The Corporate Transparency Act And Homeowners Associations

The Corporate Transparency Act is a fairly new piece of legislation that could affect homeowners associations and condominiums nationwide. This law has several benefits and objectives, though association experts and advocates question its importance to communities. As of October 2023, there is even a petition to exclude HOAs from this new law.

What Is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a federal law passed by Congress in 2021. It amends the Bank Secrecy Act and seeks to promote transparency among corporations, requiring certain companies in the United States to provide select information regarding the beneficial owner/s of those companies. Such information includes the beneficial owner/s’ full name, date of birth, current address, and identification number.

This Act aims to help identify and report suspicious activity related to money laundering and terrorist finance. It also aims to help track money that goes through terrorist or criminal activity and protect national security. While the Corporate Transparency Act specifically tackles corporations, community associations like HOAs and condominiums are not exempt.

Does the Corporate Transparency Act Apply to HOAs?

As of writing, the Corporate Transparency Act does apply to community associations. This is because the Act applies to corporations, including nonprofit corporations, which most HOAs and condominiums are. It also applies to any entity that has been created through a filing with the Secretary of State or a similar office under the law of any State or Indian tribe. Thus, unless the HOA is in a state with no centralized state-wide registration, even unincorporated HOAs need to comply.

Corporate Transparency Act Exemptions

The Corporate Transparency Act outlines certain qualities that might exempt an entity from compliance. These include large corporations or entities that, in the prior tax year, have the following:

• Gross receipts of more than $5 million; or
• Fewer than 20 full-time employees

Apart from these, the CTA specifically outlines certain exempt entities. These include banks, investment companies, securities exchange, credit unions, venture capitals, insurance companies, accounting firms, clearing agencies, and public utilities.

It’s important to note that certain IRS-qualified tax-exempt organizations are also exempt. Therefore, a community association that has a tax-exempt status may be exempt from compliance. However, they will need to establish their eligibility for said exemption.

After reviewing the provisions of the Act, community association lawyers have determined that this new legislation applies to HOAs and condominiums.

The Corporate Transparency Act’s effective date is January 1, 2024.

The Benefits of the Corporate Transparency Act

Firms and authorities are most likely to benefit from the Corporate Transparency Act through the following means:

• The Act will create a national database that will make it easier to access information and cross-reference important details about corporations.
• It can counter corruption and fight illicit financing by making hiding assets through shell companies more difficult.
• The Act will make it easier for law enforcement to track illicit activity and identify suspicious individuals.
• It can increase investor confidence through better due diligence and increased legal protections.

Of course, the CTA is not without its challenges. Firms and authorities may experience several obstacles, including data collection and privacy-related hardships. Small businesses and start-ups may also face problems with compliance, as they don’t have dedicated departments for administrative work, unlike large corporations.

Corporate Transparency Act 2024 Final Regulations

What must homeowners associations do to comply with the Corporate Transparency Act? According to the newly passed law, corporations must file information with the Financial Crimes Enforcement Network (FinCEN) through the Beneficial Ownership Information (BOI) reporting requirements.

Community associations must file a report with the FinCEN federal agency every year. At a minimum, this report must contain the following information:

• Business name
• Beneficial owners’ legal names, birthdates, home addresses, and identification numbers (driver’s license, passport, or state ID)
• Company applicants’ legal names, birthdates, home addresses, and identification numbers (driver’s license, passport, or state ID), if required
• Any changes, additions, or corrections to the filing must take place within 30 days of when the association becomes aware of the change (for example, if a board member moves and changes their address or if the association changed board members)

Community associations must maintain accurate, up-to-date records of their beneficial owners. The information must be easily accessible as associations periodically change their board of directors. This ensures that they can report any changes on time.

According to the Corporate Transparency Act update, existing community associations must file their initial registration of beneficial owners by December 31, 2024. Meanwhile, new entities must register with FinCEN by March 31, 2024. After March 31, all new entities have 30 days to register.

Who Is a Beneficial Owner?

The CTA requires companies to file a Beneficial Ownership Information (BOI) report to FinCEN. Beneficial owners are defined as individuals who:

• Directly or indirectly exercise substantial control over the association or
• Own or control at least 25% of the association’s ownership interests

By this definition, beneficial owners include all HOA board members. It also includes the declarant, developer, and any declarant-appointed board members, while the declarant owns at least 25% of the separate interests. Homeowners are generally not considered beneficial unless a specific homeowner owns at least 25% of the association.

On the other hand, there are exemptions for beneficial owners. These include the following:

• Minor children;
• Individuals acting as a custodian, nominee, intermediary, or agent;
• Employees who are not senior officers;
• Creditors; and
• Individuals whose sole interest is a future right of inheritance

There is some debate about whether or not community association managers are considered beneficial owners. If the association employs them, they’re likely not beneficial owners. However, whether HOA management companies or HOA managers not directly employed by the association fall under the description is still unclear.

Who Is a Company Applicant?

The company applicant’s information is required if a reporting company is registered or created on or after January 1, 2024. A company applicant is defined as:

• The person who files the document that registers or creates the company and
• If there is more than one person involved in the filing, the person who is mainly responsible for controlling or directing the filing

According to the CTA, a company can only have two company applicants. Community associations may choose the HOA board compliance officer, HOA general counsel, or a third-party reporting company as the company applicant. However, the last option may be the best of all the choices as they are less likely to make errors.

As of writing, company applicants may have a continuing obligation because they cannot be removed from the files. Therefore, community associations must choose their company applicant wisely.

Consequence of Noncompliance

What happens if an HOA fails to file information with FinCEN? Noncompliance carries a heavy consequence. According to the law, reporting violations could lead to civil penalties of $500 per day. Meanwhile, willful violations are a felony subject to penalties of up to $250,000 and up to 2 years in prison.

Recommendation: Amend the Bylaws

It’s highly recommended to amend the HOA bylaws to accommodate the law. More specifically, it’s best to add a disqualification clause for board members who refuse or fail to comply with the CTA’s reporting requirements. This is because non-compliance has drastic consequences. While the members take their time to remove the board member at a special meeting, the clock is ticking, and the HOA might already face heavy penalties.

However, remember that the board may not be allowed to amend the bylaws alone. Most governing documents prevent the board from modifying qualifications without a membership vote.

The Fight Against HOA Implementation

Community association advocates, including the Community Associations Institute, vehemently campaign to exclude community associations from the Corporate Transparency Act or to delay its application. CAI, in particular, is taking the following actions:

• Requesting the exemption of community associations from the Corporate Transparency Act and the related Beneficial Ownership Information (BOI) reporting requirements;
• Requesting the delay of the effective date of the BOI reporting requirements through the support of H.R. 4035/S. 2623 and H.R. 5119; and,
• Advocating for the confidentiality of the individual corporate filings of the BOI reporting requirements through creating rules.

Those who want to show their support and contribute to this cause may do so here.

The Final Word

Congress enacted the Corporate Transparency Act to protect national security and minimize illicit financing. Noble as these intentions may be, there is no denying that the CTA could burden community associations. As such, actions are underway to request legislators to consider exempting community associations from the Act and delay reporting requirements.

Homeowners associations often have difficulty navigating the ins and outs of HOA laws, whether at the federal or state level. Hiring an HOA management company can help with that. Start looking for the best one in your area using our online directory!

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