Beware of the Single Owner Arizona Medical Marijuana Dispensary

Question:  Should I be the sole owner of my Arizona medical marijuana dispensary?

Answer:  Probably not.  Although the Arizona Department of Health Services rules allow an Arizona medical marijuana dispensary to be owned by a single person (a sole proprietor) or a company that has only one owner, I strongly recommend that no dispensary owner be the sole owner of the business.  The reason every dispensary should have at least two owners is to prevent the lose of the valuable dispensary license if the sole owner were to die or to become ineligible to be an owner, officer or director of the business.

Two examples will illustrate the terrible consequences of having a sole owner dispensary business.

Example 1:  Homer Simpson is the sole owner of an Arizona LLC called Bart’s Greenies, LLC.  Homer invested $500,000 to get a dispensary license and open his dispensary in Scottsdale in the food court of the Fashion Square Mall and to set up his 20,000 square foot cultivation farm in Pine Top.  Homer unexpectedly dies from joy and pride while attending Bart’s graduation ceremony at the Penn State University Hershey School of Medicine where Bart received his M.D. degree.  Because the LLC no longer has an owner approved by the Arizona Department of Health Services to be an owner, the LLC’s dispensary license automatically evaporates and so does all of its value.  There is no LLC with a dispensary license to be inherited by Homer’s family.

Example 2:  Same facts as in Example 1 except Homer does not die.  Instead, Homer divorces Marge and defaults on his child support payments for Maggie.  Because Homer is no longer eligible to be an owner, officer or director of an Arizona medical marijuana dispensary the LLC’s dispensary license automatically evaporates and so does all of its value.

Solution:  I recommend that every Arizona medical marijuana dispensary organization have at least two owners so that if one of the owners were to die or cease to be eligible to own an interest in the business, the other owner could continue as the sole owner of the business so that the business does not automatically lose its dispensary license.  Although a husband and wife who jointly own a dispensary are technically do not have a sole owner business, they should consider having another nominal owner in case the husband and wife were killed in a common accident.

Caution 1:  The December 17, 2010, first draft of the proposed rules contains 18 requirements that must be satisfied for a person to become an owner, officer or director of an Arizona medical marijuana dispensary business.  If any owner, officer or director ever becomes ineligible to be an owner, officer or director, the business will automatically lose its license to operate the dispensary.  This risk of automatic termination is one very big reason why all entities that want to obtain a dispensary license need to purchase my Bylaws that contain provisions intended to protect against the loss of the license if an owner, officer or director ceases to be eligible to be an owner, officer or director.  For more about why all dispensaries need properly drafted Bylaws see “Bylaws for Arizona Medical Marijuana Dispensaries.”

Caution 2:  Whenever a business has multiple unrelated owners, the owners must enter into a buy-sell agreement that contains their exit strategy.  Medical marijuana dispensaries especially need a good buy-sell agreement that covers the automatic buy-out of any owner who ceases to be eligible to be an owner.

By |2012-05-13T16:24:48-07:00January 18th, 2011|Legal Issues, Questions People Ask|Comments Off on Beware of the Single Owner Arizona Medical Marijuana Dispensary

Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Question:   Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Answer: Apparently not!  Although the text of Proposition 203 says that an Arizona medical marijuana dispensary must be a ““a not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses marijuana or related supplies and educational materials to cardholders,” and it refers to Bylaws (a corporate governing document), officers (typically associated with corporations) and directors (exclusively associated with corporations), the Arizona Department of Health Services expanded the definition of not-for-profit entity to include types of entities in addition to corporations.

The December 17, 2010, first draft of the proposed DHS rules states that an “Entity means a person as defined in A.R.S. § 1-215.”  Section 1-215 says that “Person” includes a corporation, company, partnership, firm, association or society, as well as a natural person.”  Since an Arizona limited liability company is a company, DHS apparently will allow LLCs to own dispensaries unless it changes the rules to eliminate LLCs.  Here is an additional provision in the first draft of the rules that sanctions the use of a limited liability company:

“R9-17-301. Individuals to Act for a Dispensary Regarding Requirements.  When a dispensary is required by this Article to provide information on or sign documents or ensure actions are taken, the following shall comply with the requirement on behalf of the dispensary: . . . 4. If the dispensary is a limited liability company, a manager or, if the limited liability company does not have a manager, a member of the limited liability company”

As an Arizona business and entity formation attorney who has formed over 2,800 Arizona entities, I am surprised, but very glad that DHS is not requiring that people form Arizona nonprofit corporations to own and operate medical marijuana dispensaries.  The only type of entity that is specifically recognized under Arizona as a nonprofit entity is the Arizona nonprofit corporation.  The big problem with an Arizona nonprofit corporation is that it does not have any owners.  It simply would not be right for the government to require people to spend substantial amounts of time and invest large amounts of money into a nonprofit corporation that does not have any owners.

If you want more background and analysis of this nonprofit entity issue, read my article called “Arizona Proposition 203 – Legalization of Medical Marijuana.”

Arizona Medical Marijuana Dispensaries Should be Arizona Limited Liability Companies

My recommendation is that all entities that seek to obtain a license to operate an Arizona medical marijuana dispensary be Arizona limited liability companies.  People who have already formed an Arizona nonprofit corporation with the intent to have it obtain the license should put the corporation on the shelf and form a new Arizona LLC to be the nonprofit entity that seeks and obtains the license.

I would love to form your Arizona LLC that will own and operate a medical marijuana dispensary.  My fee is $1,599, which includes the all important nonprofit LLC Bylaws.  See my articles called “Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?” and “Bylaws for Arizona Medical Marijuana Dispensaries.”

By |2017-02-12T07:05:51-07:00December 23rd, 2010|Legal Issues, Questions People Ask|2 Comments