Maryland Law Opens New Door for Cannabis Operators: How ESOPs Provide an Exit Strategy and a Workaround for 280E

In a major move for the cannabis industry, Maryland Governor Wes Moore signed a groundbreaking law on April 22 that exempts employee stock ownership plans (ESOPs) from the state’s restrictive five-year license-hold requirement for marijuana businesses. This new legal change doesn’t just offer founders a way to step away from ownership. It also opens the door to a powerful workaround for one of the most burdensome financial challenges cannabis operators face: Section 280E of the Internal Revenue Code.

Understanding Section 280E: Why Cannabis Businesses Seek Alternatives to This Tax Burden

For years, Section 280E has posed a unique threat to cannabis companies. Because marijuana remains federally illegal, 280E prevents cannabis operators from deducting ordinary business expenses from their taxable income. This results in much higher effective tax rates compared to other industries.

But as the industry matures and access to capital tightens, operators are becoming more strategic. One such strategy is using ESOPs—not only as an exit plan but also as a way to protect company earnings and reinvest into long-term growth.

ESOPs Explained: A Financially Smart Ownership Model That Shifts Control to Employees

An employee stock ownership plan, or ESOP, allows a cannabis business owner to sell company shares to a trust that holds them on behalf of the company’s employees. The sale allows the owner to defer capital gains taxes, while the company itself gains a substantial tax shield by becoming tax-exempt, which eliminates 280E concerns.

Gleeman helped Massachusetts-based companies Theory Wellness and The Vault execute their ESOP transactions, both of which marked a turning point for the cannabis industry in terms of employee ownership.

The Massachusetts Model: Real-World Examples of Cannabis Companies Going the ESOP Route

Theory Wellness, a vertically integrated cannabis company in Massachusetts, implemented its ESOP strategy in 2023. Chief Financial Officer Jon Shore said tax relief was a key motivator, but the employee engagement benefits quickly became just as valuable.

Canna Provisions, another Massachusetts-based cannabis brand, came across the ESOP concept while searching for employee reward structures. Co-founder Meg Sanders noted that ownership regulations in Massachusetts initially posed challenges to traditional profit-sharing plans.

Building Long-Term Value and Loyalty: Why Employees Are More Committed in an ESOP Model

Beyond tax efficiency, the ESOP model drives stronger employee retention and productivity. Michael Botelho, CEO of The Vault, began exploring ESOPs as a potential exit route and ended up building a more dedicated workforce in the process.

By linking employee performance directly to ownership, cannabis companies gain not just tax savings, but operational efficiencies and a culture of accountability.

ESOPs as Exit Plans: Why More Founders Are Considering This Structure Over Private Sales

Hannah King, a cannabis attorney at Dentons in Maine, believes ESOPs are quickly becoming a viable exit strategy for marijuana founders—especially in an environment where traditional acquisition capital is drying up.

“When you sell your company to an ESOP, a trust owns the company, but employees are vested into retirement plans built into the trust,” King said. “As the company makes money, it gets distributed into the retirement accounts.”

King emphasizes that selling to an ESOP means selling at fair-market value—without the need to surrender the company to an outside investor or face excessive tax burdens. In fact, in many ESOP transactions, founders can retain warrants to buy back a percentage of the company in the future.

ESOP Qualification Requirements: What Cannabis Companies Need to Meet to Be Eligible

ESOPs are not a one-size-fits-all solution. According to industry professionals, cannabis companies must meet specific financial and organizational benchmarks to qualify for an effective ESOP structure.

Typically, a company needs:

At least 25 full-time employees

Between $2 million to $2.5 million in EBITDA (earnings before interest, taxes, depreciation, and amortization)

These thresholds ensure that the ESOP is financially sustainable, can be funded responsibly, and will meaningfully benefit participating employees over the long term.

The Road Ahead: Will More Cannabis States Follow Maryland’s ESOP-Friendly Legislation?

With Maryland’s ESOP exemption now law, other states are likely to follow suit. This move recognizes the unique constraints that cannabis operators face and offers a responsible, employee-focused pathway to succession and survival.

As the industry continues to consolidate and mature, ESOPs offer a flexible structure for founders, meaningful ownership for workers, and a smart tax strategy that neutralizes Section 280E’s punishing effects.

Legal experts believe that Maryland’s model could become a blueprint for other adult-use markets—particularly as more business owners age out or seek capital liquidity in the face of slow market growth and increased regulatory pressure.

Final Thought: ESOPs Offer More Than Just Tax Relief—They Create Sustainable Cannabis Companies

While ESOPs may not be suitable for every cannabis business, they provide a proven framework for sustainable ownership transition, tax efficiency, and employee engagement. Companies like Theory Wellness, The Vault, and Canna Provisions are proving that these models work—and that employees, when given a stake in the business, will rise to the occasion.

In an environment where capital is tight and tax burdens are high, ESOPs may very well be one of the most powerful tools available to forward-thinking cannabis operators.

Want to Explore ESOPs or Exit Planning for Your Cannabis Business?

If you’re a cannabis operator interested in structuring an ESOP or exploring capital strategies that protect your margins and empower your team, our advisory team is here to help. We specialize in cannabis-specific tax strategy, risk management, and exit planning tailored to your growth stage and operational goals.

Contact us at info@cannabisriskmanager.com to schedule a no-pressure consultation and learn how ESOPs or other advanced financing tools can work for your business.