Let the Cannabis Team be the first to tell you that after five years of unabashed gamesmanship trying to portray medical marijuana dispensaries as “nonprofits” while their affiliates were reaping the profits, the Massachusetts Secretary of State of the Commonwealth (the “SoS”) and the Massachusetts Department of Public Health (the “DPH”) have taken the first steps required by Section 72 of Chapter 55 of the Massachusetts Acts of 2017, “An Act To Ensure Safe Access To Marijuana” (the “ACT”) to allow the growing and providing of marijuana by for-profit business entities in Massachusetts.
For Current Licensees and Applicants: The SoS has announced that the form needed to convert existing nonprofit corporations into for-profit MASSACHUSETTS BUSINESS CORPORATIONS, as required by the ACT, is available, requiring only that the DPH “certify” that the nonprofit corporation converting is an existing applicant or licensee. On October 3, the DPH announced that it had established the process for obtaining that conversion certification.
Unfortunately, this is half a glass. While it is a real advantage for applicants to avoid nonprofit status, it remains limiting and unnecessary to require the for-profit entity be a corporation and have no option to convert into limited liability companies, partnerships, or other entities. In our view, the statute does and is intended to permit conversion to all entities. We have spoken with counsel to the Secretary of State on repeated occasions and do not believe that this restricted interpretation is necessary or appropriate. Section 72 of the Act “entitles” a nonprofit:
“to convert from a nonprofit corporation organized under chapter 180 of the General Laws into (i) a domestic business corporation or (ii) a ‘domestic other entity’ pursuant to chapter 156 of the General Laws, or (iii) any ‘other such domestic business entity’ as permitted by the General Laws, by adopting a plan of entity conversion in accordance with section 9.51 of chapter 156D of the General Laws.”
[Emphasis added, including the internal quotation marks and numbering, to make the phrasing easier.]
This unnecessary limitation deprives licensees and applicants of an easy conversion to an alternative that may offer significant tax, investor, or management advantages.
For New Applications Only: On October 3, the DPH also announced that effective immediately, it is accepting applications for medical marijuana facilities from Domestic Business Corporations, but only Domestic Business Corporations — not limited liability companies, partnerships, or other entities. Again, we see nothing that requires the limitation or any distinction between business corporations or other entities.
We are aware of and expect to contribute to current discussions to seek corrective legislation for these and other noncontroversial uncertainties
What Should You Do?
First, it is clear that EVERY nonprofit should convert sooner or later. Otherwise, the entity will remain a nonprofit, will continue to be subject to M.G.L. Ch. 180 and the Attorney General’s Office, will remain subject to the provisions in its Articles of Organization that require it to be run as a nonprofit, and may continue to be subject to review for payments of excess compensation, etc.
That decision is the easy one. The more important and difficult issue is how to structure the resulting entity. If the choice is to be a business corporation, that can and should be done now. If you decide that the choice is to be limited liability company or other entity, the choices are multiple: i) you might wait; ii) you could plan a two-step conversion by converting to a corporation first and then converting again to the other entity type when the DPH permits (the costs and filing fees for a second conversion should be nominal); or iii) you could merge into an affiliate: the SoS has no objection to this approach, but the DPH has not addressed converting into other entities, and certainly not merging into other entities — yet. We do expect the DPH, or the Cannabis Control Commission, when it succeeds to the role of the DPH, to offer that flexibility.
A simple conversion, without more, will result in a business corporation with no shareholders or other owners. A decision whether to issue stock, convert into another entity, merge with a management company or other entity, choose a different path, or do nothing at all must include consideration of a multitude of decision points and questions regarding the tax implications:
Because our Cannabis Team includes our most experienced corporate and tax attorneys, we are uniquely suited to assist you in the decision-making process. We also work closely with area accounting firms that will be available to assist with deciphering the tax and economic impact of these decisions and with obtaining appraisals, if needed. If you have any questions about the information presented here, or wish to speak to the Cannabis Team, please contact John Bradley, the co-chair of the Team and the author of this alert, at 617.456.8076 or firstname.lastname@example.org.
The Cannabis Team publishes alerts like this from time to time as news warrants. We are also sponsoring a continuing series of roundtable discussions with various speakers of note and interest, so please be on the lookout for future invitations.