Structure Isn’t About Doing Things “Right” — It’s About Creating Room to Grow

For example, the owners who self-financed a company’s first location may need an outside investor to open its third. Bringing that investor in requires agreement on how returns and control will be shared. The founders need to establish which terms their current structure permits and whether the proposed arrangement would leave enough cash to support the expansion. Their financial reports must also give both sides a sound basis for assessing what the investment could deliver.

Working through that possibility before negotiations begin gives owners time to identify restrictions and prepare any necessary changes. They can then approach a financing opportunity knowing what their business can accommodate and what adapting it would cost, with time to weigh those costs against the proposed expansion.

Start with the kind of capital you may need

Firstly, the kind of capital a business expects to raise should inform how it is structured. Investors can negotiate rights that affect how they receive a return and how much of the company they may ultimately own. The business’s legal and tax arrangements must accommodate those rights, while its financial plan must account for their cost. Examining the terms of an actual cannabis investment helps explain why financing and entity selection need to be considered together.

In December 2023, Glass House Brands announced the completion of a $15 million preferred stock offering through its subsidiary, GH Group. The preferred shares entitled investors to an annual cash dividend of 15% for the first five years after initial issuance and 20% thereafter. Investors also received warrants, giving them the right to buy shares in the parent company at a specified price. The arrangement therefore combined a defined cash return with an opportunity to acquire additional equity. Glass House said the proceeds would help fund the retrofit of Greenhouse 5 at its Southern California farm, among other uses.

Applied to the full $15 million face value, those rates imply annual cash dividends of $2.25 million during the first five years and $3 million thereafter if the preferred stock remains outstanding. An operator considering similar terms would need to forecast those payments alongside the expansion’s operating needs and assess the potential ownership dilution from the warrants. The structure must accommodate the rights an investor wants, and the financial plan must establish whether the business can afford them.

Secondly, tax treatment is part of that assessment. An LLC is a legal entity formed under state law; its federal tax classification is a separate choice. An eligible LLC can elect S corporation treatment, but S corporation rules prohibit partnership shareholders and permit only one class of stock. Generally, that means identical rights to distributions and liquidation proceeds, although voting rights may differ. An operator taxed as an S corporation would therefore need to resolve those restrictions before admitting a fund organized as a partnership as an equity owner or granting preferential distribution rights.

Before making an election, ask your tax adviser to compare viable structures against the financing the new business expects to seek. An established company needs the same comparison, including the consequences of leaving S corporation treatment or changing its entity classification in some other way. Those are different steps: the IRS explains that certain classification changes are treated as asset transfers or liquidations for tax purposes, so the business’s adviser should identify the actual route required and its tax cost.

The comparison should show how much cash remains available for expansion. In a partnership-taxed LLC, owners generally owe tax on their allocated share of taxable income whether or not they receive a distribution. This is also true of those with S corporation status. Distributions intended to cover those bills reduce cash retained by the business. Under C corporation treatment, federal income tax falls at the company level, with dividends generally taxed again to shareholders. Model the proposed investment alongside those obligations to estimate how much cash will remain available for operations and expansion after closing.

Make the ownership plan fit the license

But there’s also the state framework to consider. A financing arrangement that works for tax purposes must also fit the state’s ownership rules. This distinction becomes concrete in the example of Grown Rogue’s investment in New Jersey cultivator ABCO Garden State.

In its June 5, 2024 announcement, Grown Rogue reported acquiring a 44% interest in New Jersey cultivator ABCO Garden State for approximately $1.26 million after receiving regulatory approval. The agreement also provided an option to acquire another 26% for approximately $720,000, with the later acquisition subject to regulatory approval and a timetable tied to the start of operations.

Grown Rogue’s investment required considerably more funding than those ownership payments suggest. In an April 2025 update, Grown Rogue explained that it had funded most of its investment in ABCO through senior secured loans, which had to be repaid before profit distributions could begin. The reported balance, including accrued interest, was approximately $8.2 million at March 31, 2025. At that point, Grown Rogue still held 44% and said New Jersey regulations prevented it from increasing its ownership to 70% before fall 2026.

