Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Question:   Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?

Answer: Apparently not!  Although the text of Proposition 203 says that an Arizona medical marijuana dispensary must be a ““a not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses marijuana or related supplies and educational materials to cardholders,” and it refers to Bylaws (a corporate governing document), officers (typically associated with corporations) and directors (exclusively associated with corporations), the Arizona Department of Health Services expanded the definition of not-for-profit entity to include types of entities in addition to corporations.

The December 17, 2010, first draft of the proposed DHS rules states that an “Entity means a person as defined in A.R.S. § 1-215.”  Section 1-215 says that “Person” includes a corporation, company, partnership, firm, association or society, as well as a natural person.”  Since an Arizona limited liability company is a company, DHS apparently will allow LLCs to own dispensaries unless it changes the rules to eliminate LLCs.  Here is an additional provision in the first draft of the rules that sanctions the use of a limited liability company:

“R9-17-301. Individuals to Act for a Dispensary Regarding Requirements.  When a dispensary is required by this Article to provide information on or sign documents or ensure actions are taken, the following shall comply with the requirement on behalf of the dispensary: . . . 4. If the dispensary is a limited liability company, a manager or, if the limited liability company does not have a manager, a member of the limited liability company”

As an Arizona business and entity formation attorney who has formed over 2,800 Arizona entities, I am surprised, but very glad that DHS is not requiring that people form Arizona nonprofit corporations to own and operate medical marijuana dispensaries.  The only type of entity that is specifically recognized under Arizona as a nonprofit entity is the Arizona nonprofit corporation.  The big problem with an Arizona nonprofit corporation is that it does not have any owners.  It simply would not be right for the government to require people to spend substantial amounts of time and invest large amounts of money into a nonprofit corporation that does not have any owners.

If you want more background and analysis of this nonprofit entity issue, read my article called “Arizona Proposition 203 – Legalization of Medical Marijuana.”

Arizona Medical Marijuana Dispensaries Should be Arizona Limited Liability Companies

My recommendation is that all entities that seek to obtain a license to operate an Arizona medical marijuana dispensary be Arizona limited liability companies.  People who have already formed an Arizona nonprofit corporation with the intent to have it obtain the license should put the corporation on the shelf and form a new Arizona LLC to be the nonprofit entity that seeks and obtains the license.

I would love to form your Arizona LLC that will own and operate a medical marijuana dispensary.  My fee is $1,599, which includes the all important nonprofit LLC Bylaws.  See my articles called “Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?” and “Bylaws for Arizona Medical Marijuana Dispensaries.”

By | 2017-02-12T07:05:51+00:00 December 23rd, 2010|Legal Issues, Questions People Ask|2 Comments

About the Author:

The author of this article is Richard Keyt, an Arizona business law attorney who is the creator of this Arizona medical marijuana law website. Connect with Richard at 480-664-7478 or on Google+

2 Comments

  1. tranders January 21, 2011 at 12:00 pm

    Has there yet been any clarification as to the intent of the “not-for-profit entity” text in the proposition? If one was to form an AZ LLC, would there be any operating restrictions or could it be operated in a for-profit manner (or do we know for sure yet)?

    • On the Net January 22, 2011 at 7:08 am

      No. Proposition 203 and the first draft of the rules say the dispensary must be a nonprofit entity, but neither give any guidance on what that means. Regardless of the type of entity chosen by a dispensary, the only thing we know for sure is that Arizona Revised Statutes Section 36-2806.A states:

      “The Bylaws of a registered nonprofit medical marijuana dispensary shall contain such provisions relative to the disposition of revenues and receipts to establish and maintain its nonprofit character.”

      Any dispensary that operates on a for profit basis risks a loss of its license and possible federal criminal charges. See “‘Nonprofit’ key to California Medical Marijuana Sales” found here:

      http://www.keytlaw.com/blog/2010/10/nonprofit-key-to-medical-marijuana-sales/

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