The Corporate Transparency Act (“CTA”) has caused panic and confusion among the HOA industry. Both managers, board members, and others in the industry are wondering what it means for them and how they can comply with the requirements.
The CTA is a federal law requiring corporations and other businesses to report their “beneficial ownership” information to the Financial Crimes Enforcement Network of the United States Treasury Department (“FinCEN”) as a means of reducing various financial crimes. These reporting requirements are further set forth in the rules adopted by FinCEN and incorporated into the Code of Federal Regulations (“CFR”).
This article focusses on answering some of the most common questions we have been asked about the CTA.
Does the CTA apply to HOA’s?
The CTA applies to all corporations, limited liability companies, and other similar entities in the United States. Because associations are primarily created as nonprofit corporations, they fall under this requirement unless otherwise exempted.
Although there are several exceptions to the reporting requirement, only two exceptions may apply to associations:
- If the association was created as a 501(c) tax-exempt entity, it is excluded from the reporting requirements; keep in mind that being a nonprofit corporation does not mean the association is tax-exempt. In fact, very few associations qualify for tax exempt status. We recommend reaching out to the association’s CPA to determine the association’s tax status.
- Associations that fall under the category of “large operating companies” are also exempt. To qualify as large operating company, an association must have more than 20 full-time employees, must have filed and continue to file a tax return demonstrating more than $5,000,000 in gross receipts, and have a physical location where business is conducted.
If your association falls under either of these exemptions, keep in mind that it is still required to report itself as an exempt entity to FinCEN.
When do we have to start filing reports?
The reporting requirements took effect on January 1, 2024, and associations existing as of this date are required to file their first beneficial ownership information report (“BOIR”) no later than December 31, 2024. Entities created after January 1, 2024, will be required to file their first report within 30 days of formation.
What is a beneficial owner?
“Beneficial owners” are defined by the CTA as:
- individuals who, directly or indirectly, exercise “substantial control” over the corporation; or
- individuals who own or control 25%, or more of the entity.
The CTA further provides that an individual has “substantial control” if such person:
- serves as a director or officer on the board;
- has authority to appoint or remove officers or a majority of the board of directors (or similar body); or
- directs, determines, or has substantial influence over important decisions made by the association, including, but not limited to, decisions regarding:
(a) The nature, scope, and attributes of the business of the association, including the sale, lease, mortgage, or other transfer of any principal assets of the association;
(b) The reorganization, dissolution, or merger of the association;
(c) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the association;
(d) The entry into or termination, or the fulfillment or non-fulfillment of significant contracts; or
(e) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures;
Based on the above, directors and officers on association boards qualify as beneficial owners with substantial control over the association. Additionally, any owner who owns 25% or more of the units (or voting rights) in the association, would also constitute as a beneficial owner subject to reporting requirements.
What information must be reported?
There are two primary registrants when it comes to the CTA: the “reporting company” and the “beneficial owners”. The reporting company is the entity being registered (i.e. the association) and the following information must be provided:
- Legal name of association
- Trade name (if any)
- Current address (including both the registered agent and principal office)
- State where association was formed
- Taxpayer identification number
In addition to the above, every beneficial owner of the association must be registered by supplying the following information and documentation:
- full legal name
- birth date
- current address, and
- one of the following:
- passport number; or
- driver’s license number; or
- state-issued identification document number; and
- an image of the document from which the unique identifying number was obtained
Changes to any reported information must be reported no more than 30 days after such changes are made. This includes directors stepping down from the board or new directors being elected/appointed to the board.
How do we register?
FinCEN has created a BOI E-filing system that allows companies to file their Beneficial Ownership Information Reports (“BOIR”) online. The system allows filing in one of two ways: 1) via PDF, or 2) online filing. Both options allow for the preparation of information and filing to be accomplished exclusively online.
The CTA provides that it is illegal to willfully provide, or attempt to provide false or fraudulent beneficial ownership information, including fake photographs or documents; it is also illegal to willfully fail to report completed or updated beneficial ownership information.
These prohibitions carry with them civil penalties of $500 per day (until noncompliance is cured), and criminal penalties of up to $10,000, and imprisonment for up to 24 months. Therefore, it is important for associations to have a plan in place for filing and updating these reports.
Please reach out to an Altitude attorney at 303.432.9999 or [email protected] if you have questions.