In recent years, there has been growing concern over the use of anonymous companies to engage in illegal activities like money laundering and tax evasion. In response, the U.S. government enacted the Corporate Transparency Act (CTA) in 2021, aiming to increase corporate transparency and prevent the misuse of business structures. But what does the Corporate Transparency Act mean for Homeowners Associations (HOAs), and how does it impact their operations? This article will explore the key provisions of the CTA and explain what HOAs need to know about the law.
Community associations are nonprofit organizations or business corporations that manage and govern residential communities such as homeowners’ associations, condominium associations, and housing cooperatives. They are typically managed by volunteer boards comprised of homeowners in the community.
Volunteer boards are responsible for all operations and ensure the association is following the law and community governing documents. Reporting companies created or registered before January 1, 2024, have until January 1, 2025, to file.
Reporting requirements:
- The full legal name of the company.
- The company’s business address.
- The state jurisdiction where the company was formed or first registered.
- The taxpayer identification number and an identity document, such as a filed Articles of Incorporation or Organization.
- Full legal name and date of birth.
- Home address.
- A photocopy of U.S. driver’s license or passport.
Understanding the Corporate Transparency Act
The Corporate Transparency Act (CTA) is a significant piece of legislation designed to combat financial crime and increase transparency in business ownership. Under the CTA, certain entities doing business in the United States must disclose their beneficial owners—the individuals who ultimately control or own the company. This information is filed with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which will maintain a confidential registry of beneficial owners.
The primary objective of the CTA is to make it more difficult for bad actors to hide behind opaque corporate structures, like shell companies. By increasing transparency, the CTA seeks to ensure that law enforcement agencies, financial institutions, and regulators can track down the true owners of companies and prevent illicit activities.
The law took effect on January 1, 2024, with companies formed or registered after this date required to comply immediately. Existing companies (those in operation before January 1, 2024) must file their beneficial ownership information by January 1, 2025.
Who Is Affected by the Corporate Transparency Act?
The CTA applies primarily to small and mid-sized companies, including limited liability companies (LLCs), corporations, and similar entities. However, certain entities are exempt from the CTA’s reporting requirements, such as large, publicly traded companies, regulated financial institutions, and inactive entities with no substantial assets or activities.
Specifically, the CTA targets reporting companies, which are entities that:
- Have 20 or fewer employees
- Generate less than $5 million in revenue annually
- Do not have a physical office or substantial business activities outside of the U.S.
In essence, the CTA aims to collect data on entities that might be more vulnerable to misuse or illegal activities due to their small size and lack of oversight.
How Does the Corporate Transparency Act Apply to HOAs?
Homeowners Associations (HOAs), by their nature, are unique entities that may not immediately seem like the type of organizations targeted by the CTA. However, many HOAs are incorporated as limited liability companies (LLCs), corporations, or similar legal structures, and thus, they could be subject to the reporting requirements outlined in the CTA.
For HOAs that are incorporated as legal entities, the key question is whether they meet the criteria of a reporting company under the CTA. Most HOAs, particularly those with fewer than 20 employees and limited business activities outside the community, are likely to fall within the CTA’s scope. This means that many HOAs will be required to disclose their beneficial ownership information to FinCEN.
Beneficial owners in the context of an HOA typically include the individuals who have substantial control over the HOA’s management or who own a significant percentage of the entity. For many HOAs, the beneficial owners would likely be the members of the board of directors or individuals with a direct financial interest in the association’s operations.
Reporting Requirements for HOAs
HOAs subject to the CTA must file a report with FinCEN detailing the beneficial owners of the association. This report must include the following information:
- Full legal names of beneficial owners
- Dates of birth
- Current addresses
- Unique identifying numbers (e.g., from a passport, driver’s license, or other government-issued identification)
For HOAs with multiple beneficial owners (such as board members or others with a controlling interest), the CTA requires that each person’s ownership and control be clearly identified. While the information will be kept confidential and accessible only to authorized parties like law enforcement agencies, this data will be invaluable for improving transparency and accountability in the operation of these entities.
Potential Impact on HOAs
For HOAs, the implementation of the Corporate Transparency Act may bring several implications:
- Compliance Costs and Administrative Burden
HOAs will need to ensure they comply with the reporting requirements of the CTA, which may involve tracking down and verifying ownership information. Smaller HOAs may lack the resources or staff to easily navigate these new obligations. This could lead to additional administrative costs, especially for those associations that are not accustomed to maintaining detailed records of their ownership structure. - Privacy Concerns
While FinCEN has emphasized that the information provided will remain confidential, some HOA members may be concerned about the exposure of their personal data. The disclosure of sensitive information, including personal addresses and identifying numbers, could lead to privacy concerns, even if the information is only accessible by authorized parties. - Increased Scrutiny
The increased transparency brought by the CTA could also lead to greater scrutiny of HOAs, particularly in cases where there are concerns about the misuse of HOA funds or potential legal disputes. Members of the community may expect more transparency regarding how their association is managed, and directors could face more pressure to be accountable for their decisions. - Long-Term Benefits
On the positive side, the CTA could help HOAs increase their credibility and enhance their reputation, especially in cases where transparency is valued. It could also make it easier for banks, insurers, and other third parties to engage with HOAs, as the ownership structure will be clearer and more trustworthy.
The Corporate Transparency Act (CTA) is a step toward increasing transparency in business ownership and preventing financial crimes. While it may not have been explicitly designed with Homeowners Associations (HOAs) in mind, many HOAs will likely be affected by the new reporting requirements. Compliance with the CTA will require associations to identify and disclose their beneficial owners, which may have implications for privacy, administrative burdens, and transparency. While this may present challenges, it also offers an opportunity for HOAs to demonstrate their commitment to openness and accountability. As the deadline (2025) for reporting approaches, HOAs should begin preparing for compliance to avoid potential penalties and ensure their operations align with the new regulations.