Hi, guys. I just want to post an update.
I've had a rare falling out with my brother a few days ago, when we spoke on the phone. He was going on and on, trying to convince me how this cannabis business can't lose, and how everyone on MMM are "squares" that are "too dumb" for this business and giving me bad advice. I countered that not everyone on MMM can be wrong, especially since some of them are actually in the cannabis business. Long story short, I ended up offending him, when I accused him of being "simple-minded" and lacking the ability to see pitfalls. We hung up on each other and haven't spoken since.
At this point, I'm virtually sure that I won't get into this business. But, I still feel that I have to do my due diligence, just so no one can accuse me of being fickle (after all, I did make several trips to Massachusetts to look at properties, so my brother had high hopes that I was being serious).
I compiled a list of questions, which I'll show my brother once we start talking again (mind you, we haven't had a fallout in years, and this is the longest time we haven't spoken to each other in memory). Here's what I came up with (I'll probably think of more questions as time goes by):
(1) How are we going to avoid the damage that 280E will inflict on our profits?
My brother actually forwarded this question to the manager (Jeff) and got this response verbatim:
280E is for deducting business expenses from your revenue. You could pay 100% of the revenue as income tax. A good CPA and lawyer will set it up so we don't get hit quite that hard. So if the business makes $1,000,000 you pay your portion of the business as income tax. So at 70% you will pay on 700k even though profits were only 400k so 70% is 280k as income. Big difference.
Hmm. Not sure I follow, but I guess he's trying to say that we can wiggle our way out of onerous federal taxes using a good tax accountant. Does he know this for a fact? Has this been done before, or is he just speculating?
Anyway, here are the other questions and comments (which haven't been answered yet):
(2) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.
(3) My 401(k) investment company can drop me because I'm violating federal law. I can be forced to liquidate my assets, thus incurring a 10% early withdrawal fee in addition to a 35% income tax on the lump sum. What do you say to this?
(4) I am probably prohibited from participating in a cannabis business by my NY state civil service job. Yet, I can't ask my employer if this is the case, because then they'll have their eye on me.
(5) I know that Jeff (the manager) runs a real estate business, but has he ever been in the cannabis business? What qualifies him to run one?
(6) Jay and Jeff (grower & manager) are going to be part owners of the property, even though they didn't contribute capital. How do we prevent this?
(7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?
(8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after cannabis?
(9) How can my parents contribute money to this business without being legally involved and without tax consequences?
(10) How on earth will I pay Jay and my brother (who have felonies)? In cash?
(11) Who are the financial institutions that will take our money? Also, if they are not federally insured, who are they insured by?
(12) What happens when Jay and Jeff decide to bail? I know nothing about running a pot business.
(13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?
(14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop our grower and/or manager to jump ship to a competitor, who will pay them more?
(15) What if we lose a crop? We don't have the money to ride the storm out.
(16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?
(17) Where is our detailed start-up budget and cost-of-sales projection?
(18) What is our specific strategy for achieving efficient regulatory compliance?
(19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?
(19) Assuming we find these reliable markets and distribution channels, how will they pay us? In cash?
(20) I don't like that we're entering into a contract that limits our ability to terminate or change the compensation of our manager and grower.
(21) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just those who have contributed capital (my parents and I)?
(22) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?
(23) Is it true that we will not only be liable for federal taxes (with limited deductions), but for Massachusetts AND NY state taxes as well (because I'm a resident)?
(24) Are you sure that we are not underestimating the amount of money we're going to need to get this operation off the ground and keep it afloat?
(25) What if the grower and/or manager get injured or even kidnapped on the property? How liable am I?