On May 18, 2026, the California Department of Cannabis Control published proposed emergency regulations (DCC-2026-03-E) allowing licensed cannabis retailers to split a combined adult-use (A) and medicinal (M) license into two separate licenses, each held by a related entity, at the same premises. The pathway exists, in DCC’s own words, “due to the timing and uncertainty of the federal process.”
DCC’s accompanying newsletter was equally explicit that the agency is not taking a position on the federal process itself:
“DCC expresses no view on the federal registration process, or the requirements for registration, and encourages licensees interested in federal registration to consult their legal counsel.”
For California retailers who were already weighing federal medical registration under 21 C.F.R. § 1301.13(k) (the expedited DEA pathway opened by the April 2026 Attorney General’s order placing FDA-approved marijuana products and state-medical-license-covered marijuana into Schedule III), DCC has now made the California structural piece easier on paper. The proposed emergency regulations open a California-specific route for retailers to hold a clean medical-only entity at the same premises as their existing adult-use business.
This post is written for California retailers who are considering forming a new entity to pursue federal medical registration. It does not analyze whether any particular retailer should pursue federal registration. That is a fact-specific question reserved for individual consultation.
What this post does is walk through the nine practical considerations a California retailer should think through before filing.
1. Federal eligibility under § 1301.13(k)
Before forming the entity, confirm federal eligibility. The § 1301.13(k) pathway is built around a specific federal threshold: the operation must qualify as a “state-licensed medical marijuana operator” under the rule. For California retailers with a combined A/M license, the qualifying medical activity is usually straightforward to confirm, but it should be confirmed by counsel before incorporation. For retailers whose existing license arrangements are atypical (for example, where medical sales are currently nominal or where ownership is structured unusually), the eligibility analysis may surface issues that affect entity design or timing. This is the first question to settle because every downstream decision flows from a confirmed yes.
2. Ownership chain compliance under DCC § 15003 and § 15004
The new entity’s ownership chain has to satisfy DCC’s ownership-disclosure rules. DCC-2026-03-E expressly requires that the two related entities (the A licensee and the new M licensee) share the same individual owners and the same Designated Responsible Party.
Under § 15003, every “owner” of the new licensee must be disclosed. Under § 15004, financial-interest holders with sufficient indirect ownership must also be disclosed. The ownership chain has to mirror the existing licensee precisely. An ownership-match defect is not a clerical issue. It is a license-level problem on top of a federal-application problem, and DCC reviews ownership disclosures carefully.
3. Governance Documents designed for the federal application
The new entity’s governance documents should not be a fill-in-the-blank template. It needs to anticipate both the federal application and the operational realities of running a federally registered medical retailer alongside an adult-use retailer at the same premises. Provisions to think through:
- Capital calls and funding sources for the federal entity, which may have different banking and accounting constraints than the existing licensee.
- Decision-making authority for federal-registration matters, including who signs the DEA application, who serves as the registrant’s representative, and how decisions at the federal-registration level interact with state-license obligations.
- Tax distributions structured around the differential 280E exposure between adult-use and Schedule III medical activity.
- Indemnification and risk allocation provisions that anticipate the joint-and-several liability mandated by DCC-2026-03-E.
4. Intercompany agreements framework
Two related retail entities at the same premises need a documented contractual framework. Here are things to consider:
- A management services agreement (MSA) governing shared services, including administration, IT, HR, accounting, and security.
- An intellectual property license if the medical entity will use brand assets, store design, signage, or trade dress associated with the existing licensee.
- A premises arrangement formalizing the medical entity’s right to occupy and operate at the licensed premises.
Each agreement has to be arm’s-length and supportable under § 280E, transfer-pricing principles, and DCC’s ownership-disclosure rules. They also need to allocate operational responsibility cleanly. A DCC inspector walking the floor should be able to tell which entity is responsible for which inventory, which records, and which customer-facing function.
