The Corporate Transparency Act and Beneficial Owners

This article was originally published by Lazega & Johanson LLC in PDF format.
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What is the Corporate Transparency Act?

As you may be aware, there is a new federal regulation that went into effect on January 1, 2024, that impacts your community association. This article will recap what you need to know to stay compliant, answer common questions, and discuss where things may be headed in the future. On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) with bipartisan support to protect national security and strengthen the integrity and transparency of the financial system. Pursuant to the CTA, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a federal regulation that requires most corporations, limited liability companies, and other entities registered to do business in the U.S. to report information about their “beneficial owners” to FinCEN. As stated in FinCEN’s press release, the idea is that this requirement will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and others from using anonymous shell companies to hide their illicit proceeds.

How does this affect you and your community?

So, what does any of this have to do with your community association? Given how broadly the term “reporting company” is defined by FinCEN, most community associations are required to comply with these reporting requirements. The term “reporting company” includes any corporation or limited liability company created by filing incorporation documents with the Georgia Secretary of State or similar office in a different state. It is easy to forget, but community associations are, for the most part, nonprofit corporate entities.

There are 23 exemptions to this definition of “reporting company,” but it is unlikely that a community association will qualify for any of them. One exemption that could possibly apply is for entities that are tax exempt pursuant to Section 501(c) under the Internal Revenue Code (IRC). Most community associations, however, do not seek or otherwise qualify for this tax-exempt status. The Internal Revenue Service (IRS) has a history of denying community associations 501(c) status. For example, the IRS has said that if a community association provides exterior maintenance of private residences and common areas or facilities, then it will not qualify for 501(c)(4) status. Likewise, the IRS has said that if a community association administers and enforces architectural restrictions or maintains any streets, then it will not qualify for 501(c)(7) status. Rather, most community associations file under Section 528 of the IRC. This is often done by filing Form 1120-H, and results in certain income being tax exempt, like membership dues.

If you have questions about whether your community association has qualified as a 501(c) tax exempt entity or could qualify as one, you should speak to your accountant as a starting point. Just because a community association is a nonprofit corporate entity, that does not mean it is also a 501(c) tax exempt entity.

Who is considered a beneficial owner?

Assuming that your community association is considered a reporting company and not otherwise exempt from the CTA, you will need to report to FinCEN information about “beneficial owners.” A beneficial owner includes anyone who, directly or indirectly, either exercises substantial control over the community association or owns or controls at least 25% of the ownership interests in the community association. The term “substantial control” is defined to include anyone that: (1) serves as a senior officer of the community association, (2) has authority over the appointment or removal of any senior officer or a majority of the Board, (3) directs, determines, or has substantial influence over important decisions made by the reporting company, or (4) has any other form of substantial control over the reporting company.

At a minimum, this is going to capture the directors that are currently serving on the Board and certain corporate officers. Whether the term “beneficial owner” includes other people or even entities, such as a developer, property manager, or committee members, will need to be evaluated on a case-by-case basis. The answer will depend on the unique setup of your community association.

One way that an individual can have “substantial control” is by being considered an “important decision-maker.” An “important decision-maker” is defined by FinCEN as someone “who directs, determines, or has substantial influence over important decisions made by the association, including decisions regarding: (1) business operations, such as the nature, scope, and attributes of the business, the selection or termination of business lines or ventures, or geographic focus, and the entry or termination, or the fulfillment or non-fulfillment of significant contracts; (2) finances, such as the sale, lease, mortgage, or other transfer of any principal assets, major expenditures or investments, issuance of any equity, incurrence of any significant debt, or approval of the operating budget, and compensation schemes and incentive programs for senior officers; and (3) the legal structure, such as reorganization, dissolution, or merger, and amendments of any substantial governance documents of the association, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

What information must be submitted?

You must include the following information about beneficial owners: (1) their full legal name, (2) date of birth, (3) current address, (4) a unique identifying number from an acceptable form of identification, like a passport number or driver's license, and the name of the issuing state or jurisdiction, and (5) a copy of that document. In the alternative, a beneficial owner can request a FinCEN ID number. A FinCEN ID number is a unique 12-digit number that allows a beneficial owner to use this ID number instead of other required information. There is no requirement that you get a FinCEN ID number, but it may help simplify the reporting process.

