On November 7, 2012, Massachusetts voters approved a measure to legalize medical marijuana. At that time, Massachusetts law required Registered Marijuana Dispensaries (RMDs) to form and operate as nonprofit corporations pursuant to Massachusetts General Law (M.G.L.) .c.180. In addition, M.G.L. c.180 had strict compliance requirements relating to transactions between RMDs, management companies, real estate companies, and the RMD board of directors. Compensation of employees and revenue sharing arrangements were also subject to these compliance requirements. A typical operating structure with an RMD is the creation of a for- profit service company that provided management and consulting services to the RMD in exchange for a fee. The owners of the for-profit company are generally the same parties that provided initial funding to the RMD. These operating arrangements were subject to the approval of the Massachusetts Department of Public Health (“DPH”).
In October 2017, the DPH released its guidance document outlining the steps by which a nonprofit RMD may convert to a for-profit entity. The guidance provides a straight-forward process to follow in order to complete the required paperwork with the Secretary of State’s Office. The change in the law is great news for investors who want to simplify their operating structure and have a definitive ownership structure. Please be advised that the conversion of a nonprofit to a for-profit entity could result in unintended tax consequences upon the issuance of stock to the new shareholders. Because of this, it is extremely important that the investors, the nonprofit RMD and other related parties seek the advice from a knowledgeable CPA firm that has experience in assisting organizations through these very complex issues in order to avoid any unnecessary tax consequences.
If you have any questions, please contact Cory Parnell, Chief Operating Officer of Bridge West LLC at firstname.lastname@example.org for additional information.