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BLOG / 01.26.24 /Kenneth R. Jacobs

Co-Ops and HOA’s Caught In “Corporate Transparency Act” Net

In its ongoing effort to limit “money laundering, terrorist financing, corruption, tax fraud, and other illicit activity,” Congress passed the “Corporate Transparency Act” (“CTA”) in 2021 requiring certain business entities to file reports with Treasury identifying the beneficial owners of the entity. In 2022 the “Financial Crimes Enforcement Network” of the Treasury Department (“FinCEN”)  passed final rules to implement the CTA. The rules go into effect on January 1, 2024. Happy New Year!

Unless an entity is exempt from filing under the CTA, any entity created by filing with the secretary of a state or similar office is considered a “reporting company.” (More about what companies are exempt from filing below.) This would include most corporations and LLC’s. In that case, relevant information regarding the “beneficial owners” of the reporting company must be filed with FinCEN as well. FinCEN is supposed to keep this information confidential.

A ”reporting company” means “an entity that is (a) a corporation; (b) a limited liability company; or (c) any entity created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.”

A “beneficial owner” is anyone who (a) exercises “substantial control” over a reporting company, or (b) owns or controls at least 25% of the reporting company.  “Substantial control” includes service as a senior officer; authority over the appointment or removal of a senior officer; or “substantial influence” over important matters affecting a reporting company through “any other contract, arrangement, understanding, relationship or otherwise.”  Under the FinCEN regulations, Board membership may be considered  one form of substantial control.

The information required to be produced to FinCEN includes the entity’s name/address/state/TIN. In addition, beneficial owners must produce certain personally identifiable information. Both an individual beneficial owner and the reporting company can obtain unique FinCEN identifiers, though, and the reporting company can submit the identifier in lieu of individually identifiable information for beneficial owners. Filing forms and instructions can be obtained at https://www.fincen.gov/boi.

Reporting companies have one year to submit their first report, and 30 days to file changes. Penalties for intentional noncompliance by companies and beneficial owners can run from $500 to $10,000 per day, plus fines or even prison time. (The same penalties also apply to persons who intentionally disclose such information after it has been filed.) The statute does not specify penalties for inadvertent noncompliance. In addition, the person submitting the certificate of incorporation or articles of organization of a company to the state must report their own info to FinCEN when applying. (It’s not clear whether that would also apply to corporate service companies that make most filings.)

Are Cooperative Corporations Required to Report under the CTA? Unfortunately, most cooperative housing corporations in New York must report, unless they fall under one of the relevant exemptions. Exempt entities include entities formed under IRC Section 501(c) and entities that have more than 20 full-time employees and report gross receipts of at least $5,000,000 per year.  (The other statutory exemptions are not relevant to community associations.) Thus, the largest private housing cooperatives might be exempt, and many co-ops formed under the Private Housing Finance Law would be relieved from filing.

Individual Board members appear to fit the definition of “beneficial owners” for purposes of the CTA in that the Board obviously exerts control over corporate decisions. Therefore, they would need to provide their information to their co-op or HOA for reporting as well, unless they have obtained a separate FinCEN  identifier. If a co-op appointed a non-Board member as a “senior officer” such as Treasurer, they too would need to report. Officers with ministerial authority (such as signing stock certificates) would not.

What about Homeowners Association? Homeowners associations in New York are formed under the Not-For-Profit Corporation Law. They typically seek exemption under Section 528 of the Internal Revenue Code. Though, rather than under Section 501(c). Therefore, they would have to file under the CTA. Likewise, Board members and senior officers would need to file as well.

What about Condominiums? In New York, condominium associations are formed by recording the Declaration of Condominium with the county clerk, not the Secretary of State’s office. Furthermore, they are neither corporations nor LLC’s. Therefore, condominium associations currently appear to be exempt from the definition of a “reporting company” under the CTA. However, we must note that the Condo Act also contains a requirement that a copy of the Declaration be sent to the Secretary of State when the Declaration is recorded, and the Secretary of State has begun to claim that condos must file with them as a condition of organization as a result of that requirement. The DOS also has begun to identify condo associations in a separate database. Therefore, condominium associations also might be deemed to be caught in the CTA net.

How about Managing Agents? Some commentators have argued that managing agents exert “substantial control” over associations because they have substantial influence over corporate decisions; hence they are required to file as “beneficial owners” of reporting associations. We would judge not to do so, though. First, agents might advise corporations, but do not “control” them in the traditional sense. Second, their role is governed by their employment contract alone, not by their inherent relationship with the association. Third, most managing agents will have independent reporting requirements. Finally, we doubt that most associations have ties to terrorists or money launderers (despite what you may think of your Board), so extending reporting requirements to  managing agents probably does not serve the underlying purposes of the statute.

We will monitor the CTA regulations in the hope that Congress will see fit to include community associations as “exempt entities.”