Strategic planning for business owners

By Hal Snow

This is the first installment of a two-part article which talks with you about issues to consider when structuring the ownership once operation of your I-502 related business has begun.  

A very important issue with regard to any business, but now particularly with an I-502 business, is the isolation of the potential liability associated with the operation of an I-502 business or I-502 related business from the other assets of the business owner. This strategic planning issue is of particular concern to participants in the I-502 industry so long as the application of federal law to the business remains uncertain.

Where we are: The passage of I-502 made the sale of recreational marijuana legal under Washington State law and resulted in the creation of major new business opportunities within the state.

The problem with this new business is that the direct or indirect growing, possession, sale and distribution of marijuana remains a violation of the federal Controlled Substance Act. So what is legal under Washington law remains illegal under federal law.

The federal Department of Justice, in an Aug. 29, 2013 memo issued by Deputy Attorney General James M. Cole has delegated enforcement of the law related to growth, use and distribution of marijuana in Washington State to the state and local law enforcement authorities.

So, as long as the state and local authorities adequately prevent the marijuana industry from being abused (as the federal government defines abuse) and thereby not violating certain important federal principles (no use by minors, no gang participation, no money laundering, etc.), the federal authorities will cede the enforcement of the Controlled Substances Act as it applies to marijuana to state and local law enforcement.

The issue: The potential problem with this federal action is two-fold. First, it is merely guidance. It is not legislation.

The guidance could be withdrawn or modified at any time. Who knows what a new federal administration will do in 2016. Second, the federal government could leave the guidance in place but find the state and local supervision of the marijuana industry falling short as it pertains to either certain participants in the industry or certain segments of the industry.

A withdrawal of the federal guidance in whole or in part is potentially disastrous for a direct or indirect participant in the I-502 business in two ways. First, your I-502 business activities, illegal under federal law, could thereby result in your facing criminal prosecution for your I-502 business activity. That might mean jail time and fines.

Second, all fruit of the poisonous tree could be confiscated. That would include profits, business assets and personal property acquired from the profits of the I-502 business.  The breadth of the federal prosecution could also be extensive and might include business owners and their assets who either directly or indirectly participated in the I-502 activity.

This issue is obviously important to the actual I-502 business owner. A change in federal enforcement policy might be disastrous for the business owner, both criminally and financially. The same issues might also face the business owner who provides products or services to the I-502 business owner. The latter business owners would be found liable under some sort of conspiracy theory if the pursuit of the federal law enforcement options was sufficiently vigorous.

The solution: When working with a business owner client, there is usually a discussion about business structure.  The goal is to isolate the activities of the active business and the associated liability of the business from the other assets of the client in the event a business creditor obtains a financial judgment against the business and seeks to satisfy the judgment with assets of the business owner/judgment debtor. The goal is to limit the assets the judgment creditor can seize to satisfy the judgment to only those within the operating business.

This separation of assets from liabilities is accomplished with the use of two planning tools: limited liability companies (LLCs) and the use of trusts.

In the June issue of Marijuana Venture, we will address the scope and specifics of planning with LLCs and trusts for the I-502 business.

Attorney Hal Snow, of Garvey Schubert Barer Law, has 30 years of experience counseling business owners in the areas of asset protection planning, wealth transfer and transfer tax minimization.

 

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