to shut its doors. Many people don’t realize how
long it takes to build a successful company. According to the Marijuana Business Factbook, 56 perfect
of businesses within the medical cannabis industry take between six months to
two years to become profitable after making medium- to large-sized investments.
Building a successful cannabusiness is an uphill battle, and not everyone makes
it to the top.

Sometimes,
I touch base with a client and learn that the business did not work out and
that it has been shut down. However, what many clients don’t realize is that
simply “saying” you shut down your business is not enough. Even though a
business is no longer physically operating, there are procedures that must be
followed in order to finalize the closure of the business.

The
following will focus on how to wind down a California Non-profit Mutual Benefit
(NPMB) Corporation, but similar procedures apply to other types of entities. To
start the process of shutting down your business, there must be a resolution to
wind down and dissolve. California law provides for voluntary dissolution
several ways.

NPMB
Corporations most commonly accomplish this by a vote of the directors. It’s
important to properly record the resolution to dissolve. Typically, drafting
minutes from the board meeting reflecting the vote to dissolve is sufficient.
After the nonprofit has formally decided to dissolve, a Certificate of
Dissolution must be filed with the California Secretary of State.

One of
the biggest mistakes clients make when they walk away from the business is
failure to file final tax returns on the state and federal level. Remember, so
long as your corporation exists, you owe the Franchise Tax Board a minimum of
$800 every April 15. Failure to file your final tax returns means that you will
continue to owe $800 every year. An entity can avoid the minimum franchise tax
for the current and subsequent taxable years if the following requirements are
met: Timely file your final franchise or annual tax return, cease transacting
business in California after the last day of the preceding taxable year, and
file the appropriate documents with the California Secretary of state within 12
months of the filing date of your final tax return. Failure to take this step
can cause the Franchise Tax Board to suspend your corporation, and this status
can complicate an otherwise fairly simple dissolution process. It is also
important to file the necessary forms to closeout your seller’s permit,
signaling your closure to the Board of Equalization.

After
the nonprofit has formally authorized the dissolution, it continues to exist
for the purposes of taking care of final matters. Mainly, paying off any debts
and distributing any remaining assets. It is crucial that you make sure that
you deal with your creditors. State tax agencies, landlords, consultants and
vendors still expect to be paid. Work with your CPA and lawyer to understand
what debts need to be paid off first and to give priority to certain payments.          

When a
business fails, it can be heartbreaking, and the last thing a business owner
wants to do is spend more time or money dealing with the business. However,
it’s very important to properly wrap the business up, and follow the
appropriate process to shut down the business. If your nonprofit corporation is
no longer operational, please be sure to contact your attorney and your CPA in
order to tie up any loose ends and legally bring your business to an end.