Most cannabis companies do not wind up properly, some cannabis companies (and their owners) suffer, and all cannabis companies (and their owners and investors!) do well with an orderly resolution. This blog post will cover some of the basics of the cannabis deal settlement process.
First, however, I would like to address a point that often causes confusion: “dissolution” and “wind-up” of a company are two different things. The dissolution takes place when a company representative submits the dissolution statute or similarly named documents to the responsible foreign minister. Dissolution can also be “administrative” by the state if a company does not pay any taxes or fees. Resolution is just one step in the settlement process and often occurs at the beginning of that process. Conversely, “closing” means bringing the whole thing to an end.
Step 1: Face the facts and get your affairs in order
There comes a point in the life cycle of most cannabis companies where it makes no sense to continue. Most businesses fail at some point. According to BLS stats aggregators, 20.8% of US private sector firms fail within a year, 48.8% fail within 5 years, and 65.1% fail within 10 years. I guarantee you these numbers are higher in the cannabis industry.
Sometimes it’s hard to give up. In many cases, owners stay on longer than they should, putting the company and its assets at increasing risk. Timing the resolution is critical, especially since bankruptcy is not an option for cannabis companies. It’s easier to know when to exit when your records are solid, the data is current, and when the company’s ownership structure is aligned in its mindset. (Most close-knit corporate agreements require the unanimous consent of the owner to terminate.)
Step 2: Vote and document your decision
A cannabis company contemplating dissolution should duly convene a meeting, discuss the issue, vote, and put each decision in writing. The “paper” authorizing the dissolution and liquidation would be a resolution of consent or a variation of the protocol. Here it is important to strictly comply with the company agreements; or, if the company does not have governance documents, to comply with the legal requirements in the relevant state. For example, where I reside in Oregon, unless a corporation’s articles of incorporation provide otherwise, the corporation may be dissolved: a) with the written consent of all stockholders; or b) by the board of directors, but only if the board of directors proposes the dissolution and a majority of the shareholders agree.
Typically, consent resolutions include some or all of the following:
- Recitals setting out the unfortunate milieu (doesn’t need to be gory or overly detailed)
- Decision to dissolve the company
- A resolution authorizing certain key activities: e.g. B. the filing of dissolution articles, the closure of certain accounts
- A resolution to appoint a representative (usually within the company) with authority to oversee the final disposition of all of the company’s assets, liabilities and other liabilities (known and unknown, due and contingent) once operations cease
- A resolution to provide a specified amount of money for the activities described above
These important decisions are proposed by directors or shareholders or both in a company. In an LLC, it is the members or members and managers who commit the act. See also company agreements and/or statutes here.
Step 3: Final payments and actions
Ideally, once the dissolution is approved and winding-up begins, the company will have enough cash to pay off its creditors and discharge itself of any ongoing obligations (e.g., purchase a lease, pay any taxes owed). Typically, the sequence of payments required in a settlement looks something like this:
- First, to the extent permitted by law, to creditors (including owner-creditors) in satisfaction of the company’s obligations
- Second, to the owners of the company for any income tax liabilities if the governance arrangements dictate it
- Third, to the owners of the company as distributions or dividends
- Fourth, build up reserves that are deemed appropriate for handling the company’s affairs
Here, too, company agreements are of crucial importance. If the company does not have governance agreements, consult the relevant articles of incorporation.
Step 4: Tax return
This is actually part of Step 3, but I’m giving taxes a separate category as this is usually the last thing a defunct cannabis company does right before bank accounts are closed and final earnings are distributed. Depending on the type of company, different regulations apply to the due dates for returns:
- A dissolved company must file a final tax return by the 15thth Day of the fourth month after the dissolution date
- A dissolved S corporation or partnership (most LLCs) must file a final tax return by the 15thth Day of the third month after the dissolution date
Sometimes a dissolved company cannot use official forms because current year forms are not yet available. However, early birds must follow the registration instructions. Many of these companies apply for an extension upon dissolution, taking into account the due date of the final tax return and when the current year’s tax forms will be available.
I hope you never have to liquidate your cannabis business. Or if so, I’m hoping that’s because you sold all your assets to a wealthy buyer and it’s a simple resolution where you file taxes and ride off into the sunset. For everyone else, the best advice is: a) get out before it gets bad (if possible), b) follow the protocols set out in relevant company agreements and/or relevant bylaws (always), and c) get help if needed. Good luck.