How to Add Thousands of Dollars in Profits to Your Cannabis Company's Bottom Line Without any Heavy Lifting

Sounds too good to be true, doesn't it? Well, cannabis is making such strides at becoming a mainstream business, that certain tax advantage opportunities that were saved for traditional enterprises can now figure into the business development of cannabis enterprises.

Captive Insurance Companies. Sure, you've heard the term, but what the hell is it? A captive insurance company is generally a self held company that insures the risk of the parent company for a defined premium. The beauty of the deal is that the premium is being paid to you - not to an insurance company. There are definitely complexities to it, but it is doable depending on the size of your business. Additionally, there are already set up captive insurance companies that can manage your risk and save you premiums as well.

How does it work? Delaware and especially Vermont (the largest home of captive insurance companies) have streamlined the way a company can create a captive insurance company. Generally, the steps are a feasibility study, the plan design, plan administration, tax law expertise, captive regulations and meeting with regulators, and then funding the plan.

What are the advantage? Does your current insurance plan require a deductible of $500, $1,000, or $5,000? Why not self insure the risk and collect a premium for it? For those of you bold enough, you can completely self insure, but that is risky. You can always contact established cannabis insurance companies and ask if they would be interested in selling you a custom policy to insure certain risks like fires, crop failures, property insurance, etc. If you're paying a $5,000 annual premium, probably half of it can be collected by the captive, and then used for your bottom line. Your actual insurance can be $5,000 per year, but you will have the opportunity to mark it up if you use a management company. Why not collect $8,000 per year, use $2,000 for purchasing "reinsurance", and keeping the premium for yourself? There are regulations that will allow you to pretty much do that, but it is a little complicated for the novice. The dollars put into the captive which are not spent are a great way to shelter retirement income as well, but the real purpose must be insurance.

Disadvantages? Size does matter - if you're too small, it won't make sense. Additionally, there is some administration that needs to be taken care of, but this can always by farmed out. The big boys have used captive insurance companies for years, so now it's our turn! Speak to your tax lawyer or accountant about it, or start at these web sites for more information:

https://www.tei.org/news/articles/Pages/Forming-a-Captive-Insurance-Company-Understand-the-Business-and-Tax-Implications.aspx

https://www.dfr.vermont.gov/captives/steps-form-captive

This is the first article in a series of posts about captive insurance, as it is somewhat complicated, but there are real advantages when it is formed as business with multiple entities sharing the costs.