The Corporate Transparency Act is a relatively new law that has just taken effect. It has major implications for corporations across the country. Does it apply to community associations? Moreover, does it matter whether they are incorporated or unincorporated? Let’s find out.
The Corporate Transparency Act Explained
In 2021, Congress passed the Corporate Transparency Act (CTA) — a federal law that amends the Bank Secrecy Act. It aims to create transparency among certain companies in the United States. Through the CTA, the U.S. government hopes to reduce money laundering schemes and terrorist financing.
Companies that are required to comply must provide the personal information of their beneficial owners, including their full names, dates of birth, identification numbers, and current addresses. This allows the government to find, report, and track suspicious individuals and criminal activity much easier.
The Act took effect on January 1, 2024. According to the recent Corporate Transparency Act update, corporations must file their initial registration by December 31, 2024. Meanwhile, new entities must register with FinCEN within 30 days, and their initial deadline is March 31, 2024.
Corporate Transparency Act 2024 Application
Which corporations must comply with the federal Corporate Transparency Act? At first glance, the Act may refer only to U.S. corporations, limited liability corporations, and limited partnerships. However, every entity that files under any state office, including the Secretary of State, must comply with the Act.
From the definition, several HOA lawyers have gathered that community associations are not exempt. Thus, condominium associations and homeowners associations must also file a report.
Corporate Transparency Act Exemptions
Not all corporations must comply with the Act. The CTA has outlined several specific entities that are exempt from filing. These include:
- Accounting firms
- Banks
- Clearing agencies
- Credit unions
- Insurance companies
- Investment companies
- Public Utilities
- Securities exchange
- Venture capital
Apart from these, certain corporations are also exempt. More specifically, corporations with the following qualifications need not register:
- Entities with less than twenty full-time employees; or
- Corporations with gross receipts of more than five million dollars; or
- Tax-exempt organizations qualified under the IRS
A community association may only be exempt from filing if they meet the above requirements. However, associations must provide evidence if they file for exemption because of their tax-exempt status.
Results of Non-Compliance
If a community association fails to file with FinCEN, the reporting violation will cost it $500 per day in civil penalties. However, if the violation is willful, it is considered a felony. This can lead to up to 2 years of imprisonment and $250,000 in fines.
Corporate Transparency Act Requirements
Like other corporations, homeowners associations must file the relevant Beneficial Ownership Information (BOI) with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The following must be included in the FinCEN beneficial ownership reporting:
- Business name
- Legal names, current residential addresses, birthdates, and identification numbers (driver’s license, state ID, or passport) of beneficial owners
- Legal names, current residential addresses, birthdates, and identification numbers (driver’s license, state ID, or passport) of company applicants, if necessary
Community associations must file the report with FinCEN every year. If there is a change, correction, or addition to the information, they must modify the filing within 30 days from when they became aware of the change. This may happen when a beneficial owner changes their current residential address.
Identifying Beneficial Owners
The FinCEN Corporate Transparency Act identifies beneficial owners as individuals who have:
- Twenty-five percent ownership or control over the corporation; or
- Significant control, whether directly or indirectly, over the corporation
For homeowners associations, this means the following are considered beneficial owners:
- Board of directors
- The declarant or developer, including their appointed board members, if they own at least twenty-five percent of the properties
- Homeowners who own at least twenty-five percent of the properties
On the other hand, it’s important to note that some individuals are exempt even if they meet the qualifications. These include minor children, creditors, nominees, custodians, intermediaries, agents, employees without senior officer positions, and individuals whose only interest is a right of future inheritance.
However, lawyers and industry experts are unsure about whether HOA management companies or HOA managers are exempt. The community is currently divided on this issue.
Identifying Company Applicants
The company applicants are only necessary if the association is new (created on January 1, 2024, or later). A company applicant is the person who files the documents of a community association, leading to its creation. If more than one person files the documents, it also refers to the individual who is primarily responsible for filing direction and control.
Community associations that file with FinCEN may only include two company applicants. Moreover, they cannot replace or remove the names of the company applicants. Therefore, the association must be careful about who it chooses. Homeowners associations often choose the following as company applicants:
- HOA general counsel
- Board compliance officer
- Third-party reporting company
The third option is preferable as they are professional companies. They will make fewer errors and will stay on top of timely reporting. In addition, the association does not have to worry about removing the name of the company applicant in the file even if the point-person changes.
Amending the Governing Documents
While the CTA does not necessitate an amendment to the bylaws, it is highly recommended. In particular, adding an amendment that automatically removes any board member who does not comply with the Corporate Transparency Act may be prudent. Why?
Let’s say one of the board members refuses to provide their personal information. The community would violate the CTA. In this case, can’t the association members simply remove the defiant board member and replace them with someone else?
While that is an option, keep in mind that it takes time to remove a board member. Most communities need to hold a special meeting. They must also obtain a membership vote, which can be challenging. In the meantime, the community must shoulder the fines if they do not meet the deadline. However. the HOA could circumvent this issue by automatically disqualifying the board member.
Do remember that most governing documents will also require a membership vote to amend the bylaws this way. The board may have much power over the association but usually cannot change board qualifications without a vote.
Advocating Against Implementation
The Community Associations Institute (CAI) and several other organizations and advocates are campaigning to delay the CTA’s implementation. They are also aiming to exclude homeowners associations from the Act. This is because the CTA has several implications for community associations.
For one thing, the board members might not agree to provide their personal information. They might be sensitive when it comes to data security and privacy. Moreover, it can act as a deterrent and keep people from volunteering. This could massively reduce the number of nominees and candidates. It could even result in vacancies and a dysfunctional community.
Anyone interested in contributing to the cause may show their support through this link.
A Changing Landscape
The Corporate Transparency Act could change the landscape of homeowners associations as we know it. This piece of legislation places strict requirements on communities and can discourage volunteers. Nonetheless, it may be best to comply with its requirements to avoid penalties.
Are you on the hunt for a remote HOA management company? Clark Simson Miller is the best in the business. Reach out to us online or call us now at 865.315.7505 if you want to know more!
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