Is It a Mistake to Form an Arizona Nonprofit Corporation to Operate an Arizona Medical Marijuana Dispensary?

Question:  My attorney formed an Arizona nonprofit corporation for me to own and operate an Arizona medical marijuana dispensary.  Was that a mistake?

Answer:  Yes because Arizona nonprofit corporations do not have owners/shareholders.  Why would you invest a lot of money in an entity that you cannot own and cannot leave to your heirs if you were to die? For the reasons mentioned below, you should ask your attorney to refund the money if he or she formed your nonprofit corporation after December 17, 2010.  See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?”

For profit Arizona corporations are owned by their shareholders.  Arizona limited liability companies are owned by their members.  Arizona partnerships are owned by their partners.  Arizona nonprofit corporations do not have shareholders.  If authorized in the Articles of Incorporation, an Arizona nonprofit corporation can have members and the criteria and characteristics of members can be set forth in the Articles of Incorporation or in the corporation’s bylaws.  However, members are not shareholders/owners and are not treated as such by Arizona’s nonprofit corporate statutes.

Admission:  Before the Arizona Department of Health Services issued its first draft of the rules on December 17, 2010, it was my opinion that Arizona medical marijuana dispensaries had to be Arizona nonprofit corporations.  I formed a number of Arizona nonprofit corporations for my clients before DHS issued the first draft of the rules because the only type of nonprofit entity recognized by Arizona statutes is the nonprofit corporation.

Proposition 203 stated that a dispensary had to be a nonprofit “organization,” which I thought was a strange choice of words.  Last December I asked the lawyer for the Marijuana Policy who is in charge of the model medical marijuana code on which Proposition 203 was based why Proposition 203 used the word organization instead of corporation, limited liability company and/or partnership.  She said she did not know.  I could tell she did not understand the significance of the fact Arizona nonprofit corporations do not have shareholders/owners.

Before December 17, 2010, I recommended to clients that they form an Arizona nonprofit corporation to own the dispensary because Proposition 203 was uncertain and because the nonprofit corporation is the only type of nonprofit entity authorized under Arizona law.  I told my clients in writing of this issue.

When the first draft of the rules was issued on December 17, 2010, it clarified that a dispensary could be owned by any type of entity recognized by Arizona law.  Since that date, I recommend to everybody that they form an Arizona limited liability company to own a dispensary and that the LLC be operated on a not-for-profit basis.

If you formed a nonprofit corporation to own your dispensary, it is not too late to replace it with an Arizona LLC.  If your nonprofit corporation has already entered into one or more leases, get approval from your landlord to allow the tenant’s rights to be assigned by the corporation to the new LLC.

P.S.  If you find a lawyer today who advises you to form a nonprofit corporation to operate your dispensary, run away as fast as you can.