By Elina B. Gilbert, Esq., Altitude Community Law
The Corporate Transparency Act (“CTA”) was originally enacted by Congress on January 1, 2021 for the purpose of preventing money laundering, tax fraud, and other similar activities, by requiring small corporations in the United States to file reports with the federal government disclosing certain information.
The reporting requirements are scheduled to take effect on January 1, 2024, and entities in existence as of this date, will be required to file their first report no later than December 31, 2024. Entities created after January 1, 2024, will be required to file their first report within 30 days of formation.
The CTA requires small corporations and limited liability companies to disclose information about their beneficial owners by filing a report with the Financial Crimes Enforcement Network of the United States Treasury Department. The CTA further provides that any information collected through the reporting requirements will not be available to the public. Instead, a database will be maintained of beneficial ownership data that will be made available to law enforcement.
Because most Colorado associations are set up as nonprofit corporations, they fall under the reporting requirement of the CTA. “Beneficial owners” are defined as:
(1) Any owners who, directly or indirectly, either exercise “substantial control” over the corporation; or
(2) Any owners who own or control 25%, or more, of the corporation.
Pursuant to the CTA, an individual is deemed to exercise “substantial control” over an association if such person:
(1) Serves as a officer of the association;
(2) Has authority over the appointment or removal of any officer or a majority of the board of directors (or similar body);
(3) Directs, determines, or has substantial influence over important decisions made by the association, including, but not limited to, decisions regarding:
(a) The nature, scope, and attributes of the business of the association, including the sale, lease, mortgage, or other transfer of any principal assets of the association;
(b) The reorganization, dissolution, or merger of the association;
(c) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the association;
(d) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; or
(e) 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;
The CTA further provides examples of “substantial control” as including:
(1) Board representation;
(2) Ownership or control of a majority of the voting power of the association;
(3) Rights associated with the association’s finances; or
(4) Having contract authority on behalf of the association.
Based on the above, and by virtue of the authority granted to them through Colorado law and governing documents, directors qualify as beneficial owners with substantial control over the company. Additionally, any owner who owns 25% or more of the units (or voting rights) in the association, would also constitute a beneficial owner subject to reporting requirements.
Although exceptions exist with respect to “beneficial owner” qualifications, board members will not typically fall under such exceptions. The most significant exceptions include:
(1) Individuals acting as nominees, intermediaries, custodians, or agents on behalf of another individual;
(2) Individuals acting solely as employees of a corporation or LLC whose control over or benefit from is derived solely from his or her status as an employee;
(3) Large corporations with more than 20 employees having an operating presence at a physical office and more than $5 million in gross receipts or sales; and
(4) Tax-exempt 501(c)(3) corporations. Please note, these types of corporations are set up for religious, charitable, education, or similar purposes and do not typically encompass homeowners’ associations despite the fact that they are nonprofit corporations.
Once reporting requirements become effective, associations will be required to provide the following information in their reports:
- Legal name of association
- Trade name (if any)
- Current address (including both the registered agent and principal office)
- State where association was formed
- Taxpayer identification number
The initial report must also include the following:
- List of every beneficial owner in the association including full legal names, birth dates, current addresses, and one of the following:
-
- passport number;
- driver’s license number; or
- state-issued identification document number; and
- an image of the document from which the unique identifying number was obtained
The information reported must also be updated after elections/appointments to remove prior board members and add current directors.
Finally, failure to comply with the reporting requirements can result in civil penalties of $500 per day, and criminal penalties of up to $10,000, and possible jail time (up to 24 months), so it is very important for associations and board members to be aware of and ready for the reporting requirements.
Elina Gilbert has practiced community association law for 23 years with Altitude Community Law, PC., with an emphasis on transactional issues such as insurance, document amendments, and real estate matters. Elina is Shareholder in Charge of Practice and has overseen the Altitude Community Education (“ACE”) program for over 14 years, a critical part of the firm’s mission statement and overall brand. Overseeing ACE involves creation, preparation, and presentation of 25+ programs per year, including lunch forums, webinars, and half-day classes that provide managers with CMCA and Real Estate credits. She also heads up the firm’s monthly E-Newsletter, which is nationally circulated. Elina is a frequent speaker on both a local and national level, which includes CAI Law Seminars, attorney courses through the National Business Institute, national webinars through HOALeader.com, and state classes and webinars through ACE and local CAI Chapters. Elina was inducted into the College of Community Association Lawyers (“CCAL”) in 2010, which represents an elite group of attorneys determined to be the most qualified experts in the HOA industry. Elina served as co-chair of the CCAL Law Seminar Planning Committee between 2018 and 2021, which developed and created the annual Law Seminar for HOA attorneys around the country, and currently serves on the CCAL Board of Governors and as a member of the CCAL Admissions Committee. When Elina is not practicing law, she enjoys spending time with her family and dogs, doing crosswords and Sudoku puzzles, working out, taking walks, and dreaming of the day the law will allow her to have a pet moose.
