Updated on January 13, 2012, from my checklist first published on January 16, 2011.
Here’s my checklist for the legal issues that every prospective Arizona medical marijuana dispensary business must complete, sooner rather than later than the yet to be announced date when the Arizona Department of Health Services will stop accepting applications for dispensary registration certificates. Check back in the future because I will update the checklist as I find more legal issues to add to the list.
See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012” and “Ten Critical Tasks Every Every Prospective Arizona Medical Marijuana Dispensary Must Accomplish to Be Able to Submit an Application to DHS for a Medical Marijuana Dispensary License.”
1. Create an Arizona LLC to own and operate the dispensary business and hold the medical marijuana dispensary license.
A. Make sure that all members satisfy all of the requirements for ownership set forth in the DHS rules.
B. Members adopt Bylaws that comply with the DHS rules. R 9-17-304.D.8 states that the Bylaws must contain “provisions for the disposition of revenues and receipts.” See “What the Final DHS Rules Require to Be In Dispensary Bylaws,” “Bylaws for Arizona Medical Marijuana Dispensaries,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”
C. Members sign a resolution approving the Bylaws.
D. Members adopt a buy-sell agreement that contains their exit strategy and deals with issues such as having the LLC purchase the interest of a deceased owner to make sure that no person becomes an owner who does not satisfy all of the requirements of the DHS rules. to be an owner.
E. Members sign a resolution approving the buy-sell agreement.
F. Members sign a resolution giving the designated officers managers the power and discretion to sign any and all contracts they deem necessary and appropriate to carry out the purposes of the business.
G. The LLC enters into written Nondisclosure / Confidentiality Agreements with all members.
2. Obtain a federal employer identification number for the LLC.
3. Open a bank account in the name of the LLC. See “Will Some Banks Refuse to Give My Dispensary a Bank Account?” and Banking Issues.
4. Hire a Certified Public Accountant to determine if the LLC should be taxed as a sole proprietorship (if it has one owner or husband and wife owners who own their interest in the LLC as community property), a partnership (if there are two or more members), a C corporation under subchapter C of the Internal Revenue Code of 1986, or an S corporation under subchapter S of the Internal Revenue Code (if the LLC meets the requirements to be an S corporation for federal income tax purposes.
A. If the CPA recommends that the LLC be taxed as a C corporation the CPA should file an IRS form 8832 within 75 days of the date the LLC is formed.
B. If the CPA recommends that the LLC be taxed as an S corporation, the CPA should obtain the signatures of all members on an IRS form 2553 and file it with the IRS not later than 75 days after the LLC is formed.
The CPA must also be willing and able to conduct an annual audit of the LLC’s books and records as required by the DHS rules.
5. Purchase a state of the art bookkeeping software program on which the LLC will keep its financial books and accounts.
6. Hire the CPA to configure the bookkeeping software with the proper charts of accounts appropriate for a medical marijuana dispensary business.
7. Hire a good zoning lawyer who can advise you on where city or county zoning will allow you to operate a dispensary and grow marijuana (if you intend to grow). You need the zoning lawyer to explain the often confusing zoning requirements and show you where your dispensary or cultivation site can be located within the appropriate Community Health Analysis Areas (CHAA). Don’t waste time looking for a place to rent or buy unless you have a map that shows you the boundaries of the CHAAs and the areas within the desired CHAA where you can operate your dispensary or cultivation site. I recommend you get an appointment with Maricopa County zoning attorney Michael Curley yesterday. Call him at 602-903-3077. See “CHAA on This!” and “Marijuana Dispensary Plan Defies Business Logic; Politics Replaces Economics 101.”
8. Find the site where the LLC will open its dispensary. Make sure that the city or county zoning (if the site is not in a city) allows a dispensary to be located at the desired site.
9. Get a comfort letter from the landlord (see item 2 in “Eleven Critical Tasks Every Every Prospective Arizona Medical Marijuana Dispensary Must Accomplish to Be Able to Submit an Application to DHS for a Medical Marijuana Dispensary License”) or enter into a written lease with the landlord for the dispensary site. The lease must have appropriate exit clauses if the LLC does not get a dispensary license, if it gets a license and later loses the license or if all of the owners of the LLC were to die. See “How Does My Dispensary Tie Up Land for its Retail & Cultivation Sites?” Caution: Arizona Revised Statutes Section 36-2804.B.1(b)(ii) states that the application for a dispensary license must list the “physical address of the nonprofit medical marijuana dispensary and the physical address of one additional location, if any, where marijuana will be cultivated.”
10. If the leased premises is encumbered by a Deed of Trust or a Mortgage, the tenant must obtain a signed Nondisturbance Agreement from the lienholder. If the dispensary tenant does not obtain a Nondisturbance Agreement from every person or entity that holds a lien on the leased premises and the landlord defaults on the obligations secured by the lien, the lienholder will foreclose and the tenant will be evicted or be forced to pay a lot of money to the new owner to stay in the leased premises. Warning: If your dispensary leases a site, the owners risk the loss of their entire investment if the landlord defaults on a loan unless the lienholder has given the tenant a Nondisturbance Agreement. See “What is a Nondisturbance Agreement & Why Do Dispensary Tenants Need It?“
11. If your dispensary intends to grow marijuana: Find the site where the LLC will grow its marijuana. Make sure that the city or county zoning (if the site is not in a city) allows medical marijuana to be grown at the desired site.
12. If your dispensary intends to grow marijuana: Enter into a written lease with the landlord for the cultivation site. The lease must have appropriate exit clauses.
13. If your dispensary intends to grow marijuana: Apply for a zoning permit and/or a special use permit if necessary for the cultivation site.
