Homeowner Association, Community Associations, Condo Associations and the Corporate Transparency Act

The Corporate Transparency Act (CTA) poses unique challenges for Homeowner Associations, Community Associations and Condo Associations (“Associations”).

Associations are Not Exempt

A few months ago, my tax partner Harry Teichman and I posted an article that analyzed how the CTA would apply to Associations.  The CTA contains an exemption for “non-profits.”  At first glance, many Associations might conclude they were exempt.  As Harry and I explained in that article, however, the CTA exemption for non-profits only applies to entities that are exempt from income tax under IRC Section 501(c) and a few other selected provisions.  Nearly all Associations are tax exempt under IRC Section 528 and the CTA exemption does not apply to Section 528 entities.  As a result, we concluded that most Associations will not be exempt and will need to file beneficial ownership reports under the CTA.

What our prior article did not cover, however, is how the CTA would apply to Associations and the process that Associations should follow to determine their beneficial owners. 

Who are the Beneficial Owners of an Association?

The CTA requires each reporting company to identify each of its beneficial owners.  An individual is a “beneficial owner” if that individual either (a) owns 25% or more of the ownership interest in the company (not applicable in the case of most non-profit Associations) or (b) exercises substantial control.

For those Associations that are non-profit corporations, there are no shareholders, so there should be no beneficial owners under the ownership prong.  The key question for Associations will be who it is that exercises substantial control over the Association.

FinCEN’s regulations provide that a person exercises substantial control if that individual:

(A) Serves as a senior officer of the reporting company;

(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:

   (1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

   (2) The reorganization, dissolution, or merger of the reporting company;

   (3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

   (4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

   (5) Compensation schemes and incentive programs for senior officers;

   (6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

   (7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

(D) Has any other form of substantial control over the reporting company.”

The list is non-exclusive and there is no safe harbor for excluding anyone.  As a consequence, a prudent approach will tend to be over-inclusive and will include any individual that might exercise substantial control. 

A Consistent Process for Identifying Beneficial Owners

Counsel for Associations will want to follow a consistent process when advising Associations that are identifying their beneficial owners.

First, the Association should identify each beneficial owner under the two per se rules, including (a) each senior officer of the Association and (b) each individual who has the power to appoint or remove any of those senior officers.

FinCEN’s regulations define “senior officer” as “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.”  Consequently, a first step is to include as a beneficial officer any individual who performs any of the listed functions contained in the definition of “senior officer.”  Each such individual is a per se beneficial owner.

Second, while it would be unusual for an individual to have the power to appoint or remove any senior officer, any such individual should also be listed as one of the per se beneficial owners.

Third, the Association should identify every other individual who has “substantial influence over important decisions.”  In practice, this list should include every member of the Association’s board of directors.

Finally, the Association should also identify as a beneficial owner any other individual who “has any other form of substantial control over the reporting company.”  Here’s where Associations and their counsel will need to exercise their judgment.

Associations and Management Companies

Because Associations exist to manage community amenities, they are usually led by volunteer boards, often elected annually from residents in the community.  They have no profit motive and often volunteer simply to ensure that their favorite amenities are maintained. 

In practice, most Associations are managed by professional management companies.  Management companies often develop the Association’s budget, hire and fire vendors, schedule and lead board meetings, maintain bank accounts, collect dues from residents and handle vendor payments.  Traditional corporate governance suggests that an outsourced management company ought to be supervised and directed by the corporation’s board of directors.  However, because volunteer boards can be somewhat passive, some management companies develop a more independent relationship.  In those circumstances, the management company may act independently, only to have its actions ratified by the board long after the fact.

A management company with the ability to act independently or at its own discretion could have “substantial influence over major decisions” or some “other form of substantial control” over the Association.  If so, the management company would qualify as a beneficial owner.

Importantly, however, the Association will not be able to list the management company itself as a beneficial owner.  When a corporate entity would qualify as a beneficial owner, FinCEN’s regulations require the reporting company to identify those individuals who are the beneficial owner of the corporate entity.  As a result, the Association will need to conduct the same beneficial ownership analysis of its management company as it did for its own corporate entity.

The challenge this poses is that most Associations do not have the corporate ownership and corporate governance information applicable to their management companies.  In a situation where the Association’s management company is a beneficial owner, the Association will need to require the management company to complete its own beneficial ownership analysis (following the procedure outlined above).

Beneficial Owner Personal Information

After the Association collects its list of beneficial owners, it will need to collect from each beneficial five items of personal information: (a) full legal name, (b) date of birth, (c) residential street address, (d) a “unique identifying number” (which for most will be either a drivers license or passport number) and (e) an image of the document that contains the unique identifying number (i.e., the drivers license or passport). The Association will need to include in its BO Report these five items of personal information for each beneficial owner.

This will also prove challenging.  These items of personal information or usually kept confidential because they can be used for identity theft.  The Association’s board members and officers may be reluctant to share their personal information with the Association for inclusion in the BO Report.

For those circumstances where the management company’s beneficial owners must also be included, it will be even more difficult.  The management company (and its individual beneficial owners) will also be reluctant to share their personal information with their managed Associations.

Associations and their counsel will need to utilize tools to organize and maintain the integrity of beneficial owner personal information. 

Choosing a data management tool will be especially important to assist Associations in tracking changes in their beneficial owners’ data.  A key provision of the CTA requires a reporting company to amend its BO Report within 30 calendar days after any change in the data contained in the original report.  For example, if a beneficial owner should change residential address or get a new drivers license or passport number, the reporting company would need to file an amendment.  Without a data management tool to track such changes in data, tracking the need to file an amendment will be nearly impossible.

Conclusion – Associations Have a Lot of Work to Complete

The CTA takes effect on January 1, 2024, and Associations that exist before that date will have until its first anniversary (January 1, 2025) to file their initial BO Report.

Associations and their counsel, however, should not wait to get started.  Explaining the CTA and its requirements for beneficial owners will take time.  Associations and their counsel would be well advised to start the process immediately.  Counsel may be able to utilize filing systems or tools that will assuage the privacy concerns of individuals.  Management companies that may be operating with excess independence may reassess their approach and advise boards to become more active to avoid a conclusion that the management company exercises substantial control.