In addition to the above, you will need to file information with FinCEN about your community association itself (i.e., the reporting company in question). This information must include the following: (1) its full legal name, (2) any trade name, (3) the current address of its principal place of business, (4) its state of formation, and (5) its Tax ID number.

Lastly, the person who creates your community association to begin with, like the lawyer that files the Articles of Incorporation, will be considered the “company applicant,” and will need to report the same information as the beneficial owners. This reporting requirement for company applicants only applies, however, to reporting companies that are created or registered on or after January 1, 2024 – it does not apply to reporting companies that were created or registered before that date. Also, you do not need to update information about the company applicant if it changes.

When does this information need to be reported by?

There are different deadlines for filing the initial report. For community associations that existed before January 1, 2024, they have until January 1, 2025 to file their initial report. This is to give existing community associations (and other reporting companies) a chance to get familiar with the new filing requirements. For community associations that were created after January 1, 2024 and before January 1, 2025, they have 90 days to file their initial report. Lastly, for community associations that will be created after January 1, 2025, they will have 30 calendar days to file their initial report.

This only applies to the initial report though. After the initial report, community associations will have 30 days to update their information any time a beneficial owner changes. That means if you have an election and new Board members are put in place, you have 30 days from that date to update the requisite information with FinCEN.

You can access the application online https://www.fincen.gov/boi, and scroll through it before filling out the required information and hitting submit.

How is this information kept secure and shared?

Some Board members have expressed concern about these filing requirements and sharing private information with the government. For what it is worth, on December 21, 2023 (and effective February 20, 2024), FinCEN adopted a rule to address the security of information submitted to it. The purpose of this rule is to ensure that: (1) only authorized recipients have access to this information; (2) authorized recipients use this information only for purposes permitted by the CTA; and (3) authorized recipients re-disclose this information only in ways that balance protection of the security and confidentiality of this information with furtherance of the CTA's objective. In particular, this rule requires that information be stored in a secure, nonpublic database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. In addition, this information is exempt from disclosure under the Freedom of Information Act (FOIA).

This information can be disclosed, however, to the following government agencies and financial institutions for the following reasons: (1) federal agencies engaged in national security, intelligence, or law enforcement activity; (2) state, local, and tribal law enforcement agencies with court authorization; (3) officials at the Department of the Treasury; (4) foreign law enforcement agencies, judges, prosecutors, and other authorities that submit a request through a U.S. Federal agency to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement; (5) financial institutions with customer due diligence requirements under applicable law (in order to facilitate compliance with those requirements); and (6) appropriate regulatory agencies that supervise or assess financial institutions (in order to supervise their compliance with customer due diligence requirements).

What happens if you choose not to comply?

You could be hit with a civil fine of up to $500 per day adjusted for inflation annually (i.e., $591 as of April 18, 2024), up to $10,000 in total, imprisoned for up to 2 years, or both for the willful failure to file or update the required information with FinCEN.

There are, of course, certain safe harbors. You will not face penalties if you do not realize the report contained inaccurate information and voluntarily and promptly (and in no case later than 90 days after submission of the report) submit an updated report with correct information. This safe harbor, however, does not apply if you filed an inaccurate report for the purpose of evading the reporting requirements and knew that the information in the report was inaccurate.

Is anybody challenging the implementation of the CTA?

The Community Association Institute (CAI) filed a lawsuit on September 10, 2024 to exempt community associations from the CTA. Furthermore, as part of that lawsuit, CAI is seeking a preliminary injunction to preclude enforcement of the CTA against community associations as the lawsuit is pending. This litigation, however, can take time and there is no guarantee that this injunctive relief will be granted before your deadline or at all.

We are also aware of several other cases that are working their way through the federal courts. The case that has gained the most attention is the National Small Business Association v. Yellen, which was filed in the Northern District of Alabama. On March 1, 2024, that court ruled that the CTA is unconstitutional because it exceeded Congress’ authority. Unfortunately, this ruling only applies to the plaintiffs in that litigation. FinCEN is continuing to implement the CTA against everyone else, while this case works its way through the courts. The U.S. Justice Department appealed this decision to the 11th Circuit on March 11.

We hope this information is helpful. Should you have any questions about the CTA, please do not hesitate to reach out to your legal counsel.

*Individual situations may vary and this document is not intended as specific legal advice to any party.