Cannabis Business in California

California Cannabis Industry Overview

The California cannabis industry generates $4 to $5 billion annually. Of that, Medical marijuana accounts for just $293 million. In 2023, medical cannabis sales accounted for around 6% of the cannabis market in California. As of 2024, there were only around 3 thousand medical marijuana patients in California.

Cannabis businesses in California must navigate a dual-layer regulatory system, with rules set by both the state and local governments. While cannabis use is legal statewide, the ability to establish a cannabis business varies by city and county, creating a patchwork of regulations.

• Local Control: Cities and counties have the authority to license or prohibit cannabis businesses. As of 2024, 46% of California’s localities allowed at least one type of cannabis business, while 54% prohibited all. Retail cannabis businesses faced even more restrictions, with 57% of cities and counties banning retail operations.
• State Licensing: The state of California issues licenses based on specific activities, including cultivation, manufacturing, testing, distribution, retail, and microbusinesses.
• City and County Regulations: Each locality sets its own rules, which can vary between cities and counties. Counties regulate cannabis businesses in unincorporated areas, while incorporated cities establish their own rules, which may differ from those of the surrounding county. Some areas limited the number of licenses issued, contributing to only 4.5 retail licenses per 100,000 people statewide as of July 2022.

This dual regulatory structure makes it essential for cannabis businesses to understand both state laws and local restrictions before operating.

Types of Cannabis Businesses in California

Cannabis businesses in California can be broadly categorized into Cannabis-Touching and Cannabis-Adjacent entities, each with distinct regulations and operational characteristics.

Cannabis-Touching Businesses

These businesses are directly involved in the cultivation, production, and sale of cannabis products:

• Cultivators: Nearly 5,000 licensed cultivators engage in the growing of cannabis plants in California, both indoors and outdoors, focusing on various strains and cultivation techniques.
• Processors: Convert raw cannabis into a variety of products, including oils, edibles, concentrates, and topicals. As of 2024, there were around 142 active processors.
• Dispensaries and Retail Stores: Over 1,100 retail establishments across California sell cannabis products directly to consumers, adhering to strict state regulations.
• Distributors and Supply Chain Managers: Oversee the logistics of transporting cannabis products, ensuring compliance with state tracking systems. Over 1,200 California companies are involved in distribution and transportation of cannabis.
• Testing Labs: The 27 licensed labs conduct rigorous testing to ensure the quality and safety of cannabis products.

Cannabis-Adjacent Businesses

These businesses provide essential support services to the cannabis industry without directly handling the plant:

• Marijuana Event Organizer: Allows individuals or businesses to legally organize cannabis events in California where the sale and consumption of cannabis are permitted.
• Legal Services and Regulatory Compliance: Assist businesses in adhering to the complex cannabis laws and regulations.
• Consulting and Management Services: Offer expertise in compliance, licensing, and market strategy.
• Technology Providers: Supply vital tools like seed-to-sale tracking systems, POS systems, and security solutions.
• Marketing and Branding Firms: Develop and promote cannabis brands within the legal framework.
• Accounting and Financial Services: Help cannabis businesses navigate financial and regulatory challenges, particularly IRS Section 280E.
• Banking and Payment Processing: Provide essential financial services, addressing the challenges posed by federal banking restrictions.
• Insurance Providers: Offer coverage for cannabis-related operations, including plants, facilities, staff, and liabilities.
• Packaging and Labeling Companies: Ensure cannabis products meet regulatory packaging and labeling requirements.
• Data Analytics Firms: Optimize business operations and compliance through data analysis.
• Advocacy Organizations: Represent the interests of the cannabis industry in legislative matters.

Key Differences Between Cannabis-Touching and Non-Touching Businesses and How It Affects The Business

Before getting into the cannabis industry, it is important to understand how the type of a chosen business will affect the structure of the business and the type of ancillary service providers you will need to involve, to smoothly run the operations. Here are a few examples of when specialized ancillary services need to be involved:

• Banking: Access to financial services like checking accounts, credit cards, and loans remains challenging for cannabis businesses due to federal restrictions. Cannabis is illegal under federal law, and financial institutions must monitor and report certain information. While Cannabis-Touching businesses face significant banking limitations, a program from California’s Department of Cannabis Control (DCC) offers a potential solution. Businesses can authorize DCC to share specific application and compliance information with financial institutions, potentially easing access to banking services. This optional program does not share criminal background or personal owner information.
  • Cannabis-Touching Businesses: Face significant banking restrictions, often operating primarily in cash
  • Cannabis-Adjacent Businesses: Enjoy broader access to financial services, including loans and credit lines.

Find a cannabis bank in California

• Accounting: The cannabis industry in California is subject to strict accounting regulations, particularly for businesses directly involved with the plant. Under IRS Section 280E, Cannabis-Touching businesses in California cannot deduct many of the typical business expenses, making accounting complex and limiting profitability. However, Cannabis-Adjacent businesses can follow standard accounting practices without these limitations.

  • Cannabis-Touching Businesses: Must comply with IRS Section 280E, limiting tax deductions and increasing accounting complexity.
  • Cannabis-Adjacent Businesses: Can claim standard business deductions, resulting in simpler accounting practices.

  Find a cannabis CPA in California

• State Laws: Cannabis businesses in California face distinct regulations at both the state and local levels. While the state issues licenses based on the type of cannabis activity (e.g., cultivation, retail), cities and counties can decide whether to allow or prohibit these businesses. In fact, 54% of localities ban all cannabis operations, creating a complex regulatory landscape. Local rules vary between counties and incorporated cities, with some areas limiting the number of licenses issued.

  • Cannabis-Touching Businesses: Require specific state licenses and are subject to rigorous regulations.
  • Cannabis-Adjacent Businesses: Need general business licenses and face fewer regulatory hurdles.

  Find a legal compliance cannabis consultant in California

• Insurance: Cannabis businesses in California face unique challenges when securing insurance coverage due to the federally illegal status of cannabis. Comprehensive insurance is crucial for protecting the business, employees, and products. According to the Department of Cannabis Control, a distributor licensee must always carry and maintain commercial general liability insurance. Cannabis-specific insurance policies cover everything from crop loss and equipment damage to liability and worker's compensation. Working with an insurance provider experienced in the cannabis industry ensures that businesses meet both state requirements and industry needs.

  • Cannabis-Touching Businesses: These businesses need specialized insurance to cover risks associated with cultivation, production, and retail. This includes coverage for crops, product liability, and facility protection.
  • Cannabis-Adjacent Businesses: While these businesses do not handle the plant directly, they still require coverage for their operations, such as professional liability and property insurance, but without the specific cannabis-related risks.

Find a cannabis insurance carrier in California