The Corporate Transparency Act (“CTA” or “Act”) was enacted in 2021 as part of an effort to prevent money laundering, corruption, and tax fraud by imposing new reporting requirements for corporations that will take effect on January 1, 2024. The Act is codified in the Code of Federal Regulations at 31 CFR §1010.380. Although the Act was certainly not enacted with community associations in mind and never specifically mentions community associations, the majority of community associations are incorporated (typically as nonprofit mutual benefit corporations) and therefore may be subject to the CTA's reporting requirements simply due to their status as corporations.
The Act requires a “reporting company” to file a beneficial ownership report with the U.S. Department of Treasury's Financial Crimes Enforcement Network (“FinCEN”) disclosing certain information about the company, as well as certain “personally identifiable information” for each “beneficial owner” of the company. A “reporting company” is defined to include a corporation or other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state. Incorporated community associations are created by the filing of articles of incorporation with the Secretary of State's office and, therefore, an incorporated community association would be a “reporting company” under the CTA unless a specific exemption applies. Currently, the exemptions provided under the CTA are unlikely to apply to most incorporated community associations.
The information that must be reported about the reporting company includes its full legal name, address, and taxpayer identification number. In addition, the information that must be reported about each individual who is a “beneficial owner” of the reporting company includes, for each individual, his or her full legal name; date of birth; current address; and unique identifying number from either a non-expired passport, driver's license, or government-issued identification document. An image of the non-expired passport, driver's license, or government-issued identification document must also be submitted.
A “beneficial owner” is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” The regulations provide that an individual exercises “substantial control” over the reporting company if the individual serves as a senior officer; directs, determines, or has substantial influence over important decisions made by the reporting company; or has any other form of substantial control over the reporting company. The regulations further state that an individual may exercise “substantial control” over the reporting company through “board representation.” At a minimum, it appears that each board member of an incorporated community association would be considered a “beneficial owner” of the reporting company. There is even some debate as to whether community managers could also potentially fall under the broad definition of a “beneficial owner” because they are individuals who “directly or indirectly” may have “substantial influence over important decisions” made by the association.
Failure to report complete beneficial ownership information could result in civil penalties of $500 per day up to a maximum of $10,000. The deadline to file an initial report for existing corporations is January 1, 2025 (more than a year from now), and an updated report will need to be filed within 30 days of any change to the information reported (such as a change in “beneficial owners”).
Again, the CTA is clearly not aimed at community associations, but status as a corporation may nonetheless subject incorporated community associations to the Act's reporting requirements. Industry groups, including the Community Associations Institute (CAI), are attempting to obtain an exclusion for community associations. However, there is no guarantee that such an exclusion will be added to the Act or that it would take effect prior to the first reporting deadline of January 1, 2025. Our firm will continue to monitor any developments relating to the CTA that may pertain to community associations.