Recreational Cannabis Startup Guide

Click to jump to a topic:

Where is recreational cannabis legal?
Marijuana industry revenue in 2021
Cannabis startups and investment activity
Difference between recreational and medicinal cannabis
Types of cannabis businesses
Map of U.S. states for state-specific info
How much does it cost to start a dispensary, grow operation, etc.?
How to start a dispensary, grow operation, or other cannabis business
Sample cannabis business plan
Get expert help

Where is recreational cannabis legal?

Recreational marijuana use is legal for those 21 and over in 16 states plus Washington, D.C., as of July 2021. Canada also legalized recreational marijuana use in 2018. Which states have legalized recreational cannabis? In alphabetical order, they are Alaska, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Washington D.C., and Washington state.

• Alaska: Adults can possess up to 1 ounce of flower, 7 grams of concentrate, or 5,600 milligrams of THC. People can grow marijuana at home. Businesses can grow and sell recreational marijuana and products, as long as they don't look like candy. Explore our Alaska cannabis startup guide
  
  
• Arizona: Arizona voters passed Proposition 207 in 2020 to legalize adult-use cannabis. Under the new law, people can possess up to one ounce of marijuana and up to 6 plants. Businesses can sell marijuana products as long as they don’t resemble food or drink brands that are marketed to children, or in the form of a human, animal, insect, fruit, or toy. Explore our Arizona cannabis startup guide


• California: Adults can possess up to 1 ounce of flower or 8 grams of concentrate. People can grow marijuana at home. Businesses can grow and sell any type of recreational marijuana and products. Explore our California cannabis startup guide


• Colorado: Adults can possess up to 1 ounce of flower or 8 grams of concentrate. People can grow marijuana at home. Businesses can grow and sell recreational marijuana and products, as long as edibles don't look like a fruit, animal, or human. Explore our Colorado cannabis startup guide
  
  
• Illinois: Adult-use cannabis was legalized in 2019, and the program launched in January 2020. Under the law, residents can possess up to 30 grams of cannabis. Home cultivation is limited to medical marijuana patients. There are no restrictions on the type of cannabis products that businesses can sell. Illinois cannabis startup guide


• Maine: Adults can possess up to 2.5 ounces of flower. People can grow up to three marijuana plants at home. There are no restrictions on the types of cannabis that can be sold, provided they do not appeal to children. Explore our Maine cannabis startup guide


• Massachusetts: Adults can possess up to 10 ounces at home and up to 1 ounce in public. Each individual can grow up to six marijuana plants at home, with a max of 12 plants per household. Businesses can grow and sell recreational marijuana and products, as long as they are under a certain THC concentration and aren’t shaped like a human, fruit, or animal. Explore our Massachusetts cannabis startup guide
  
  
• Michigan: Legal cannabis sales began in December 2019 after voters passed Proposal 1 in 2018. Residents can possess up to 2.5 ounces of cannabis outside their home and up to 10 ounces in their home. Home cultivation is allowed. There are no restrictions on the type of cannabis products that businesses can sell. Explore our Michigan cannabis startup guide
  
  
• Montana: Voters passed ballot initiatives to legalize cannabis in 2020, and the state has set January 2022 for the launch of legal cannabis sales. Home cultivation is allowed, but is limited to 2 plants per adult with a maximum of 4 plants per household. Explore our Montana cannabis startup guide
  


• Nevada: Adults can possess up to up to 1 ounce of flower or 1/8 of an ounce of concentrate, as long as it has 1,750 mg of THC or less. Residents can grow up to six marijuana plants at home, with a max of 12 plants per household, provided that there isn’t a state-licensed retailer within 25 miles of the home. Businesses can grow and sell recreational marijuana and products, if they don’t look like candy or appeal to kids. Explore our Nevada cannabis startup guide
  
  
• New Jersey: Voters approved a ballot referendum to legalize cannabis in November 2020. State officials are developing rules and regulations for the legal sale of marijuana and the program is expected to launch sometime in 2022. Explore our New Jersey cannabis startup guide
  
  
• New Mexico: The New Mexico legalized cannabis beginning in June 2021. Adults may possess up to 2 ounces of cannabis and grow as many as six plants in their home. State officials are currently developing the rules and regulations for the legal sale of cannabis, with the program expected to launch by April 2022. Explore our New Mexico cannabis startup guide
  
