UPDATE 3/4/24: A federal court has found the CTA to be unconstitutional. This ruling leaves the enforceability of the CTA questionable, although it remains to be seen whether the decision will be appealed and whether legislative changes could follow. Check back for additional updates on further developments.
In a world where transparency and accountability have become paramount in both public and private sectors, the U.S. government has taken significant steps to address financial secrecy and prevent illicit activities through the implementation of the Corporate Transparency Act (CTA). The CTA, signed into law in January 2021, is primarily aimed at increasing transparency in corporate entities. While it predominantly focuses on for-profit corporations and limited liability companies (LLCs), non-profit corporations like condominium and homeowners associations are not currently exempt from its reporting requirements. Accordingly, condominium and homeowners associations, as well as management companies, should prepare for the disclosure requirements imposed by the CTA.
Understanding the Corporate Transparency Act
The Corporate Transparency Act seeks to combat money laundering, terrorist financing, tax evasion, and other illicit activities by mandating the disclosure of “beneficial ownership.” Beneficial ownership refers to the individuals who ultimately own or control an entity. The CTA requires corporations, LLCs, and other similar entities to report who their beneficial owners are to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Determining Whether the CTA Applies
Under the CTA, an entity is classified as a “reporting company” if it is any of the following and does not qualify for an exemption: a corporation, limited liability company, or other entity created under the laws of a U.S. state or Indian tribe by the filing of a document with a secretary of state or similar office under the law of a U.S. state or Indian tribe. Most condominium and homeowner associations are formed by the filing of Articles of Incorporation with the Michigan Department of Licensing and Regulatory Affairs and, consequently, fall under the reporting company classification.
Entities exempt from the CTA include large companies that directly employ more than 20 full time employees in the United States, have an operating presence at a physical office in the United States, and have filed a federal income tax return or information return demonstrating more than $5 million in gross receipts or sales from sources within the United States. Most Michigan condominium and homeowner associations do not have any full-time employees, let alone 20 full-time employees, so this exemption will not apply in most cases.
Based upon the stated criteria for inclusion and the limited exemptions provided, the vast majority of condominium associations, homeowners associations, and management companies will be subject to the CTA and its reporting requirements. These entities must follow the Beneficial Ownership Information Reporting Requirements (“BOI Requirements”) issued on September 30, 2022.
Here’s how the CTA applies to these associations and management companies:
- Reporting Beneficial Ownership: Identification and reporting of their beneficial owners to FinCEN. This includes disclosure of the individuals who exercise substantial control over the organization. For management companies, this includes the management company’s corporate managers; for condominium associations and homeowners associations, this would include association Board members.
- Information Disclosure: Associations and management companies must disclose the name, date of birth, address, and a unique identifying number of their beneficial owners. The exact form and submission process might vary depending on the final regulations and guidance ultimately issued by FinCEN. But, at this time, it is expected to include an explanation of how each beneficial owner meets the criteria for being considered a beneficial owner under the CTA and details about the reporting entity, such as its official name and jurisdiction of organization. This information is meant to be kept on file by FinCEN.
- Reporting Changes: Associations and management companies must promptly update any changes in their beneficial ownership, ensuring that FinCEN always has accurate and up-to-date information for each association.
Complications of the CTA for condominium associations, homeowners associations, and management companies include:
- Privacy Concerns: Privacy concerns may arise as beneficial ownership information is submitted to a government agency.
- Compliance Challenges: Condominium associations, homeowners associations, and management companies will need to invest time and resources in understanding and complying with the CTA’s requirements. This includes identifying beneficial owners and ensuring compliance with proper reporting under the CTA.
The BOI Requirements are now effective as of January 1, 2024. Existing entities (condominium associations, homeowners associations, and management companies) must report their initial BOI Reports by January 1, 2025.
Penalties
The CTA applies civil and criminal penalties for willfully (1) failing to report or update a reporting company’s BOI or (2) providing a false or fraudulent BOI. The civil penalties include a daily fine of $500 for a continuing violation, up to a maximum fine of $10,000. The criminal penalties include imprisonment for up to two (2) years. The CTA does not contain any provisions for non-willful or negligence penalties.
Conclusion
The Corporate Transparency Act aims to reduce illicit activities, enhance law enforcement capabilities, and protect businesses and consumers from secretive corporate structures. However, including condominium and homeowners associations within its scope is arguably excessive, especially given the personal disclosure requirements imposed on volunteer directors. The additional scrutiny is simply not warranted for most community associations. Despite pending efforts to secure exemptions from the reporting requirements, compliance with the CTA is currently mandatory as of January 1, 2025. Accordingly, condominium and homeowners associations, as well as management companies, should prepare for compliance by familiarizing themselves with the CTA’s requirements and seeking legal counsel and management professionals’ guidance.
James J. Tocco is an attorney with Makower Abbate Guerra Wegner Vollmer, PLLC and has practiced law in the State of Michigan since 2005. Mr. Tocco focuses his practice primarily in the areas of general civil litigation, real estate, and contract drafting, negotiation and enforcement. For several years, he has concentrated his practice in the area of community association law. Mr. Tocco is a member of the State Bar of Michigan and the Community Associations Institute.