The operation subsequently grew. Grown Rogue’s second-quarter 2026 results reported $4.4 million in New Jersey revenue, compared with $2.7 million a year earlier, with additional cultivation capacity under development. In September 2026, the New Jersey Cannabis Regulatory Commission approved an ownership transfer involving ABCO.

For an operator considering a similar arrangement, the case shows why the ownership agreement and the funding plan need to be assessed together. A business may require substantial investment while a later ownership transfer remains pending. The finance team should model that funding period, including how loan repayments would affect cash available for expansion and distributions. Licensing counsel can establish which rights apply during that period and what happens if approval is delayed. Together, that work helps owners judge whether they can support the operation through each stage of the proposed acquisition.

Other states may constrain the choice of investor itself. New York’s True Party of Interest framework covers direct and indirect ownership interests as well as roles that confer control. Its guidance states that an investor with a supply-side cannabis interest in another state cannot be a TPI in a New York adult-use retail dispensary. A retailer pursuing capital should have licensing counsel examine a prospective investor’s existing holdings and proposed control rights early in discussions. The review can establish whether the proposed ownership arrangement is available before the parties invest heavily both time and money in negotiating it.

Give existing owners a workable way to change

An eligible investor still needs terms the current owners can approve. A look at the operating or shareholder agreement determines how much of that negotiation has already been settled.

A company’s expansion may coincide with one founder’s decision to leave. A prospective investor offers to buy the founder’s interest. The transaction may solve the ownership transition while leaving the expansion unfunded: cash paid directly to the departing founder goes to that founder. If the business also needs new money, the parties must agree how much of the investor’s commitment will purchase existing interests and how much will enter the company.

Work through that distinction with your accountant before settling on a headline investment amount. The resulting forecast should show the cash available to operate and expand after the transaction, alongside the ownership each party will hold. Counsel can then assess the approvals required by the existing agreement and whether its provisions accommodate the proposed terms. If the agreement requires unanimous consent for the proposed transaction, any owner can withhold approval, making the financing dependent on everyone’s agreement.

An agreement governing future departures should also connect the valuation process with a feasible payment arrangement. When the company or remaining owners will fund a buyout, a fair price can still exceed the cash available at closing. Testing installments against operating cash needs helps the parties negotiate terms they can carry out. Settling how the price will be determined and disputes resolved in advance gives that later negotiation a better starting point.

Keep the records needed to assess an ownership change

Ownership arrangements establish what can change; financial reporting helps owners judge whether it makes economic sense.

Consider a hypothetical dispensary group selling one location. Its allocation of shared administration costs may be reasonable for internal reporting and advantageous group tax filings, yet tell neither party what the sale and loss of that location would change. The store’s reports may include a share of the group’s accounting payroll. If that payroll stays unchanged after the sale, the seller saves nothing on that expense. The buyer might absorb the work with its existing staff, incurring little or no additional cost, or the buyer may find the accounting expense for the newly acquired location increases since it may no longer have such advantageous shared admin costs. The allocated charge therefore does not establish either the seller’s savings or the buyer’s future expense.

The controller and operations team should forecast both businesses after the sale. For the seller, remove the store’s revenue and only those costs expected to leave with it. Estimate the buyer’s support costs using staffing plans or service quotes, and show how unresolved assumptions affect operating profit and the price each party can justify. Recording revenue and direct costs by location, with shared charges separately identifiable, preserves the information needed for this analysis. Revisit material allocations during monthly reporting as responsibilities change.

Each location’s revenue and costs can be reported separately within one legal entity. Creating a separate company may be useful when bringing an investor into one location without giving them an interest in the rest of the business. Advisers should assess whether licensing rules permit that arrangement and whether its benefits justify the cost of maintaining another company, including accounting for transactions between the businesses.

Start with one plausible change over the next two years, such as bringing an outside investor. Working through it with your accountant and licensing counsel can reveal what the business can accommodate, what needs preparation and what the transition would cost. Keep that assessment current so owners can approach the next opportunity with a clearer basis for negotiation.

Verdant Strategies’ Client Accounting Services connect ongoing accounting with financial planning and advisory support. If an investment or ownership change is entering your growth plans, contact Verdant to assess the financial implications and prepare the reporting needed to evaluate your options.