I Am an International Cannabis Company. Do I Need a U.S. Corporation or LLC to Do Business?
I work with international cannabis companies outside the U.S. and regularly field inquiries from others who want to enter the U.S. market or are already selling into the U.S. market through an intermediary like a broker or a sales agent. In the United States, there are four main ways to enter the market to do business, all of which have different pros and cons.
Before I dig into those, I need to flag the issue of U.S. immigration for non-U.S. citizens who are somehow involved or thinking about getting involved in a U.S. cannabis marijuana business, whether from their home country or while you are in the U.S. My colleague Akshat Divatia wrote a cautionary blog post discussing how involvement could cause foreign individuals to have significant problems with USCIS (U.S. Citizenship and Immigration Services) and USCBP (U.S. Customs and Border Protection). In that post, Akshat wrote:
Even a foreign national who has never consumed marijuana could be declared inadmissible under the INA [Immigration and Nationality Act] based on his or her involvement in a [U.S.] legal cannabis [marijuana] business, either as ‘a knowing aider, abettor, assister, conspirator, or colluder with others’ or ‘an illicit trafficker’ of a controlled substance.
In short, if you are a non-U.S. citizen and think you want to get involved in any way in a state-legal U.S marijuana business, and if you have any plans on entering the U.S., you should consult with an immigration attorney before you come to the U.S.
If after considering the immigration implications for non-U.S. individuals you have then made the determination that you want your non-U.S. cannabis company to enter the U.S. market, these are the primary methods to do so:
1. Sell from Abroad.
For companies that are not prepared to enter the U.S. market with an established presence but want to test the market appetite for their products, you can sell from abroad through a broker, agent, distributor, or online marketplace. None of these activities should require you to establish a U.S. business entity, though you will still need to deal with many other aspects of doing business.
These include the logistics of getting your product through U.S. customs and to your customers, receiving payments, paying some U.S. taxes, and paying your intermediaries. You must also ensure you have strong contracts in place to protect your business interests and that you are both compliant with U.S. cannabis laws and regulations, which vary extremely from state to state.
2. Register a Branch Office.
If you have determined that you would like to have some kind of U.S. presence but you are not prepared to set up a U.S. entity, then you can start by registering your existing foreign company in a U.S. state. Most U.S. states provide you this option, which is generally referred to as establishing a “branch office.” In U.S. legal terms, you will qualify your foreign company to do business in one or more U.S. states.
Initial registration fees vary state-by-state (usually less than USD 500), and all states require you to designate a registered agent in their state and pay an annual fee (usually less than USD 300) to remain in good standing. Along with this annual fee you will need to submit additional company information, which varies from state to state. Some states, like Delaware, only require minimal information, such as your Delaware registered agent’s name and address. Other states, like Washington, require disclosure of at least some of a company’s owners, directors, and officers, which Washington refers to as “governing persons.”
It is uncommon for a U.S. state to require disclosure of underlying owners of a business. The IRS (Internal Revenue Service) collects this information when it issues your company a U.S. TIN (tax identification number) but does not routinely share the information regarding owners with U.S. states. If you do not need a U.S. bank account and do not need to register with any state taxing authority, then you generally will not need to obtain a TIN.
3. Form a U.S. Company Taxed as a Passthrough Entity.
If you have determined that you need or want to form a U.S. company rather than only qualify your foreign company to do business in the U.S., then you need to decide what type of tax nexus you want to have with the U.S. or how much you want to expose your U.S. company’s foreign owners to IRS scrutiny.
With some exceptions, you can decide how your foreign company is taxed at the U.S. federal level. If you form a U.S. company and check the box on the IRS form to be taxed as a passthrough entity (a wholly owned subsidiary for a single owner or a partnership for an entity owned by a partnership or LLC (limited liability company)), then the foreign parent owner(s) will be responsible for all of the tax obligations resulting from the U.S. company.
As above in registering your foreign company in the U.S., if you form a U.S. company you still need to decide which state(s) to register in. You will choose a single U.S. state as your primary registration and then qualify your U.S. company to do business in other U.S. states as needed.
4. Form a U.S. Company Taxed as a C Corporation.
If you have determined that you need or want a U.S. company but you do not want to expose its parent company or owners to U.S. tax obligations, then you will want to form a U.S. entity (partnership, corporation, or LLC) and choose to have it taxed as a C corporation.
Most of the foreign companies I work with would rather deal with a C corporation’s double taxation (on corporate profits and shareholder distributions) than expose their owners to the IRS. This is especially true in the cannabis industry where the IRS is more likely to audit even law-abiding hemp companies that have no involvement in marijuana, which remains illegal as a controlled substance under U.S. federal law.
We are expecting significant changes in the way cannabis businesses are treated by the federal government, though those conversations and rallying cries always seem to emerge in election years and then recede without significant developments. Regardless, we will work to keep international companies informed to ensure you can enter the U.S. market on your own terms.
For more reading on international cannabis, check out: