The U.S. cannabis industry reached $30 billion in sales in 2022, with projections showing it could hit $58 billion by 2030. Despite this explosive growth, launching a cannabis business isn’t as simple as opening a typical retail store or service company. You’re entering a highly regulated industry where federal prohibition creates unique challenges around banking, taxes, and compliance.
This guide walks you through the eight essential steps to start a cannabis business, from understanding complex regulations to opening your doors. We’ll focus on building a foundation that keeps you compliant while positioning your business for long-term success.
Table of Contents
- How to Start a Cannabis Business: 8 Steps To Follow
- Research State & Local Laws
- Choose Your Business Model
- Draft a Compliant Business Plan
- Secure Funding & Banking
- Apply for Licenses & Permits
- Find a Location & Meet Zoning Rules
- Build Operations & Hire Your Team
- Launch, Market, and Stay Compliant
- Common Challenges When Opening a Cannabis Business
- FAQs
Key Takeaways
- Cannabis sales are projected to grow 136% by 2030, creating substantial business opportunities.
- Secure your legal foundation first, then pursue funding with a compliance-focused plan.
- Obtain proper licensing and verify zoning requirements before signing any property agreements.
- Partner with cannabis-experienced accountants, lawyers, and payroll providers from day one.
How to Start a Cannabis Business Legally: 8 Steps To Follow
1. Research State & Local Laws
Cannabis remains federally illegal as a Schedule I controlled substance, but states have created their own regulatory frameworks. This creates a complex legal environment where you must understand multiple layers of compliance.
Start by researching your state’s cannabis laws and regulations. Each state has different:
- License types and availability
- Application processes and timelines
- Ownership restrictions
- Residency requirements
- Criminal background check policies
- Capital requirements
Don’t stop at state laws. Local municipalities often have additional regulations that can be even more restrictive. Some cities and counties ban cannabis businesses entirely, while others limit the number of licenses or impose strict zoning requirements.
Contact your state’s cannabis regulatory agency and local government offices to get the most current information. Regulations change frequently, so staying informed is crucial.
2. Choose Your Business Model
The cannabis industry offers various business models, each with different startup costs, regulatory requirements, and profit potential.
Cultivation (Growing)
- Requires significant capital investment
- Needs specialized agricultural knowledge
- Can be indoor, outdoor, or greenhouse
- Typically has higher barriers to entry
- Subject to strict testing and tracking requirements
Manufacturing/Processing
- Creates products from raw cannabis
- Includes extraction, edibles, topicals, etc.
- Requires specialized equipment and facilities
- Subject to food safety regulations (for edibles)
- Often needs significant technical expertise
Retail (Dispensary)
- Direct consumer sales
- Requires prime real estate locations
- Needs strong security protocols
- Customer service focused
- Typically has the most visible public presence
Distribution/Transport
- Moves products between licensed businesses
- Lower capital requirements than cultivation or retail
- Requires secure vehicles and protocols
- Subject to strict inventory tracking
Testing Labs
- Tests products for potency and contaminants
- Requires scientific expertise and equipment
- Essential part of the compliance ecosystem
- Often has less competition than other sectors
Ancillary Services
- Doesn’t touch the plant (lower regulatory burden)
- Includes software, packaging, consulting, etc.
- Often easier to obtain traditional financing
- Can serve multiple cannabis businesses
Consider your skills, interests, and resources when choosing a model. Many successful cannabis entrepreneurs start with one license type and expand vertically as they grow.
3. Draft a Compliant Business Plan
A solid business plan is essential for any startup, but cannabis businesses need extra attention to compliance details. Your plan should include:
Executive Summary: Concisely explain your business concept, target market, competitive advantage, and financial highlights.
Market Analysis: Research your local cannabis market, including customer demographics, competitors, and growth projections.
Company Structure: Detail your legal structure (LLC, corporation, etc.), ownership team, and how you’ll meet state ownership requirements.
Compliance Strategy: Outline how you’ll meet all regulatory requirements, including:
- Seed-to-sale tracking
- Security protocols
- Age verification
- Product testing
- Inventory management
- Record keeping
Operations Plan: Describe your day-to-day operations, supply chain, quality control, and staffing needs.
Financial Projections: Create realistic 3-5 year projections that account for:
- High startup costs
- Tax limitations due to IRS Code §280E
- Banking challenges
- Competitive pricing pressures
- Changing regulatory costs
Funding Strategy: Explain how you’ll fund your business, including owner investments, loans, or equity partners.
Your business plan serves two crucial purposes: guiding your business decisions and convincing investors or lenders to fund your venture. Have cannabis-experienced attorneys and accountants review your plan before sharing it with potential investors.
4. Secure Funding & Banking
Cannabis businesses face unique funding challenges due to federal prohibition. Traditional bank loans, SBA funding, and institutional investors are typically unavailable.
Common Funding Sources:
- Personal savings
- Friends and family investments
- Angel investors with cannabis experience
- Cannabis-focused venture capital firms
- Private loans (often with higher interest rates)
- Real estate sale-leasebacks
- Equipment leasing
Expect to need substantial capital. A small dispensary can require $250,000-$500,000 to launch, while cultivation facilities often need $1-5 million or more.
Banking Challenges:
Finding a bank that serves cannabis businesses is difficult but essential. Operating in cash creates security risks and complicates tax payments and payroll.
Look for:
- State-chartered banks or credit unions with cannabis programs
- Specialized cannabis banking services
- Payment processing alternatives
When approaching banks, bring your complete business plan, compliance protocols, and transparent ownership information. Be prepared to pay higher fees than traditional businesses, as banks incur additional compliance costs to serve the cannabis industry.
5. Apply for Licenses & Permits
The cannabis licensing process varies by state but typically involves extensive paperwork, background checks, and fees.
Common License Application Requirements:
- Detailed business plan
- Financial statements and funding proof
- Background checks for all owners
- Facility plans and security protocols
- Local approval or conditional use permits
- Social equity qualifications (in some states)
- Environmental impact plans
- Community benefit proposals
License application fees range from a few thousand dollars to over $100,000 depending on the state and license type. Annual renewal fees are also substantial.
Many states have limited license availability, creating competitive application processes. Some use merit-based scoring, while others use lotteries for qualified applicants.
Beyond cannabis-specific licenses, you’ll need standard business permits:
- Business license
- Employer Identification Number (EIN)
- Sales tax permit
- Occupational licenses
- Building permits
- Fire department approvals
- Health department permits (for edibles)
Start the application process early; it can take 6-18 months to receive approvals in many states.
6. Find a Location & Meet Zoning Rules
Location restrictions are among the most challenging aspects of opening a cannabis business. Most jurisdictions have buffer zones prohibiting cannabis businesses near:
- Schools
- Daycare centers
- Parks
- Churches
- Substance abuse treatment facilities
- Other cannabis businesses
These buffer zones (typically 500-1,000 feet) severely limit available properties, especially in urban areas.
When searching for a location:
- Get zoning verification from local authorities before signing any lease or purchase agreement
- Check if the landlord allows cannabis businesses (many don’t)
- Ensure the property meets security requirements
- Verify adequate utilities for your needs (especially for cultivation)
- Consider accessibility for customers or distribution
- Plan for growth and expansion
Many cannabis entrepreneurs secure location options with contingency clauses that depend on license approval. This prevents paying rent during the lengthy application process but gives you a secured location if approved.
7. Build Operations & Hire Your Team
With licenses secured and location ready, it’s time to build your operational infrastructure.
Key Operational Systems:
- Seed-to-sale tracking software
- Point-of-sale systems
- Security systems (cameras, alarms, access control)
- Inventory management
- Compliance documentation
- Financial controls
- HR and payroll systems
Hiring Considerations:
Cannabis businesses need specialized staff. Key positions include:
- Compliance manager
- Security personnel
- Budtenders/retail staff
- Cultivation experts (for grows)
- Extraction technicians (for manufacturing)
- Inventory specialists
- Administrative support
When hiring:
- Conduct background checks as required by regulations
- Verify age requirements (typically 21+)
- Provide thorough compliance training
- Develop clear standard operating procedures
- Consider using specialized cannabis payroll services that understand the industry’s unique requirements
Your payroll and HR systems need special attention due to banking restrictions and tax complications. Platforms like Hybrid Payroll’s cannabis payroll software can help navigate these challenges with features designed for the industry’s unique needs.
8. Launch, Market, and Stay Compliant
With everything in place, you’re ready to launch. But success requires ongoing attention to compliance and marketing within regulatory constraints.