  
• New York: Cannabis became legal in New York in March 2021, and under the new law, adults may possess up to 3 ounces of cannabis and grow up to 3 mature plants at home. On Sept. 1, 2021, the New York State Senate approved Governor Hochul's nominees for key recreational cannabis oversight positions. This was the first step toward creating the the board that will oversee the Office of Cannabis Management, and will create the rules and regulations that govern the legal sale of cannabis. Once the board appointed, it will take up to a year to develop the rules and regulations that govern the program. Therefore, the current expectation is that legal sales of cannabis will not launch until late 2022 or 2023. Explore our New York cannabis startup guide
  


• Oregon: Adults can possess up to 8 ounces at home and up to 1 ounce in public, up to 16 ounces of solid product, up to 72 ounces of liquid product, up to 5 grams of extracts or concentrates, and up to 10 seeds. People can grow up to four marijuana plants per household. Businesses can grow and sell recreational marijuana and products, as long as edibles are under a certain THC concentration. Explore our Oregon cannabis startup guide


• Vermont: Adults can possess up to 1 ounce of flower. People can grow marijuana at home. Vermont's adult-use commercial program is still in development with sales likely to begin in October 2022. Explore our Vermont cannabis startup guide
  
  
• Virginia: Cannabis became legal in Virginia in July 2021, and adults can no possess up to 1 ounce of marijuana and up to four plants at their home. The state is developing the rules and regulations for the legal sale of cannabis products, with the program set to start no later than July 2024.


• Washington D.C.: Adults can possess up to 2 ounces of flower. People can grow up to six marijuana pla,nts at home, with a max of 12 plants per household. But businesses cannot grow or sell recreational marijuana or products. D.C. cannabis startup guide


• Washington state: Adults can possess up to 1 ounce of flower, 7 grams of concentrate, 16 ounces of solid infused product, or 72 ounces of infused liquid product. But people cannot grow marijuana at home. Businesses can grow and sell recreational marijuana and products. Washington cannabis startup guide

More states may follow suit in the near future. South Dakota passed a ballot measure in November 2020 to allow a medical marijuana industry in the state. Though the program was due to start in July 2021, the governor and legislative leaders have delayed the implementation of the program, and it is currently tied up in the courts.

States that could legalize cannabis within the next year include Connecticut, Delaware, Minnesota, and Rhode Island.

Marijuana industry revenue in 2021

Adult-use cannabis is booming. It is estimated that in 2020, despite retail limitations placed on stores due the COVID-19 pandemic, retail sales will surpass $10 billion. New legal marketplaces, led by populous states like New York, will ensure significant growth over the next several years; analysts expect the Compound Annual Growth Rate (CAGR) for retail cannibis to be nearly 20% in 2020-2025. That means the industry is likely to surpass $10 billion in 2023 and is likely to hit $25 billion in 2025.

Cannabis startups and investment activity

With sky-high growth expectations, it is no surprise that investment dollars are flowing into the cannabis industry. Much has been made of the consolidation in the industry to large, publicly traded companies, but while mergers and acquisitions are on the rise, the industry is still largely fragmented. As of 2020, there were 3,200 recreational cannabis retail licenses. Of those, just 293 (9%) were owned by the five largest publicly traded cannabis companies (Curaleaf, Green Thumb Industries, Harvest Health, Cresco Labs, MedMen, and Planet 13 Holdings).

Furthermore, states are increasingly adding social equity components to the licensing requirements, ensuring that majority owners would include those who have been historically disenfranchised by marijuana prohibition.

Difference between recreational and medicinal cannabis

Strains of cannabis vary. Types with more THC may be more commonly used recreationally, as they can induce relaxation and psychoactive effects, whereas cannabis strains that are higher in CBD are more commonly used to treat medical conditions. However, there is no official difference between recreational and medical marijuana. The product is the same; the only difference is how it is licensed and who can legally obtain it.

In states that have legalized recreational cannabis use, typically anyone 21 years old or older can use marijuana. Whereas in states where only medical marijuana is legal, patients often must have a physician-issued medical marijuana card to purchase it (specific rules vary by state). Some states have legalized recreational marijuana sale, while others like Vermont and Washington, D.C., have only legalized recreational marijuana consumption, resulting in a “gray market.”

