Why Cannabis LLCs Need Operating Agreements

Home | Canna Law Blog | Why Cannabis LLCs Need Operating Agreements Table of Contents Toggle Cannabis businesses are usually structured as limited liability companies (LLCs)—and for good reason. LLCs offer far more flexibility than corporations, which are bound by rigid governance rules. To take advantage of this flexibility (and for many other reasons), LLC owners—called members—need a well-drafted operating agreement. Below, we look at a few critical reasons why cannabis LLCs shouldn't operate without one. Cannabis LLC operating agreements don't have to break the bank Cannabis entrepreneurs often worry about legal costs, especially in the early stages. The good news is that LLC operating agreements don’t need to be overly complex or expensive. Unless the business has a highly customized structure or multiple classes of equity with distinct rights, a straightforward agreement is usually sufficient. For simpler businesses, the cost of preparing an operating agreement can be quite manageable. That said, trying to draft an agreement without legal counsel is risky. Many entrepreneurs attempt to piece together documents on their own, but this often leads to mistakes that can cause significant legal and financial problems down the line. LLC law contains subtle legal nuances—particularly in the highly regulated cannabis industry—that require professional insight to navigate properly. What happens when a cannabis LLC doesn’t have an operating agreement? Starting a cannabis business is costly, and it can be tempting to skip "optional" documents like operating agreements. But that’s a major misstep. Without an operating agreement, cannabis LLCs can face serious issues: Banks and financial institutions may refuse to open accounts without basic governance documents. Regulators may require licensees to provide operating agreements as part of compliance. In some states operating agreements are required by law. In states where operating agreements are optional, companies without them are governed by default state law, which may not reflect the members’ intent, is often much more rigid, and may lead to uncertainty in situations not exactly addressed by state law. Ownership and management confusion is common. Without an agreement, it’s hard to prove who owns what percentage, who controls what decisions, and how profits or losses are allocated. These are just a few examples of why skipping an operating agreement is a bad idea. Operating agreements prevent infighting and deadlock One of the most common failure points for cannabis businesses is equal ownership without a plan for resolving disagreements. When two members each own 50% of a company, deadlock becomes a real threat—and without a clear decision-making structure or tie-breaker, the business can grind to a halt. This kind of deadlock has sunk more cannabis companies than you might think—and it’s completely preventable. Operating agreements should include deadlock resolution provisions and other clear governance rules. Beyond that, they define who manages the company, how profits are distributed, what happens during capital calls, and more. Having these rules in place from the beginning reduces the likelihood of costly internal disputes later on. Operating agreements make scaling easier Picture a cannabis company that starts with two friends and a handshake. Later, more investors and team members come in, and the company grows. Suddenly, that informal or barebones agreement isn’t enough. But by then, making changes requires unanimous member approval, and not everyone may agree—especially if changes would alter ownership rights, profit distribution, or control. This is why cannabis companies need strong operating agreements from day one. The effort and investment up front can save immense legal costs, delays, and member disputes down the road. While no operating agreement needs to cost a fortune, getting it right is a long-term investment in the company’s future. A solo entrepreneur might not need a complex structure—but someone planning to raise capital or expand their team certainly does. Taking the time to align your agreement with your business vision from the beginning is one of the smartest moves a cannabis founder can make. Check Out Our Cannabis Law Services Share Twitter Facebook LinkedIn E-mail Comment Fred Rocafort Fred leads Harris Sliwoski’s intellectual property practice and is the coordinator of the firm’s international team. Much of Fred’s practice consists of helping cannabis businesses protect their brands. He also works with entrepreneurs and companies entering the Web3 space, a new frontier for IP law. Prior to joining Harris Sliwoski, Fred worked overseas for more than a decade, in both government and private sector roles. Fred is a regular contributor to the award-winning China Law Blog and Canna Law Blog. Fred began his career overseas as a U.S. consular officer in Guangzhou, China, where he advocated for fairer treatment of American companies and citizens in China and for stronger intellectual property rights enforcement. After entering the private sector, Fred worked at a Shanghai law firm as a foreign legal advisor and later joined one of the oldest American law firms in China, helping foreign companies navigate the Chinese legal environment. He also led the legal team at a Hong Kong-based brand protection consultancy, spending most of his time out in the field, protecting clients against counterfeiters and fraudsters in Greater China, Southeast Asia and Latin America. In addition to his IP work, as a native Spanish speaker, Fred works closely with different Harris Sliwoski teams on Latin America and Spain matters. Fred also provides advice to cannabis industry participants and other businesses on import and export transactions. Fred is an ardent supporter of FC Barcelona—and would be even in the absence of Catalan forebears who immigrated to Puerto Rico in the mid-1800s. 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