See our full webinar on the Corporate Transparency Act below
Click here to download the CTA Information sheet provided by the presenter from Kaman & Cusimano.
Click here to download the slides used in the presentation.
The Corporate Transparency Act is a new law that requires companies to report information on their beneficial owners. It applies to incorporated and unincorporated community associations alike. Thus, HOAs must be familiar with the act and how to comply.
What Is the Corporate Transparency Act?
Congress passed a new federal law called the Corporate Transparency Act (CTA) in 2021. The law is an amendment to the Bank Secrecy Act. Certain companies must file a Beneficial Ownership Information (BOI) report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
The federal government created the act to help law enforcement identify, track, and report suspicious financial activity. In particular, the act aims to spot and stop terrorist finance and money laundering schemes to protect national security.
Who Must Comply With the Act?
Any corporation or limited liability corporation (LLC) must comply with the CTA. It also applies to limited partnerships, statutory trusts, business trusts, and non-U.S. corporations registered to do business in the country. In addition, any entity that files with the Secretary of State or a similar office under state law (or an Indian tribe) is required.
Community association lawyers have deemed that condominiums and homeowners associations must comply. This is true whether or not the association is incorporated as a nonprofit organization.
Corporate Transparency Act Exemptions
Some entities are exempt from the Corporate Transparency Act. The CTA specifically exempts banks, credit unions, insurance companies, venture capital, investment companies, accounting firms, public utilities, clearing agencies, and securities exchange.
Apart from these, tax-exempt organizations under the IRS need not comply. This includes community associations with a tax-exempt status, typically under Section 501(c). However, these community associations must prove they are eligible for the tax exemption during filing.
What Happens If You Don’t Comply?
The consequences of non-compliance are dire. Reporting violations will incur penalties of $500 per day. Meanwhile, willful non-compliance and violations are considered felonies. They will incur penalties of up to $10,000 and up to 2 years of imprisonment.
Corporate Transparency Act Requirements
Homeowners associations must include the following information in the FinCEN beneficial ownership reporting:
- Business name
- Full legal names, current home addresses, birthdates, and identification numbers (state ID, passport, or driver’s license) of the company’s beneficial owners
- If required, full legal names, current home addresses, birthdates, and identification numbers (state ID, passport, or driver’s license) of company applicants
Associations must file changes, corrections, and additions with FinCEN within 30 days after the association becomes aware of the change or mistake.
What Are Beneficial Owners?
At first glance, the term ‘beneficial owners’ seems to refer to the homeowners of an association. However, a beneficial owner does not automatically refer to a homeowner or unit owner in a planned community. Instead, it relates to individuals that:
- Wield significant control over the association, whether directly or indirectly; or
- Control or hold at least 25% of ownership
As such, beneficial owners include everyone serving on the board. If a developer or declarant still owns 25% of the separate interests, it and its appointed board are also considered beneficial owners. Individual unit owners are not beneficial owners unless they own 25% of the separate interests.
On the other hand, specific individuals are exempt from being beneficial owners, including:
- Individuals acting as an intermediary, custodian, agent, or nominee;
- Employees who do not hold a senior officer role;
- Individuals whose only interest is a right of future inheritance;
- Minor children; and
- Creditors
With these definitions, it’s unclear whether or not community association managers and management companies are beneficial owners.
What Are Company Applicants?
According to the CTA, the company applicant is the person who:
- Creates or registers the company; and
- Is responsible for directing or controlling the filing if multiple persons are involved in the filing
A community association is only required to file the information of their company applicant/s if the community was made or registered on or after January 1, 2024. Moreover, each community may only have two company applicants. They can choose a third-party reporting company, the HOA board compliance officer, or the HOA general counsel to serve as the company applicant.
However, it may be wise to choose a third-party reporting company as the company applicant. They might charge a fee for reporting, but they’re often more reliable and make fewer mistakes. Moreover, the company applicant seems to be responsible for fulfilling their role. Unlike the beneficial owners, they cannot be removed from the records.
When Does the Corporate Transparency Act 2024 Take Effect?
The Act took effect on January 1, 2024. However, according to the Corporate Transparency Act update, existing associations must comply until the end of the year (December 31, 2024). By then, they must have made their initial registration with FinCEN.
Meanwhile, new entities that were created on or after January 1 have 30 days to register with FinCEN. The initial deadline for compliance is March 31, 2024.
Do HOAs Have to Amend the Bylaws?
The Act may require filing with the federal government, but that does not mean it does not affect the governing documents. It’s highly recommended that community associations amend their bylaws to disqualify non-compliant board members automatically.
Non-compliance has serious repercussions. While the governing documents may allow the members to remove problematic board members, this process usually takes time and requires a membership vote. During that time, the HOA may already be penalized for non-compliance, which could devastate the community.
Why Is the FinCEN Corporate Transparency Act Necessary?
The federal Corporate Transparency Act allows the authorities to refer to an accessible national database. With the information in reach, authorities and firms can easily cross-reference important information about corporations nationwide. This helps law enforcement pinpoint suspicious individuals and track criminal activity.
In addition, the database makes it more difficult for small business entities to engage in money laundering schemes. They will not be able to hide assets using shell companies as easily. The increased legal protections can also increase investor confidence.
Petition Against HOA Implementation
The consequences of the Corporate Transparency Act are severe for homeowners associations. It could deter members from volunteering to serve on the board, resulting in vacancies and inefficient operation. This is why advocates like the Community Associations Institute (CAI) are campaigning to delay the effective date or to exclude community associations from the Act. Concerned homeowners and board members may show their support here.
A New Era
The Corporate Transparency Act was created to reduce illicit financial activity and track criminals more quickly. However, it has serious implications regarding data privacy and security. The increased liability and exposure may deter homeowners from volunteering as board members, burdening community associations. Nonetheless, it’s best to comply with the regulation to avoid the consequences of non-compliance.
Cedar Management Group offers expert management services to homeowners associations in Tennessee, North Carolina, and South Carolina. To request a proposal, give us a call at (877) 252-3327 or contact us online!
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