Do I Need an LLC for a CBD Oil Business?

Starting a limited liability company (LLC) for your CBD oil business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a CBD oil business, lawsuits can arise from things like product liability claims and false advertising allegations.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your CBD oil business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Should I Start an LLC for My CBD Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your CBD business could benefit from tax options and increased credibility.

LLC Benefits For a CBD Business

By starting an LLC for your CBD business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

CBD oil businesses will benefit from liability protection because of the relatively high risk involved with the manufacturing and retail distribution of CBD oil. Other risks include trademark infringement and customer data breaches.

Example 1: A customer buys a bottle of CBD oil from your business and claims they were injured while using it. Limited liability protection can protect your personal assets if the court finds your business responsible for the injury.

Example 2: A customer sues your CBD oil business for false advertising after buying a product that did not produce the claimed results. If the court rules against your business, limited liability protection will shield your personal assets from the fines incurred in the lawsuit.

Example 3: An employee makes a mistake in a customer’s order and gives them the wrong bottle of CBD oil. The customer finds out later and sues your business for damages due to employee incompetence. Limited liability protection can limit the lawsuit damages to only your business assets.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a CBD Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. The net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

If a CBD oil business owner believes they'll be paying themselves a reasonable salary and at least $10,000 in distributions each year, they might benefit from another LLC tax option, the S corporation (S corp) tax status.

S corp tax status for an LLC can help reduce self-employment and overall tax burden under the right circumstances.

Credibility and Consumer Trust

CBD oil businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses that form LLCs gain a level of consumer trust and credibility simply by forming an LLC.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC (for a small fee)
Or, choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes, all businesses need insurance in order to secure their commercial assets. A CBD oil business requires factory construction and costly industrial equipment, which must be covered by insurance to protect from industrial hazards like fire outbreaks and theft. LLCs can protect personal assets, but business insurance protects business assets.

Common Situations Business Insurance May Cover for a CBD Oil Business

Example 1: During the bottling process in a rented facility, one of your employees accidentally trips over a stray box. Your employee is fine, but they accidentally ruin the conveyor belt. General liability insurance would cover the costs of fixing the conveyor belt.

Example 2: One of your customers sues you for adverse side effects due to having allergies to the product. However, they don't realize that they had an allergic reaction and claim that your product must be fake. General liability will cover the legal fees to prove it was their allergies that caused the symptoms as opposed to the quality of your product.

Example 3: Your marketing campaign is extremely similar to a direct competitor. The competitor tries to sue you. General liability can help cover any financial losses due to the alleged violation.

Example 4: A customer slips on a slick sidewalk in front of your store. General liability insurance can help you pay for any resulting medical claims from the injury.

Other Types of Coverage CBD Oil Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all CBD oil businesses should obtain:

Product Liability Insurance

If there are any legitimate damages caused by your CBD oil products, then product liability would help you cover those expenses. If one of your CBD oil bottles is accidentally contaminated during production, product liability insurance will keep you out of financial hot water. This coverage is especially recommended for CBD products because they are still not widely understood by both researchers and the general public.

Commercial Property Insurance

If you own your manufacturing or sales facilities, you’ll need commercial property insurance to protect you from damage caused by theft, natural disaster, or employee/customer error. A CBD oil business is dependent on its property to manufacture quality products and present the right image to both business partners and customers alike.

This coverage is generally offered in a business owner’s policy (BOP).

Workers' Compensation Insurance

If your CBD oil business has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees if they get injured on the job.

Business Interruption Insurance

In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.

This type of insurance is typically included in a business owner’s policy.

Commercial Umbrella Insurance

Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.

Should I Start an LLC FAQ

The better business structure depends on your business’s unique circumstances and needs. However, unless your business is low profit and low risk, an LLC is likely the better option.

At a minimum, a CBD oil business will need general liability insurance, commercial property insurance, and workers' compensation insurance.

Read our Business Insurance article for more info.

Opening a CBD oil business can be relatively inexpensive if you grow your own hemp and turn it into CBD oil. You can also partner with an established farmer to minimize your startup costs while you grow your business. You will need to invest in commercial liability insurance if a customer sues you after using your product.

Visit our How to Start a CBD Oil Business guide to learn more.

Some of the main operating expenses of running a CBD oil business include payroll, legal fees, and insurance.

CBD oil businesses make money by selling CBD oil and CBD oil-infused products to customers.

CBD oil is getting more popular every year. While it can be tricky to navigate the rapidly evolving legal and regulatory environment for the industry, the business has the potential for great profits.

Some CBD oil businesses only sell it, while others also manufacture it. If you grow your own hemp to make CBD oil, profit margins can be quite high.