5. Joint and several liability allocation
DCC-2026-03-E requires that the two related entities be jointly and severally liable for all obligations, debts, and violations incurred under either license. That is a regulator-imposed rule, not a default. The governance documents, intercompany agreements, indemnification provisions, and (depending on capital structure) reserves or insurance need to allocate that liability with care.
Done well, the structure limits each entity’s exposure to the other’s regulatory missteps to the extent the joint-and-several rule permits. Done poorly, every problem on the A side automatically becomes an M side problem, including problems that arise long after the entities were structured.
6. Operational separation that is real, not nominal
The proposed regulations require physical separation of all cannabis goods, distinguished in inventory and track-and-trace records by license, and separate maintenance of business records clearly labeled A or M. For a retailer specifically, operational separation looks like:
- Physically segregated inventory storage areas on the retail premises.
- Separate METRC tagging and track-and-trace logic, with no commingling.
- Separate books, separate banking, and separate vendor accounts where appropriate.
- Separate signage and customer-facing materials where state or local rules require differentiation between A and M sales.
A retailer’s separation has to hold up under both DCC inspection and the operational scrutiny that comes with a DEA-registered medical operation. Nominal separation (split on paper, commingled in practice) is a compliance failure waiting to be cited.
7. Banking and tax considerations
Cannabis banking is not portable. Most cannabis-friendly banks treat a new entity as a fresh KYC review, with separate beneficial-ownership disclosures, separate compliance questionnaires, and potentially separate fee schedules. Build a 30-to-60-day banking onboarding runway into your timeline.
On the tax side, the federal rescheduling changes the 280E posture for the medical entity. Section 280E denies ordinary-and-necessary business expense deductions for activity that traffics in Schedule I or II controlled substances; activity that traffics in Schedule III is not within § 280E’s scope on the same terms. The medical entity may be able to claim deductions the adult-use entity cannot. That tax differential should be reflected in the operating agreement’s distribution provisions and in how intercompany pricing is structured between the two retail entities.
8. Federal application package
The application can be drafted in parallel with entity formation. In practice, that parallel work is where most retailers recover lost time. The entity, the governance documents, the intercompany agreements, and the federal application package all benefit from being designed together rather than sequentially.
9. Timeline and the state-guidance landscape
The 60-day federal window is running. DCC has not issued operational guidance on track-and-trace mechanics, local authorization, tax collection, or other implementation matters for the new A/M license split. The proposed regulations state that those items are “still being evaluated and will be addressed through future guidance or rulemaking as needed.”
If a retailer waits for DCC to fill in the gaps before starting any legal work, there may not be time to complete the entity formation, operating agreement, intercompany framework, and federal application package before the federal window closes. The legal architecture needs to be tight enough to absorb whatever DCC eventually publishes without forcing rework.
Kocot Law takes no public position on when any specific retailer’s 60-day clock closes. That analysis is reserved for individual consultation. What we can say generally is that “I will start the legal work when DCC issues guidance” is not a workable plan for a retailer who is seriously considering this pathway.
How Kocot Law can help
Kocot Law represents California cannabis retailers, microbusinesses, and multi-state operators on entity formation, operating agreements, intercompany frameworks, and federal DEA registration matters under 21 C.F.R. § 1301.13(k). We design new-entity structures from the ground up to satisfy DCC’s ownership and joint-and-several liability rules under DCC-2026-03-E, allocate operational and financial responsibility properly between the A and M entities, anticipate the federal application, and stand up to both DCC and DEA scrutiny.
If you are a California retailer considering forming a new entity to pursue federal medical registration, the most useful next step is a conversation about your specific situation, including your existing license structure, your operational footprint, your ownership chain, and the nine considerations above.
For background on DCC-2026-03-E itself, see our prior post: California Retailers Can Now Hold Separate Adult-Use and Medicinal Cannabis Licenses Under Two Related Entities
This post is attorney advertising. Information provided here is general and does not constitute legal advice. Reading this post does not create an attorney-client relationship between you and Kocot Law. Past results do not guarantee a similar outcome.
