ESOPs Can Neutralize 280E for Cannabis Businesses

ESOP

Employee Stock Ownership Plans (ESOPs) can be great for businesses and their employees. Not only do ESOPs offer various tax benefits for all parties involved, but they also encourage employees to be successful, since they can reap financial benefits from company growth. 

Cannabis businesses can especially benefit from ESOPs. At its core, this plan creates an employee-owned company that is not subject to federal tax. Leadership ultimately still maintains control of the organization, while generating additional cash and overcoming the infamous hurdle of 280E, as stated in Cannabis Business Executive.

Goodbye 280E

The most important incentive is that any cannabis company owned 100% by an ESOP pays zero federal tax, zero state tax and zero UBIT. With no exposure to federal taxes, 280E restrictions are neutralized.

“One advantage of an ESOP is that if a company is owned 100% by the ESOP, the company pays zero federal income tax and zero state income tax and zero unrelated business income tax. If you pay zero taxes, deductions do not matter at all. They become completely irrelevant. Hence 280E is completely neutralized,” explains MBO Ventures’ Managing Partner Darren Gleeman.

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Bringing ESOPs to the Cannabis Industry

While these plans are widely used by companies in a variety of industries, the cannabis sector has yet to catch on. Until now. 

MBO Ventures just completed the first-ever Cannabis ESOP. Through its patent-pending ESOP methodology, the company has successfully neutralized the impact of 280E for three cannabis firms, one of them being Theory Wellness, a multi-state operator.

“I am thrilled to announce the successful completion of the first-ever Cannabis ESOP by MBO Ventures,” says Gleeman. “This achievement not only marks a milestone for our firm, but also demonstrates the potential of ESOPs in revolutionizing the financial landscape for cannabis businesses. By neutralizing the impact of 280E, we empower plant-touching operators to thrive and contribute to the industry’s growth.”

Through this ESOP structure, MBO Ventures can now provide a viable solution for cannabis businesses to navigate the challenges posed by 280E, enabling them to optimize financial performance and pave the way for sustainable growth while financially empowering their employees.

What Goes Into Setting Up an ESOP?

Gleeman has a whole process in place when helping cannabis companies set up their ESOP — the first step involving a full analysis of the company. They then lay out a roadmap for the owners and give them the following information:

  • The value of the company
  • How much tax will be saved with an ESOP
  • How much tax they will have to pay without an ESOP
  • How much money the employee/owners can look to receive in five and 10 years
  • How much money the owners will receive
  • How much debt (if any) will be raised
  • How many warrants will be given to the owner

“Once the analysis is complete, the shareholders can choose to go through the process or not,” Gleeman notes. “It’s up to them. If they say yes, it takes about six months to get it done.”

While operating on an income tax free basis works for any sized company, Gleeman suggests that it doesn’t make sense to do an ESOP until a business’s net income before taxes (or EBITDA) is at least $2 million to $2.5 million and they have at least 20 employees.

The Vesting Period

If a company starts an ESOP today, there is a vesting period of usually about five years, according to Gleeman. The vesting period is the schedule over which you gain ownership of various benefits. So if a business starts this year, next year they become 20% vested, then 40% the year after, and so on. 

“Though the vesting period is five years, stock allocation is longer,” says Gleeman. “This allows future employees to partake in the ESOP as well.”

Once an ESOP is in place, the company will begin to see retention of employees skyrocket. According to Gleeman, studies show that retention is 300% greater than non-ESOP owned companies. Productivity in ESOP owned companies is also much higher than non-ESOP owned companies. 

As the cannabis industry continues to move forward, it only makes sense to boost success with ESOP structures.