The Corporate Transparency Act (CTA) is a federal law designed to protect the US financial system from money laundering and other illegal activities by requiring certain companies to report information about their beneficial owners and applicants to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Homeowners associations (HOAs) are not exempt from such reporting requirements.
The Beneficial Ownership Information Report
The Beneficial Ownership Information Report (BOI) is a report that beneficial owners of reporting companies (discussed below) must file with FinCEN. The BOI requires beneficial owners to disclose certain personal information, such as their full legal name, residential address, date of birth, and an identifying number from an acceptable identification document (such as a passport, driver’s license, or birth certificate). All newly formed reporting companies must file a BOI within 90 days of formation, starting on January 1, 2024. This time window will decrease to 30 days starting January 1, 2025. Reporting companies that already exist must file an initial BOI by January 1, 2025.
It is important to note that the reporting requirements are ongoing. A reporting company must file an updated BOI each time there is a change in beneficial ownership, which includes the addition or removal of a beneficial owner, or a change in a beneficial owner’s details, such as a change of address.
The contents or form of the final BOI form is still unclear, as FinCEN has not released any sample forms at the time of this writing.[1]
Who is a Beneficial Owner?
The CTA defines a “beneficial owner” as an individual who maintains substantial control over the company, or who possesses a significant ownership interest in it. Specifically, this encompasses any person who, directly or indirectly, wields substantial control—such as those serving in senior management positions, like managing members, presidents, or CEOs—or holds at least a 25% share of the reporting company’s ownership interests. However, the CTA exempts certain individuals from this definition, including minor children, with the stipulation that the company must report the BOI of the child’s parent or guardian. This definition of “beneficial owner” aligns with the broader goal of the CTA to identify the individuals in control of entities who benefit from illicit activities and to protect the financial system from financial crimes.
Which Entities Must Report?
Under the CTA, a “reporting company” is defined as any entity that operates as a privately held business within the United States and does not fall into any of the exemption categories. The CTA requires that all reporting companies within the United States file BOIs with FinCEN detailing the personal information of their beneficial owners. It’s likely that most U.S. corporate entities will not be exempt from the CTA’s reporting requirements, as exemptions are generally intended for larger organizations such as banks, tax-exempt groups (not merely nonprofit), insurance companies, and accounting firms. Generally, a company is required to file a BOI if it employs fewer than 20 full-time employees or if its gross receipts or sales were less than $5 million in the previous year.
Will HOAs need to report?
Given the exemption criteria mentioned above, it is likely that most HOAs will fall under the reporting requirements, as they usually do not fall into the exempt categories, such as banks or formally recognized tax-exempt organizations. Although most HOAs operate as nonprofit corporations, they do not qualify as charitable organizations under Section 501(c)(3) of the Tax Code. Unless a HOA is specifically registered as a qualifying non-profit with the IRS, it is generally best practice for them to comply with the CTA’s reporting requirements.
Preparing for Compliance
HOAs should start by identifying “beneficial owners” of the HOA. Since each HOA is governed by a Board of Directors, members of each association’s Board of Directors are required to report. Perhaps less obvious, individuals who own over 25% of an HOA (e.g., investors who may own multiple units in a given community) will also be required to report.
Next, HOAs should designate someone, perhaps a Board member or management agent, to collect and securely store required personal information for the BOI, including names, addresses, birth dates, and identification details. The individual responsible should also update the BOI after any change in the Board’s composition (elections, resignations, removals, etc.) to reflect those. Remember, an entity’s reporting obligation is continuous, and updated BOIs must be submitted within 30 days of any change in control.
Risks of Non-Compliance
Noncompliance with the CTA carries significant risks, particularly for senior individuals within an entity who hold significant control and decision-making power. These individuals, if they fail to report the required BOI, or knowingly submit false or fraudulent information, face severe civil and criminal penalties.
Civil Penalties:
Senior association officials can be fined up to $500 for each day of noncompliance or for providing false information. This fine accumulates daily, potentially leading to a substantial financial burden over time. The maximum civil penalty amount is capped at $10,000.
Criminal Penalties:
Beyond financial repercussions, there are also criminal penalties associated with noncompliance. Senior association officials who willfully fail to provide accurate BOI to FinCEN or fail to update this information can face imprisonment for up to two years.
Uncertainty regarding Enforcement
If you feel like the path to CTA compliance is about as clear as a foggy Minnesota morning, you’re not alone. The recent resignation of FinCEN’s president, coupled with delays in establishing reporting requirements, has only added to the uncertainty surrounding the enforcement of the CTA. As certain essential aspects of the reporting process are still uncertain or subject to change, the exact impact on HOAs may evolve over time. Given these uncertainties and the inherent challenges of compliance, it is a smart move to consult with a legal expert. A skilled attorney can help you cut through the fog, helping you comply with confidence.
Stay up to date with official CTA developments and BOI reporting requirements by visiting FinCEN’s BOI website: https://www.fincen.gov/boi
For more information on the Corporate Transparency Act, please contact one of these Hellmuth & Johnson attorneys. Pedro Herrera, Phaedra Howard, Blake Nelson, Nancy Polomis, or Darbie Tamsett.
Please Note: This article is intended to provide general information only. You should not rely upon it for legal advice, as proper advice depends on various facts and circumstances unique to each matter. No attorney-client relationship is formed without a signed letter or agreement by which the client and the law firm agree to the terms of representation.
Sources:
U.S. Code: “31 U.S.C. § 5336.”
Code of Federal Regulations: “31 CFR § 1010.380.”
Financial Crimes Enforcement Network, U.S. Department of the Treasury: “Small Entity Compliance Guide, Version 1.0, September 2023.” [Online] Available: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf
Financial Crimes Enforcement Network: “FinCEN Issues Notice of Proposed Rulemaking to Extend Deadline for Certain Companies to File.” [Online] Available: https://www.fincen.gov/news/news-releases/fincen-issues-notice-proposed-rulemaking-extend-deadline-certain-companies-file
Financial Crimes Enforcement Network: “Beneficial Ownership Information (BOI).” [Online] Available: https://www.fincen.gov/boi
Federal Register: https://www.federalregister.gov/documents/2023/11/30/2023-26399/beneficial-ownership-information-reporting-deadline-extension-for-reporting-companies-created-or
[1] FinCEN has submitted a proposed form to the Office of Management and Budget for comments. You may access the proposed form at https://www.federalregister.gov/documents/2023/09/29/2023-21293/agency-information-collection-activities-submission-for-omb-review-comment-request-beneficial