The Corporate Transparency Act (CTA)’s Beneficial Ownership Information Reporting Requirements: What Do…

The Corporate Transparency Act (CTA)’s Beneficial Ownership Information Reporting Requirements: What Do Community Associations Need to Know?

By: Bruce Easmunt and Anna Mancino

In 2021, Congress passed a law to create more transparency as to the individuals that control organizations and corporate entities. The Corporate Transparency Act (“CTA”), adopted in 2021, may begin affecting community associations on January 1st, 2024. Pursuant to the CTA, the Financial Crimes Enforcement Network (“FinCEN”) has enacted a new rule to primarily combat money laundering, tax fraud and the financing of terrorism. While both problems seem far removed from the operations of community associations, FinCEN’s regulations appear to cover most community associations and their directors and officers in newly adopted reporting requirements.

What entities are covered by the CTA?

The scope of the entities that must comply with FinCEN’s rule is broad. It covers U.S. corporations, U.S. limited liability companies, and any other entity created through a filing with a Secretary of State or a similar office under the law of any state. This includes entities who file with the Virginia State Corporation Commission (“SCC”), the DC Corporations Division or similar state agencies. Ultimately, it appears that many community associations will be covered by and subject to the CTA.

What exactly do community associations need to do to comply?

Under the CTA, covered community association entities will be required to submit a beneficial owner information report (“Report”) to the agency.  The Report must contain:

  1. the association’s legal name;
  2. the association’s trade name;
  3. the current address for both the association’s registered agent and principal office (if applicable);
  4. the state where the association was formed; and
  5. the association’s taxpayer identification number.

Along with the above information, the Report must contain the following information for each individual in the association that qualifies as a “beneficial owner” (defined further below):

  1. the owner’s full legal name;
  2. the owner’s birth date;
  3. the owner’s current addresses; and
  4. either the owner’s unexpired passport number, driver’s license number, or state-issued identification document number.

Who must be included in the report?

A covered community association must submit this information on behalf of “beneficial owners” of the association. A beneficial owner is defined as “an individual who, directly or indirectly (i) exercises substantial control over the entity or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The definition of a beneficial owner is extremely broad as it includes any individual who exercises a certain level of control over the association, even if that individual holds no ownership interests in the entity.

Under the CTA, an individual exercises substantial control if they perform such actions as:

  • Serving as a senior officer of the reporting company. A senior officer includes “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.” This would thus arguably include the president and vice president of a community association.
  • Having authority over the appointment or removal of any senior officer or a majority of the board of directors, or
  • Directing, determining, or having substantial influence over important decisions made by the reporting association.

The above list is not exhaustive. The catch-all provision in the rule provides that an individual may also exercise substantial control if they have “any other form of substantial control over the reporting company.”

Given these broad definitions, it is likely that each director and officer of a covered community association is subject to the reporting requirements of the CTA.

How long do associations have to comply?

When the rule takes effect on January 1st, 2024, all covered associations will have one year to submit their Report (January 1st, 2025). Late filings are subject to penalties including fines of $500 per day, while purposefully false or fraudulent Reports subject a filer to fines of up to $10,000 and/or imprisonment for up to two years.

For covered associations that are created on or after January 1st, 2024, the reporting timeline is drastically shorter. Newly created associations must submit their report within thirty days of their creation (although FinCEN is considering an initial 90-day grace period in 2024).

Does the report need to be updated?

Problematically, covered community associations are required to update their Reports within thirty days of any changes through an amendment to the original filing. This likely includes the resignation, election or appointment directors or officers. In addition, this also includes a change in any beneficial owner’s information, as an example, a change in a director’s address or driver’s license.

Are there any exceptions?

In the new rule, there are exceptions, including exemptions for certain types of entities that are defined as “non-reporting companies.”

A community association may be exempt, or considered a “non-reporting company,” if it meets the following three criteria in the previous tax year. The association must show that 1) it has more than twenty (20) full-time employees in the United States; 2) it has gross receipts or sales in excess of $5,000,000 reported in its Federal income tax or information returns; and 3) it has a physical office in the U.S. Additionally, associations organized as tax exempt entities under section 501(c) of the Internal Revenue Code are exempt. While some community associations may be excluded under these criteria, there is not yet an express exception for community associations generally.

In addition, it is possible that unincorporated condominium unit owners’ associations are not covered by this new reporting requirement, but FinCEN may provide additional guidance as the effective date of this new reporting requirement draws closer.

The Big Picture

It does not appear that community associations were intended to be targeted by the CTA, but nevertheless most community associations will be required to comply with these reporting requirements.  It is our understanding that efforts are underway to lobby for changes to the CTA reporting requirements, but it is unlikely that they will expressly exclude community associations prior to the initial reporting deadlines.

If you have any questions about the CTA requirements and its effect on your association, please do not hesitate to contact us.

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