Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation

Question:  I know my Arizona medical marijuana dispensary must be operated on a not for profit basis, but does not have to be an Arizona nonprofit corporation.  Why would I want to form an Arizona nonprofit corporation that is also a tax-exempt organization under the Internal Revenue Code?

Answer:  Neither the Arizona medical marijuana law nor the Arizona Department of Health Services proposed rules require that an Arizona medical marijuana dispensary be a nonprofit corporation.  My recommendation is that all Arizona medical marijuana dispensaries be an Arizona limited liability company.  See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

One of the best ways to help satisfy the requirement that the dispensary be operated on a not for profit basis is for the dispensary to make substantial donations of profits to a tax-exempt charitable organization such as the American Red Cross, the Arizona Humane Society or any one or more of the many tax-exempt charities that have purposes consistent with those of the dispensary’s owners.  Donations to local tax-exempt charities that give to the local community are especially good choices.  The dispensary should have a regular policy of publicizing its charitable donations such as handouts given away at the dispensary or signs on the walls of the dispensary.

Dispensary owners should also consider creating an Arizona nonprofit corporation that applies for and becomes an IRS approved tax-exempt charitable organization.  One or more of the owners could be on the board of directors of the charity.  The charity’s purpose would not involve the growing, possession or sale of marijuana.  Instead, the charity’s purpose could be picked by the founders of the nonprofit corporation.  I recommend its purpose be to engage in charitable activities in which the dispensary owners have an interest and that the money donated to the charity be spent in the local community.  The tax-exempt organization must not  have a purpose that is related to marijuana, including medical marijuana.

Here are some potential charitable purposes for a tax-exempt organization founded by an Arizona medical marijuana dispensary:

  • Provide monetary assistance to people who are in a terminal condition or who cannot afford medical treatment
  • Pay the cost for low income people to live in a care home
  • Pay for nursing care for low income people
  • Pay for legal drugs for low income people

The tax-exempt organization cannot be a subsidiary of the dispensary entity.  It must be a separate stand-alone corporation governed by its board of directors.

Caveat:  The dispensary owners and insiders cannot control the tax-exempt organization.  The IRS will not grant tax-exempt status to a nonprofit corporation that is controlled by a person or a group of people.  The board of directors of the tax-exempt organization can have one or more owners or insiders of the dispensary on its board of directors as long as the board of directors has enough independent members who could out vote the dispensary’s owners and insiders.

I would love to form your Arizona nonprofit corporation that you intend to become a federal tax-exempt organization.  To learn more about forming an Arizona nonprofit corporation read “How to Form an Arizona Nonprofit Corporation” and “Arizona Nonprofit Corporation Formation Service.”

By |2011-02-14T08:23:31-07:00February 14th, 2011|Legal Issues, Questions People Ask|Comments Off on Why an Arizona Medical Marijuana Dispensary Should Form an Arizona Nonprofit Corporation

Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?

Question:  Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?

Answer:  No and thankfully no!  Arizona Revised Statutes Section 36-2806.A states: “A registered nonprofit medical marijuana dispensary need not be recognized as tax-exempt by the Internal Revenue Service.”  If Proposition 203 required dispensaries to become tax-exempt organizations, the IRS would deny every application because it would not allow any business engaged in violating federal law to become exempt from federal income taxes.  In addition, even if it were possible for a dispensary to obtain a tax exemption, the consequences would be disastrous for most dispensaries.  Tax-exempt organizations are prohibited from paying excess benefits to owners, directors, officers and insiders.  If excess benefits are paid, the tax penalties are severe – 100% of the excess benefit PER YEAR since the payment until the penalty is paid in full.

By |2017-02-11T17:03:09-07:00December 20th, 2010|Legal Issues, Questions People Ask, Tax Issues|Comments Off on Must My Nonprofit Arizona Medical Marijuana Dispensary Be a Federal Tax-exempt Organization?
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