Business & Finance: Small Businesses May Be Subject To Ownership Reporting Rule

February 23, 2024 Damian Nicholas

Only twenty-three types of companies are exempt from the beneficial ownership reporting requirement.

ICIJ

Attorney Rachel Gillette warns the marijuana industry that many U.S. cannabis companies will need to comply with reporting requirements under the Corporate Transparency Act. Rachel Gillette, a partner with Denver-based law firm Holland & Hart, established in 1947, offers services in the Cannabis and Psychedelics industry with a focus on marijuana business and tax law.

This is a pretty complex law, and I think a lot of cannabis business owners are not aware that it exists.

– Rachel Gillette. Partner Holland & Hart

The new beneficial ownership reporting requirements under the Corporate Transparency Act will apply to "most small cannabis business – (although) there are certain exemptions," Gillette said. The law is already in effect. Companies formed before Jan. 1, 2024, have until Jan 1. 2025, to file their first ownership report. Companies formed in 2024 must file within 90 days of their original file date. The requirements of disclosing beneficial ownership to the government is already familiar to legal cannabis companies, to obtain a state license– cannabis businesses must disclose their beneficial ownership. Reporting beneficial ownership is required for certain companies; to file a report disclosing their beneficial ownership with the Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury agency. The Corporate Transparency Act, passed in 2021, targets the use of anonymous shell companies to hide business ownership.

According to a FinCEN FAQ, a beneficial owner “either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.”

Who's considered a Substantial Controller:

A chief executive officer, chief financial officer, or president.
Someone who is "an important decision-maker"
Someone with "authority to appoint or remove certain officers or a majority of directors.
Anyone with "any other form of substantial control.
Even a company officer who doesn't own any shares in a business could count as a beneficial owner, Gillette observed.

There are twenty-three types of companies exempt from the beneficial ownership reporting requirement. All other companies will be required to comply. Details of the exemptions are laid out in the FinCEN Compliance guide. Overall, businesses that have under 20 employees, small cannabis businesses, and businesses under $ 5 million in income – will have to report beneficial ownership with FinCEN.

Filing Penalties:

The federal government can levy stiff penalties on companies that don’t file beneficial ownership reports as required.
Those who “willfully” violate the reporting rule could face civil penalties of as much as $500 per day.
Criminal penalties for failing to report are also possible, including up to two years in prison, plus a fine of up to $10,000.
Any changes affecting a company’s beneficial ownership also must be reported. For example, if you change the CFO of a company or add a shareholder to the company.

Relating to Cannabis Companies:

FinCEN may share information about a company's beneficial ownership with federal, state, local, and tribal officials as well as certain foreign officials.
FinCEN also can share this information with law enforcement for both criminal and civil investigations and actions. See agency fact sheet for more details.
Beneficial ownership reports can be filed via a portal on the FinCEN website. There is no filing fee.
Individual beneficial owners must provide FinCEN with their name, date of birth, address, and a government-issued identification document.

FinCEN believes most companies can file on their own without third-party help. Still, expect third-party services to help with filing.

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