While recreational cannabis use is only legal in 16 states plus D.C., medical marijuana use is legal in 35 states plus D.C. But the tide seems to be turning toward legalizing recreational use and skipping the medicinal step altogether. That simplifies access and is how Canada recently legalized cannabis.

Types of cannabis businesses

Interested in launching a recreational cannabis startup, but not sure which kind of company interests you most? Here are a few options (it’s important to note that each state’s rules and license types are different):

Dispensary: This is a retail storefront where anyone 21 and over can purchase marijuana. Typically, dispensaries must follow strict state-mandated protocols for product tracking, security, record-keeping, and hiring. (Each state’s rules are different.)

Marijuana cultivation: These businesses, also called grow operations, grow cannabis plants indoors or outdoors. Marijuana is then either sold through a dispensary or sold to a business that will create products with it, such as edibles or oils. Some cultivators are “vertically integrated,” meaning they grow, process, and sell cannabis to the public. Like dispensaries, grow operations also are required to keep thorough documentation, including water sources, smell abatement procedures, and so forth.

Product manufacturing: Cannabis manufacturers produce items like edibles, capsules, and oils, as well as everything from cannabis-infused soda to lotion. Manufacturers can distribute these products directly online and/or wholesale them to dispensaries and other distributors.

Delivery service: As of early 2021, the states where marijuana delivery is legal are Arizona, Arkansas, California, Colorado, Maine, Maryland, Massachusetts, Michigan, Nevada, New Mexico, New York, Oregon, Rhode Island and Vermont. . In those states, cannabis delivery services process online orders from consumers who are of age, then provide convenient at-home delivery once or on a recurring basis.

Testing facility: Consumers and regulators alike demand consistency and quality control in cannabis products, which creates demand for marijuana testing labs. These labs use methods like liquid or gas chromatography to analyze products for CBD and THC content, pesticides, terpenes, bacteria, fungi, and heavy metals, to name a few.

Ancillary business: If you don’t want to grow or sell cannabis, you still have plenty of options. You can create an app, payment processing service, advertising and branding agency, ad network, consulting firm, pest management product, automated plant watering system, security service, packaging and labeling service, or anything else you can think of.

Map of U.S. states for state-specific info

How much does it cost to start a dispensary, grow operation, etc.?

Costs to launch a marijuana business vary widely, depending on your state, the type of company, and additional factors. For example, a testing facility or cultivation facility will cost much more than a cannabis consulting firm or security service. And the application fee and licensing fees are much more expensive in some states than others. In Washington, it’s $1,480 to license a recreational cannabis company, whether it’s new or a renewal, whether it’s a dispensary or grow operation. Whereas in Oregon, the fee to license a recreational dispensary is $4,750. And in Massachusetts, it costs anywhere from $625 to $25,000 to license your recreational marijuana cultivation business, because the cost is based on square footage.

Needless to say, research your state’s particular fees and costs! In general, however, here are the costs you should factor in when budgeting for your cannabis company:

• Fees: You’ll probably have to pay a licensing and/or application fee, and potentially also fees for permits, and additional fees if you’re a cannabis cultivator. Some states have one fee for any kind of cannabis business, but others charge different fees based on whether you’re cultivating, selling, or testing cannabis.
• Start-up expenses: Almost every startup needs to budget for website and logo development, branding, software, and similar expenses. (Expenses are different from assets because you can’t return or resell them.)
• Assets: Physical purchases such as equipment, furniture, computers, signage, fixtures, security system, a safe, jars and display cabinets, etc.
• Working capital: These are the funds you need to run your startup (as opposed to startup capital, which are the funds that launch it). Working capital is especially important in your first few months, before you get established and when revenue is low. You should have enough working capital to fund operations for six to eight months. (You’ll know how much that is based on the financial projections in your business plan--see below.)
• Cannabis-specific expenses and assets: Again, based on which state and cannabis business type, you may have to purchase a high-tech security system, or pay for product testing. Like other fees, research these beforehand so you know what to expect.
• Business plan: It’s best to have a cannabis business plan, even if your state doesn’t require one as part of your application package. You can write it yourself, or budget to hire a consultant or a business plan firm like Masterplans.
• Legal expenses: An experienced cannabis attorney is so helpful. S/he can help you make sure your recreational marijuana business is fully compliant with state and local regulations--and help you avoid getting sued.