Compliance Maintenance:
- Regular staff training
- Updated standard operating procedures
- Internal audits
- Meticulous record-keeping
- Staying current on regulatory changes
- Proper waste disposal
- Product testing protocols
Marketing Within Regulations:
Cannabis marketing faces strict limitations. Most states prohibit:
- Marketing to minors
- False medical claims
- Public advertising (billboards, transit ads, etc.)
- Social media promotions (platform policies)
- Giveaways or samples
Focus your marketing on:
- Educational content
- Community involvement
- Customer loyalty programs
- In-store promotions
- SEO and organic website traffic
- Industry partnerships
- Compliance as a selling point
The most successful cannabis businesses build their reputation on quality, consistency, and strict adherence to regulations. This creates customer trust and reduces regulatory risks.
Common Challenges When Opening a Cannabis Business
Banking Restrictions
Most national banks won’t serve cannabis businesses due to federal prohibition. This creates problems with everything from deposits to loans to merchant services.
Solution: Work with state-chartered banks or credit unions that have cannabis programs. Be transparent about your business, maintain meticulous records, and expect higher fees. Consider cannabis-specific financial service providers who understand the industry’s unique challenges.
Tax Burden (IRS Code §280E)
Section 280E of the Internal Revenue Code prevents businesses selling federally illegal substances from deducting ordinary business expenses. This can result in effective tax rates of 40-70%.
Solution: Work with a cannabis-experienced CPA to implement proper accounting strategies. This includes carefully tracking and categorizing costs of goods sold (which are deductible) versus selling and administrative expenses (which aren’t). Consider structuring separate entities for different business functions when appropriate.
Changing Regulations
Cannabis regulations change constantly as states refine their programs. What’s compliant today may not be tomorrow.
Solution: Join industry associations to stay informed about regulatory changes. Build relationships with regulators and attend public meetings. Create flexible systems that can adapt to new requirements, and budget for compliance updates.
Security Concerns
Cash-heavy operations and valuable inventory make cannabis businesses targets for theft.
Solution: Invest in comprehensive security systems including cameras, alarms, safes, and access controls. Develop strict cash handling procedures, use cash management services when possible, and train staff on security protocols. Consider hiring professional security personnel for high-risk locations.
Hiring Challenges
Finding qualified staff who understand cannabis and can pass background checks can be difficult in a rapidly growing industry.
Solution: Create thorough training programs to develop talent internally. Partner with cannabis education programs and industry groups for recruitment. Offer competitive compensation and growth opportunities to attract and retain quality employees.
Supply Chain Instability
Cannabis supply chains face disruptions from crop failures, testing delays, and regulatory holds.
Solution: Develop relationships with multiple suppliers, maintain larger inventory buffers when possible, and create contingency plans for supply disruptions. Vertical integration (controlling multiple points in the supply chain) can also reduce these risks.
Limited Access to Capital
Traditional funding sources are largely unavailable, making growth and expansion challenging.
Solution: Build a track record of compliance and profitability to attract cannabis-focused investors. Consider alternative funding structures like sale-leasebacks for real estate or equipment leasing. Reinvest profits strategically and grow at a sustainable pace.
FAQs
How much does it cost to start a cannabis business?
Startup costs vary widely by business type and location. Retail dispensaries typically require $250,000-$750,000, cultivation facilities $1-5 million, and manufacturing operations $500,000-$2 million. These figures include licensing fees, real estate, equipment, inventory, and operating capital for the first few months.
How long does it take to get a cannabis business license?
The timeline varies dramatically by state. In established markets with open licensing, you may receive approval in 3-6 months. In competitive limited-license states, the process can take 12-18 months or longer. Factor this timeline into your planning and financial projections.
What’s the most profitable type of cannabis business?
Profitability varies based on market conditions, competition, and operational efficiency. Cultivation can generate high revenues but requires substantial capital investment. Retail typically has better margins but faces more competition. Ancillary businesses often have lower regulatory burdens and better access to banking and investment. The most successful businesses often integrate multiple license types for vertical integration.
How do I handle payroll for a cannabis business?
Cannabis businesses face unique payroll challenges due to banking restrictions and tax complications. Use a payroll provider with cannabis industry experience who understands these issues. Services like Hybrid Payroll offer specialized solutions for cannabis businesses, including cash payroll options, tax compliance support, and HR services designed for the industry’s unique needs.
