10 Legal Considerations When Starting a Hemp Business in North Carolina

Bradley Arant Boult Cummings LLP
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Bradley Arant Boult Cummings LLP

Now that North Carolina and federal laws provide for the legal cultivation of hemp, you want to start a hemp company. You have your big idea and a business plan ready, but you begin to wonder whether you should be thinking about any legal issues as you get your company off the ground. That’s where we come in.

Bradley’s Cannabis Industry team has a deep understanding of the many unique legal and business issues that impact hemp companies in North Carolina and beyond. Our multidisciplinary team of attorneys helps businesses successfully identify and mitigate risk and recognize opportunities for sustainable growth. In our experience, here are the 10 things to consider when starting a hemp business.

1. Establish a Corporate Entity to Operate Your Business.

Whether growing hemp or selling retail CBD, many entrepreneurs choose to establish a corporate entity such as a limited liability company to operate their budding business. We highly recommend doing so because the costs are relatively small, but the benefits are substantial – for you and for your business. In North Carolina, this process runs primarily through the North Carolina Secretary of State’s Office, and North Carolina law sets forth very specific requirements for new business formation and operation.

2. Obtain All Necessary Licenses to Conduct Your Business.

Hemp is a highly regulated industry, and thus licenses are essential. While necessary, the process in North Carolina to obtain a license is tricky at this time considering the North Carolina Industrial Hemp Pilot Program is set to expire at the end of October 2020. There will still be options after October 2020, but the process is more unclear, especially considering the NC Farm Bill of 2019-20 passed without the anticipated (and much needed) permanent state hemp regulations.

3. Obtain Funding for Your Business.

Even the best ideas cannot succeed unless they get off the ground. Sometimes the difference between success and failure is having access to capital, and more importantly, strategic capital. Raising capital in the hemp industry is a particular craft due to the numerous regulations, the changing laws, and the susceptibility of adverse agricultural conditions. Such factors call for a mastery of different skill sets in order for any hemp enterprise to obtain funding.

4. Prepare Contracts with Suppliers/Processors.

Unless your hemp company is fully vertically integrated, you will have contracts with other players in the hemp space. Whether you are a grower, processor, supplier, or retailer, your company needs thoughtful, well-negotiated contracts to survive in this competitive market.

5. Understand What the Law Allows for Hemp.

Even though hemp is now legal at the federal level, the hemp industry is still highly regulated by various levels of government. For example, the Food and Drug Administration prohibits the introduction of hemp and hemp-derived products (including, for example, CBD) into foods and beverages. Certain states and municipalities have their own hemp-specific rules and regulations.  For instance, in North Carolina there is a chance that smoke-able hemp may one day be deemed illegal, as this was almost the case with the NC Farm Bill of 2019-20.

Don’t get tripped up over the rules of the road. 

6. Protect Your Intellectual Property.

For many companies, their most valuable asset is their intellectual property. Without a trademark, your clever name and tag line are there for the taking. Invented a novel way to process hemp? A patent may be the appropriate strategic choice for your company.

7. Establish a Banking Relationship.

Many hemp companies are surprised to learn that many banks will not provide services to cannabis-related businesses, including hemp companies, due to the potential for hemp products to contain too much THC – and thus be illegal. Operating a business without the ability to utilize and offer banking services is a recipe for failure.

8. Establish an Accounting Relationship and Understand Hemp’s Tax Treatment.

Let’s face it, you don’t want to handle complicated tax questions. But in a highly regulated industry, that’s exactly what you can expect. Let our tax professionals do their part while you focus on growing your business.

9. Understand Employment Laws.

A company is only as good as its employees. It is critical to comply strictly with the employment laws of each jurisdiction where your business operates. This is one place where it definitely does not pay to be penny-wise, pound foolish. Get it right on the front end. Like most states, North Carolina law prescribes a variety of requirements that employers must meet related to issues such as wages, health inspections, and employee benefits.

10. Get the Right Insurance.

All businesses should have appropriate insurance coverage and surety bonds, but hemp companies will quickly realize that not all insurance or surety companies will write hemp insurance policies or issue bonds. And in the event of a claim, the hemp company may learn that many hemp claims are denied for various reasons. Don’t find yourself facing a loss without insurance coverage such as the newly announced Whole-Farm Revenue Protection available from the U.S. Department of Agriculture for North Carolina-licensed farmers who grow hemp for fiber, flower or seed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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