14. Prepare each of the following documents required by the DHS rules. to be submitted to the Arizona Department of Health Services with the LLC’s application for a dispensary license:
A. Business plan “demonstrating the on-going viability of the dispensary as a non-profit organization.” DHS rule R 9-17-304.D.9 and “What Must be In an Arizona Medical Marijuana Dispensary Applicant’s Business Plan.”
B. Policies and procedures for inventory control. DHS rule R 9-17-302.D.4.a.
C. Policies and procedures for qualifying patient recordkeeping. DHS rule R 9-17-302.D.4.b.
D. Policies and procedures for security. DHS rule R 9-17-302.D.4.c.
E. Policies and procedures for patient education and support. DHS rule R 9-17-302.D.4.d.
15. Draft each of the legal contracts and documents that will be used by the LLC in its medical marijuana business. See “What Legal Contracts Does My Medical Marijuana Dispensary Need?“
16. Hire a medical director
A. Confirm that the doctor satisfies the requirements to be a medical director contained in the DHS rules.
B. Make sure that the medical director holds a valid registration with the DHS as a medical marijuana dispensary agent.
C. LLC enters into a written Medical Director Agreement with its medical director.
D. LLC enters into a written Nondisclosure / Confidentiality Agreement with its medical director.
17. Obtain a financial institution comfort letter dated between [date to be announced by ADHS] and [date to be announced by ADHS], that shows the prospective dispensary or one of its principal officers has at least $150,000 and has had control of it for at least thirty days. See rules R9-17-304304.A.5 and R9-17-304304.D.1.f.ii and item 11 in “Eleven Critical Tasks Every Every Prospective Arizona Medical Marijuana Dispensary Must Accomplish to Be Able to Submit an Application to DHS for a Medical Marijuana Dispensary License“).
See “Clauses to Include in a Contract between a Medical Director & a Dispensary.”
The tasks listed below are needed only if your nonprofit entity obtains a dispensary registration certificate.
18. Apply for a zoning permit and/or a special use permit if necessary.
19. Hire a standby medical director. The LLC must have a contract with an alternate medical director who can take over if something happens to the medical director. The loss of the medical director could cause a loss of the dispensary license so the LLC must have a backup medical director under contract at all times who can step in and be the medical director if the current medical director were to die or cease to be the medical director. See “Why Every Arizona Medical Marijuana Dispensary Must Hire a Primary & an Alternate Medical Director.”
A. Confirm that the doctor satisfies the requirements to be a medical director contained in the DHS rules.
B. Make sure that the alternate medical director holds a valid registration with the DHS as a medical marijuana dispensary agent.
C. LLC enters into a written Medical Director Agreement with its alternate medical director.
D. LLC enters into a written Nondisclosure / Confidentiality Agreement with its alternate medical director.
A. Make sure that all prospective employees hold a valid registration with the DHS as a medical marijuana dispensary agent.
B. Require all employees to pass a test of the Arizona medical marijuana laws and the DHS rules.
C. LLC enters into a written Employment Agreement with every employee.
D. LLC enters into a written Nondisclosure / Confidentiality Agreement with every employee.
E. Give every employee an Employee Policy Manual and get a signed receipt from each employee in which the employee acknowledges receiving an Employee Manual.
A. Make sure that all prospective volunteers hold a valid registration with the DHS as a medical marijuana dispensary agent.
B. Require all volunteers to pass a test of the Arizona medical marijuana laws and the DHS rules.
C. LLC enters into a written Volunteer Agreement with every volunteer.
D. LLC enters into a written Nondisclosure / Confidentiality Agreement with every volunteer.
22. Purchase all insurance appropriate for operating a retail health care product distribution business and a farm (the cultivation facility). The LLC will need the following types of insurance plus any additional types of insurance recommended by an experienced business insurance agent:
B. Products liability
C. Business use of vehicles
D. Transportation of marijuana and related products
E. Officer and director errors and omissions
F. Employee theft
23. Prepare and file an Arizona Joint Tax Application with the Arizona Department of Revenue to apply for a Transaction Privilege Tax license, Arizona Employer Withholding and Arizona Unemployment Insurance. For more about this form and to access the Joint Tax Application, see Transaction Privilege Tax (TPT)/Licensing (Commonly referred to as a Sales, Resale, Wholesale, Vendor or Tax License).
24. Hire a payroll tax service such as ADP or Paychex (602-266-3660) to handle all compensation payable to employees and independent contractors, prepare and file all state, federal and local payroll tax forms and do the withholding and payment of withholdings to the appropriate agencies.
25. Obtain a copy of the certificate of occupancy or other documentation issued by the local jurisdiction to the LLC authorizing occupancy of the building as a dispensary and, if applicable, as the dispensary’s cultivation site. DHS rule R 9-17-305.A.2.
26. Officers an directors must hold meetings at least once every quarter to make sure that the LLC is taking necessary action to operate on a not for profit basis.
27. Hold annual meetings of the owners and directors early in the last month of the LLC’s fiscal year with the LLC’s CPA to discuss and review the year to date financial statement and to take any action necessary before year end to satisfy the requirement that the LLC be operated as a nonprofit entity. Document this meeting with minutes or resolutions signed by the members and directors.
28. Hire a CPA not later than before the end of each fiscal year to conduct an audit of the LLC’s financial books and records.
29. The nonprofit entity must obtain a food establishment license from Arizona Department of Health Services or the appropriate agency. See page 167 of DHS’ food regulations.
30. Employees who handle edibles must obtain food handler’s cards. See the Maricopa County food handler card web page.