Here are two examples of real Masterplans clients who launched businesses in the recreational marijuana industry and their startup funds. In 2020, a recreational marijuana dispensary client of ours in Oregon was seeking a total of $171,000 in investment funding. That broke down into $60,000 for expenses (legal, consultants, grand opening party, website development, branding, and deposits for utilities, insurance, and lease); $93,000 for construction, electronics, and inventory; and $18,000 for working capital.

Another Masterplans client in Las Vegas, Nevada, launched a vertically-integrated cannabis company in 2020. They sought $7 million in investor funding: $4 million for a building, $2.3 million for lab and security equipment and build-out, $154,000 for expenses (legal, website development, and licensing), and $524,000 for working capital.

How to start a dispensary, grow operation, or other cannabis business

1. Do some preliminary research and planning

A little research before launching your cannabis company will save you a bunch of time. First, figure out if the market is already crowded with similar marijuana companies. (If you’re starting a brick-and-mortar business, look at local competitors; if you’re creating an app or other nationwide business, look at a regional or national market.)

If you’re launching a cultivation business or dispensary, your local area may have a cap on the maximum number of licenses allowed for that business type. (If your city only allows six dispensaries, and there are already six, you’re out of luck.) However, if there are available licenses, research the geographic areas you’re considering for your business to see if the area is already saturated. Note the locations of schools, as a cannabis business often must be a certain number of feet away from a school.

Even if your ideal area already has recreational cannabis companies similar to yours, that doesn’t mean you have to go elsewhere--read their online reviews or interviews with the founders to determine how your competitors are positioned in the market and whether customers like them. Try to determine their weaknesses so you have an idea of how your company can meet needs that aren’t being met. (For example, do customers complain online that there isn’t enough product variety, or that products are overpriced?)

After that, if you haven’t already, check your state and local fees to open a recreational cannabis company. That will help you determine if you can afford to start--and continue operating--your business. Look at both the initial fees and renewal fees; they should be on the website for your state’s Department of Health or health authority. (These sites typically end in .gov or .us.) In addition to an application fee and licensing fee, you might have to pay other fees like a background check or a fee for a marijuana tracking system. These fees can add up quickly.

Once you know whether you can afford the fees, choose which type of recreational cannabis business to start: grow operation, dispensary, testing lab, app, etc. Use your learnings from your competitor research and available licenses, as well as your professional and personal strengths. Then start brainstorming a long list of possible name ideas (this table can help). Some of them will be taken already, which you can find out with a quick google. (Also find out if the web domain and social media handles are available and whether your ideal name is already trademarked.) Your business name should be easy for potential customers to spell and remember. Decide on a business structure, such as LLC, S-corporation, or sole proprietorship. Finally, talk to an intellectual property lawyer, who will know if anyone has started to file trademark protection for the business name you want. You don’t want to waste money on business signs, a logo, business cards, and so forth if someone beat you to the name!

2. Develop a business plan

Some cities and/or states require a business plan as part of your application for a marijuana business license. But even if not, you still need one. It will give you invaluable insight into your company’s strengths and weaknesses, financial future, potential for success, and whether you need investors. It can help reveal things you weren’t aware of, like the annual disposable income of your target market — and that a slightly different part of town might be more lucrative. It’s a comprehensive deep-dive into not only your potential success but also potential problems that are much easier to correct before you launch!



Here’s what a recreational marijuana business plan should include:

• Product/service description: Will you run a dispensary, grow operation, testing lab, cannabis consulting firm, product manufacturer, or something else? What’s unique about your business? Be as specific as you can. If you’ll open a recreational marijuana dispensary, which strains of flower or whose manufactured products will you sell?
• Market research: If you’re opening a recreational dispensary, how many people live within five miles? If you’ll wholesale flower or edibles, how many dispensaries will you sell to? If you’re creating an app, who will be the user base, and why would they use your app instead of someone else’s? Use concrete numbers verified by a third party whenever possible (instead of estimates).
• Competitors: Who will you compete with, both directly and indirectly? What do they do well and poorly? What is their online reputation? How will you differentiate your company?
• Management team: Summarize your qualifications and those of others on your management team. (Think of it as a shorter, “greatest hits” version of your resume.) Obviously include cannabis industry experience, but it’s fine if you don’t have any. Highlight leadership skills, customer service, and business development experience in other industries.
• Financials: This part can be tricky. You need a five-year financial forecast, including projected annual revenue, operating expenses, costs, and net profit. Each year’s projected revenue should include not only revenue but also your margin and direct costs. You can forecast revenue by estimating how much product you think you’ll sell (based on market potential), your retail price, your production cost, and how much you’ll spend on payroll, rent, and other expenses. Your cash flow statement will show that you’ll have enough cash to stay operational. You might want to include a sensitivity analysis (best- and worst-case scenarios), which shows 15% higher and 15% lower revenue than your initial forecast. For marijuana cultivators, it’s important to do a sensitivity analysis based on future potentialities of the wholesale price per pound. You can also include a break-even analysis, showing which month you will be profitable.
• Requirements specific to your area/business type: Depending on which state you’re in, you may have to also include details about your security system, product tracking, secure product transport, manufacturing waste plan, and other aspects of your business.
• Investor proposal: If you are presenting your plan to investors, how are you valuing the shares? There’s a method to this, and it’s important to work with someone who can assess the current industry multiple and build a “realistic and attainable” financial model. You’ll also need to consult with your attorney to make sure you are within state and federal compliance. Sometimes, you’ll need your attorney to draw up an offering memorandum, often called a private placement memorandum (PPM). A PPM informs potential investors on the details of the investment vehicle (your company) and potential risks associated with the investment. Attorneys love it when you can present them a solid business plan to work from.

As you can see, a cannabis business plan should be highly specific to your location and business type, so a business plan template isn’t sufficient.

3. Register your business and apply for permits and licenses

Your secretary of state’s website should have a page where you can register your business. And uspto.gov, the U.S. Patent and Trademark Office’s website, is where you can trademark your company name and logo if you want. (Trademarking a slogan is harder, because it can’t be generic or informational; it must be tied to selling your product.)

Now you need local permission to operate from your state (and possibly city/county). Even if your state has legalized recreational marijuana sales, certain cities might not allow it. Apply for a cannabis business permit on your state’s (and/or city’s) official website.

Finally, you need a business bank account! Using your personal one can get you into trouble and make record-keeping difficult. Thankfully, about 400 financial institutions including banks and credit unions welcome cannabis companies, the largest being Partner Colorado Credit Union at time of writing.

4. Get funding

Unfortunately, small business loans guaranteed by the Small Business Administration (SBA) are not available for cannabis companies yet, because the SBA currently “prohibits banks from issuing SBA-backed loans to any company that has a direct business relationship with a cannabis or hemp business.” But you have plenty of other options:

• Bootstrap: self-fund or use donations from friends and family.
• Get a loan from a private company that serves the cannabis industry, such as Green Leaf Money, GoKapital, Dynamic Alternative Finance, Diamond Business Loans, or United Capital Source. Watch out for high interest rates, though.
• Use a cannabis-specific crowdfunding platform, such as Fundanna or CannaFundr.
• Pitch an investment firm focused on the cannabis industry, such as Snoop Dogg’s Casa Verde Capital, Privateer Holdings, or the network of cannabis angel investors, Canna Angels.

5. Meet employer obligations

If your marijuana business will employ people (it won’t be a sole proprietorship), register with the IRS to get your employer identification number (EIN). You’ll need an EIN to pay employment taxes and other business taxes. You may also need to register with your state’s employment department, in order to pay unemployment insurance.

6. Consider tax obligations and hire an accountant

Your business plan’s financial section should have included taxes, but just in case, consult with an accountant who’s familiar with the recreational cannabis industry to make sure. You’ll have to pay federal taxes, property taxes, income tax, and payroll tax. No one likes paying taxes, but you’ve gotta stay legal!

Need help starting a cannabis company?

Confused or overwhelmed yet? That’s normal. With such a highly regulated industry, and one with different rules in every state, starting a cannabis company can be very complex. Get help with your cannabis business plan from Masterplans, the industry leaders. We’ve worked with hundreds of cannabis entrepreneurs like yourself to create investor-ready documents and presentations so you can not only meet regulations but get the funding you need. Click below for your free, confidential consultation: