September 17, 2024 • 31 mins
Join host Tony Campisi, CAE, Executive Director of the Keystone Chapter of Community Associations Institute, as he dives into the complexities of the Corporate Transparency Act (CTA) with expert guest Paul Formella, co-founder of Perfect Form.
Discover the implications of the CTA, effective January 2024, and learn why it’s critical for community associations to start preparing now. Paul shares his expertise on the requirements, the reporting process, and the potential penalties for non-compliance. Understand the nuances of beneficial ownership reporting and gain insights into keeping your association compliant with ongoing updates.
Don't miss this essential discussion on how the Corporate Transparency Act impacts community associations nationwide and the steps you need to take to ensure compliance.
Special thanks to our sponsor - Hoffman Law, LLC. Visit Hoffman Law online for more information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Music.
(00:16):
The podcast that brings you conversations that are critical to managing and
governing condos, cooperatives, and homeowner associations.
I'm your host, Tony Campisi, Executive Director of the Keystone Chapter of Community
Associations Institute.
Tune in each episode for the insights and information that are key to inspiring
(00:38):
professionalism, effective leadership, and responsible citizenship,
ideals reflected in community associations that are preferred places to call home.
There's been a lot of talk in the last year or so around the Corporate Transparency
Act and what its impact will be on community associations.
(00:58):
This is a federal act adopted by Congress, took effect in 2024,
and as the deadline to file under the Corporate Transparency Act approaches,
it's a good time for community associations to start preparing to meet the requirements of the act.
We'll talk about this subject today with my guest, Paul Formella,
(01:18):
co-founder of Perfect Form, a corporate services company.
Before we get to our topic today, here's a brief word from our sponsor, Hoffman Law, LLC.
I'm Ed Hoffman with Hoffman Law, LLC. Hoffman Law, LLC is a recognized leader
in community association law.
(01:38):
We're known Known for our responsiveness, legal acumen, leadership in the association
industry, and our unwavering focus and commitment to education.
You can learn more about us at our website, HoffmanHOALaw.com.
Hoffman Law LLC is proud to sponsor this episode of the Community Matters Podcast. podcast.
(02:02):
Paul, welcome to Community Matters Podcast. And please tell our listeners a
little bit about yourself in your company perfect form.
Hi, Tony, and hi to your listeners. I'm happy to be here, and thanks very much
for having me. As you mentioned, my name is Paul Formella.
I am a co-founder of a full-suite corporate services company called Perfect Form.
(02:23):
We offer services anywhere from entity formation, registered agent service,
UCC searches, independent managers and directors.
But our core area of focus is our Corporate Transparency Act compliance service.
And I can get into a little bit more detail about that. My background is in real estate.
I graduated with degrees in finance and real estate from undergrad,
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went to law school with the goal of becoming a real estate lawyer.
I graduated from the University of Chicago Law School in 2015 and was fortunate
enough to be able to make that goal a reality. when I joined Goodwin Proctor's
commercial real estate group.
Goodwin Proctor is a large law firm with one of the top real estate practices in the world.
(03:08):
So it was a privilege to be able
to work for them for a little over eight years is how long I was there.
Got wonderful experience working with fantastic clients, fantastic colleagues.
And Goodwin is fantastic as our most bigger law firms about training their lawyers
on client service first and foremost.
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If you've ever worked with a large law firm, you have hopefully experienced
super fast response times, attention to detail.
That is a lot of what we were trained on. And so when I decided to leave Goodwin
after a little over eight years to co-found Perfect Form, the core thing I wanted
to bring with me was that attention to top-notch client service.
And that's been our focus. We obviously complement that with some software to,
(03:54):
to enhance the client experience.
And it's that combination that, that we're trying to bring to the table.
But yeah, that's, that's a quick background on myself.
And Perfect Form is a relatively new company? Yeah. So I left Goodwin in January
of this year to start the company.
And that coincided with the Corporate Transparency Act taking effect.
(04:16):
And so that was the main reason I left exactly when I did.
The reasons I left were really twofold.
Well, one was I've always had an entrepreneurial itch, had just a desire to
start my own company and decided to start one specifically in this niche for a couple of reasons.
One, I'd worked with a number of companies in this space, had oftentimes found
(04:41):
the level of client service to be lacking.
And secondly, though, it was the passing of the Corporate Transparency Act,
which was in 2021, but then taking effect in January of this year, had a significant...
I knew it was going to have a significant impact on this industry,
thought we could come in and as a former lawyer, really design an optimized
system around compliance.
(05:02):
And so that's why I left exactly when I did. Left in January,
we built out the software, took us a few months to do that.
Officially launched the company in April.
And here we are a few months in, we're servicing a lot of clients and having a ton of fun.
And like I said, trying to provide the best, absolute best client service that we can.
And you're not in Pennsylvania, right? Where are you located?
(05:24):
Correct. I'm in Charlotte, North Carolina. So started my career with Goodwin
in Boston, moved to Charlotte a few years ago and remained with the firm and
worked remotely actually before COVID even made that cool.
And so I've been in Charlotte since 2018.
And this is not a Pennsylvania issue. I mean, our listeners are probably primarily
located in our chapter, which is Pennsylvania, South Jersey, Delaware.
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But the Corporate Transparency Act is, this is a nationwide issue.
And so let's talk about that. That's the topic for today.
So for For anybody who might not be familiar, hard to imagine,
community association practitioners who are not familiar with the Corporate Transparency Act.
We've been talking about it for the better part of a year.
Explain what the Corporate Transparency Act is and why it's been such a hot
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topic the last year or so.
Yeah, that's right. It's a federal law. So it doesn't discriminate based on
where you're located within the United States.
It's going to apply for any entity that's formed here and also any entity that's
formed internationally, but registered to do business here.
So it's a federal law that was passed back in 2021, like I said.
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Didn't take effect, though, until January 1st of this year.
And its key requirement is that it requires every legally formed entity, again.
Either formed in the country or registered to do business in the U.S.,
to file with the federal government what's called a Beneficial Ownership Information
Report, and to file specifically with FinCEN, which is the Financial Crimes
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Enforcement Network, a bureau of the U.S.
Treasury Department, which is the bureau that's been tasked with implementing
and enforcing the CTA. So it requires the filing of this BOI report is what folks call it.
And the goal behind the Corporate Transparency Act when it was passed is to
provide a higher level of transparency into who is standing behind entities
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that are operating businesses in this country.
So prior to the enactment of the Corporate Transparency Act,
take any state, it's actually not all that hard to form an LLC.
Form a corporation, and potentially with some somewhat complex flex corporate
structuring, operate that entity without anyone necessarily really knowing who's standing behind it.
And so a lot of money laundering, sanctions evasion, fraudulent,
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illicit financial activity happens.
And it can be extremely difficult, sometimes impossible, but oftentimes extremely
difficult, time consuming and expensive for the federal government to investigate
those cases and ultimately bring the nefarious actors to justice.
So the idea behind it was, hey, let's form this database of entities that are
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operating in the country with information on their owners and the control parties
behind them so that as the government is looking to investigate illicit financial activity.
They've got this database to use as a tool to help bring the bad guys to justice.
Now, the question that obviously stems from that is, well, won't the good guys
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simply report, the bad guys won't, or we'll report fraudulent information and
we'll be back to where we started. I think it's a really good question.
And I don't think FinCEN has given us great insight into a good answer to that.
But I've talked to a number of folks in upper levels of government.
And what they've told me time and time again is, don't think of this as FinCEN
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using just this database to try to crack down on illicit financial activity.
They'll use it as one of a number of tools to help connect dots,
to help put puzzle pieces together,
to prevent, to stop illicit financial activity, and hopefully to deter it in
the first place once nefarious actors understand that it's going to be much
easier for them to get caught.
(09:05):
So that's the purpose behind the law. Now, what does the law itself actually
require? Back to the BLI report requirement.
It requires reporting both at the entity level and at what's called the beneficial
ownership level and for entities formed in 2024 or later, the company applicant
level. So taking each of those in turn.
At the entity level, the report's going to require that you report the entity
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name, any alternate names that the entity is using, whether officially registered
or not, the entity's principal place of business and where it was formed or registered.
And then at the beneficial owner level, and by the way, let's talk about what
it means to be a beneficial owner.
Beneficial owner is going to mean both 25% or more owner slash control parties of the entity.
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So think about that in terms of, you know, think about that like traditional
sense of the term owner, but it's also going to include folks that are what
are called that have substantial control over the ND.
And the term substantial control is deemed to include folks that have a significant
decision-making authority involved in significant decision-making for the entity.
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So that's going to pull in folks like, you know, at a traditional company,
the C-suite, wheat, the CEO, CFO, et cetera.
But it's really a subjective test and it can also pull in really anybody else
at the company and it's up to
the entity to decide for itself who has substantial control at the entity.
So when you're thinking about substantial control in the context of an association.
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From associations we've talked
to, typically it's going to be the board members, but it could be others.
And so it's up to that association to decide who do they think has substantial
decision-making authority and influence at the association. And those are the
folks that should be reported.
Typically though, reporting the slate of board members is going to be sufficient.
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And then the last piece of it is company applicants.
And again, that's only going to apply to entities form on or after January 1 of this year.
Those are the folks who are involved in the actual formation of the entity.
So company applicant one would be the person who actually forms the entity.
Company applicant two is going to be the person, if there's more than one person
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involved in the formation, the person who has primary responsibility for the
formation of that entity.
And certainly this applies to community associations. And we should say,
before I get to the next question, CAI is working on two fronts to change this
legislatively to exempt community associations or to delay the requirements.
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And through a federal lawsuit, which we can talk about the court situation a little bit later.
But as of this episode will come out in September 2024, community associations
still have to comply with these requirements.
So who exactly is required to file under the Corporate Transparency Act?
(11:57):
Right. So, yeah, I know there's been a lot of efforts made to get associations
exempt, I think, for in many cases, good reason.
I think, as your listeners are all going to know, as you know,
they haven't been successful to date, but obviously that could change at any time.
So I know those efforts remain ongoing. going.
Filing under the CTA applies to any entity formed by the filing of a document
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with the Secretary of State or similar office.
So there is a good argument that filing doesn't apply to unincorporated associations.
I think that conversation should be had with counsel if you're an unincorporated
association to see if you can fit within that exemption, that you're not an
entity that's formed by the filing of a document.
For every other association, it likely is going to apply as of now.
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And so when we think about what does the association required to report,
it's going to be those core categories of information that I talked about.
And I think really the key question for each association is going to be that
beneficial ownership question, whether they should report just their board members,
whether they should report folks other than their board members.
I think that's the tough one to answer.
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And I think where associations are going to run into the most difficulty,
and the reason why my My recommendation would be to get the process started
sooner rather than later is,
you know, you think about an association typically made up of voluntary board
members who are, you know, working day jobs and doing this, you know,
really as a charitable activity,
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you know, you hit them with this, hey, we need your driver's license.
We need your residential address to file this report.
I think you're going to run into a lot of folks that at least question it and
probably some folks that resign or even just refuse to report.
And so getting those conversations started earlier, I think,
is going to benefit everyone in order to make sure that you're able to get compliant
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by year end if certain board members want to resign or things like that.
But it's really that beneficial ownership question that's the tricky part for associations.
But again, typically, board member slates is going to be sufficient,
but it's worth thinking about whether anyone else should be reported.
So we talked about who's required to file for a community association,
what information is required to report to be reported under the CTA?
(14:09):
Yes. Okay. So that's who's required to file in terms of the information required
to be disclosed at the entity level.
It's going to be, it's going to be that same general category of information.
So it's going to be the name of the association. If the association has filed
any doing business as, or even if they haven't, but they're They're operating
under a different name that would be reported as an alternate name for the association,
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where the association was formed, where that association's principal place of business is.
Those are really the core pieces of information that the association will need to report.
So nothing all that invasive when it comes to the entity itself.
Again, it's really once you start getting down to the individual level,
the beneficial owners and for entities on or after January 1 to 2024 company applicants,
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where what's It's called personally identifiable information starts to come
into play and where folks are probably going to have the most pushback.
So not surprisingly, CAI has been getting a lot of questions about this over the last year or so.
And one of the questions we get most often on this topic has to do with changes
in members of the board. People resign all the time.
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People might be removed for whatever reason from a board midway through their term, through the year.
Does that require an additional filing? Filing, it sounds like this could be
an ongoing thing, not just a one time a year thing.
That does require an updated filing. So the rule under the CTA is that,
hey, we're not going to require any automatic annual updated report.
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We're not going to have an automatic annual updated report requirement.
But if any previously reported information changes, so except for information
about company applicants, so put that to the side. FinCEN actually doesn't need
you to report if information about your company applicants changes.
But for anything else, information you've reported on the entity,
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information you've reported on the beneficial owners or the slate of beneficial
owners themselves changes.
And that can be as simple as somebody moving down the street,
somebody's driver's license expiring, the ID document that they give.
If any of that changes, an updated report needs to be filed within 30 days of the change occurring.
And it's not just an update to that information. It's the information that's
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changed along with all the information that stayed the same.
So it's really a full updated report that needs to be filed.
And you've only got 30 days to do it. And so my recommendation to folks is,
as you're thinking about getting initially compliant, you also want to be thinking
about what is going to be your system, what's going to be your process for making
sure you stay compliant.
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And that's a big piece of where a company like ours can help and comes into
play. and I can talk more about that.
But to me, that's really the big lift here.
Once you've heard about it, you can get your arms around the initial filing fine.
It's keeping up with changes, especially in the context of associations where
you've got board member turnover that becomes the heavier lift.
(17:00):
And so I agree that is that is going to be a heavy lift with with because,
you know, that information can change quite often.
What are the penalties for failure to comply with this?
They must be substantial. Substantial.
The penalties are substantial. So I have, we'll start with that as the bad news,
and then we'll go to some good news.
So first of all, in terms of deadlines, entities formed prior to this year have
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until the end of the year to file.
Entities formed on or after January 1 of this year have 90 days from the date of formation to file.
And just for anyone potentially listening, thinking, oh, we formed back in February
and we haven't filed yet.
The best thing you can do is go ahead and file as soon as you can.
There's There's no delinquency report.
There's no notice you need to give the government that you missed the deadline.
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The only thing you can do is go ahead and file.
And obviously, I can't make any promises. No one can make any promises.
But I would be shocked if anyone who's missed that 90-day deadline this year,
as long as they file this year, as soon as they can, after they understand they've
missed it, I'd be shocked if they suffer any noncompliance penalties.
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The reason being, FinCEN's got its hands full just getting people to hear about
this law in the first place and to file in the first place.
I think we see the numbers of entities that have reported.
I think the most recent numbers I've seen is we're at something like 3.75 million
and FinCEN's estimated something like 32 and a half million entities are going
to need to report this year.
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So unless there's an absolutely massive rush the last four months of the year,
which I think there will be somewhat of a rush, but I don't think it's going
to be to the tune of 28, 29 million entities, there's going to be millions of
folks that miss the year end deadline anyway.
And so as long as you get that filing in in 2024, I would be utterly shocked
if FinCEN actually takes noncompliance action against those folks.
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Again, can't make any promises.
And it's the only thing you can do anyway is get the filing in.
So go ahead and do that. But just to hopefully give people a little bit of comfort.
So those are the deadlines. In terms of the penalties, if FinCEN does want to
enforce noncompliance, both civil penalties and potentially criminal penalties at play.
Civil penalties of up to what it says in the legislation is $500 per day of
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noncompliance to be indexed for inflation. deflation.
And so the latest figures we've seen is that's up to $591 per day of continued
noncompliance on a per entity basis and criminal penalties of up to two years
imprisonment and up to $10,000 in fines.
That's the bad news. Really significant penalties if you are an entity that they want to come after.
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The good news is in order to even be at risk of noncompliance penalties in the
first place, violation has to be willful.
So going back to what I mentioned a little bit earlier you're sitting here this
is the first you've heard of the cta you realize you missed the 90-day deadline
you go ahead and file you know as as soon as you reasonably can.
It's going to be very hard to argue that you've willfully failed to comply with the CTA.
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And the way the legislation defines the term willful is that it's got to be
a voluntary intentional violation of a known legal duty, right?
So really who that's going to apply to are going to be folks who hear about
the CTA, simply choose to ignore it.
Obviously the bad guys who either don't report at all or report fraudulent information.
It's going to be very difficult though to ever try to prosecute a case against
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someone where they either haven't known about it or they've reported,
but, you know, made some type of an error that, you know, was,
you know, at least arguably reasonable, right?
Let's say you decide not to report somebody as a beneficial owner because you
don't really think they have substantial control power.
If later FinCEN investigates your entity for some reason, they decide that person
did again, going to be very hard to argue that you willfully fail to comply.
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So to me, although the noncompliance penalties are severe.
As long as you are making a good faith effort to report on time and to report correctly,
I wouldn't get super caught up in folks who have either just not heard about
this or forgotten about it, or being absolutely obsessed with getting really
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complicated beneficial owner reporting correct,
where you might have someone who's, you're on the fence about whether you should report.
I didn't know the fines were tied to inflation. So good thing inflation's coming down, I guess.
Let's talk about, we talked a little bit earlier about the court cases, the court challenges.
Can you talk about that and what that means for those that haven't filed yet?
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Yes. There was a federal district court out of Alabama.
There was a case back in March where the judge ruled the CTA unconstitutional.
And the judge had a couple options in that case. They could have,
as a result of that ruling, issued a nationwide injunction, and that would have
paused CTA compliance for everybody until that case played its way through the appeals process.
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That judge didn't choose to do that. And instead, their ruling applied only
to the plaintiff group in that case.
And the plaintiff group was the NSBA, the National Small Business Association.
And so until that case plays out in the appeals courts, that that group,
that plaintiff's group, they're shielded from having to comply to the CTA.
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But for everybody else, and FinCEN has come out and kind of reinforced that
they continue to expect everybody else to file, for everybody else,
the CTA continues to apply.
And so where does that Alabama case go from here? FinCEN has appealed that decision
to what is the 11th Circuit Court of Appeals.
That's the appellate court that will make a decision as to whether the judge
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in the district court case, whether his ruling should be upheld or overturned.
If it's regardless of which way they rule, I anticipate whichever side loses
will appeal that decision to the U.S. Supreme Court.
And the U.S. Supreme Court has discretion whether to take that case or not.
And from folks I've talked to, though, I'm not a litigator, I'm certainly not
(23:00):
a constitutional expert, but from folks I've talked to that are,
most people seem to think they will simply because of how wide reaching the effects of the CTA are.
And so, but the timing in terms of how all of this is going to play out and
when it's going to play out remains to be seen.
So oral arguments in that 11th Circuit case, I believe are slated for the end of September.
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In a typical case, you oftentimes might not see a ruling until end of 2025.
But, you know, given the significance of the CTA in 2024, maybe there's a chance
that they move a little more quickly than they otherwise typically would.
And they issue a ruling following those oral arguments prior to the end of the year.
But we'll just have to see how it plays out. And I should say a number of other
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cases now have popped up, especially following that Alabama case,
other plaintiff groups hoping to get similar rulings.
As of now, I don't believe we've seen any rulings out of any other courts that
would pause CTA compliance for anyone else.
But again, Again, that's a moving target as well.
And we should note here that CAI is working on filing a case in the federal courts.
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And by the time this episode is published, that may have been filed already.
But I think this is a good opportunity to note again that.
Until such time as something changes, you know, people might hope that a court
case would change these requirements for community associations.
But until such time as there's actually legislation signed into law,
which is probably unlikely before
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the end of the year, given there's an election coming up, et cetera,
or a court case having a final decision before the end of the year,
community associations have to comply and should, like you said,
should start getting ready now.
So we talked about this at the beginning, you're co-founder of the corporate
services company, Perfect Form.
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What exactly do you do, especially in the context of the CTA as it relates to
community associations?
And by the way, how did you find CAI? Yeah. So let me start with the CAI question.
The way we found CAI is that one of our... So we work with a lot of law firms.
So law firms who have clients that need to file into the CTA will work with
(25:10):
us to get their clients CTA compliant.
And so one of the law firms that we do a lot of work with is in this space.
And they represent a lot of associations, a lot of association management companies.
And as we started working with them, we started to think about the fact that,
hey, our service can be really helpful to associations and I can get into why that is.
(25:31):
And so we started talking about how can we spread our message just so folks
know that our service is here if they want to use something like us to get CTA compliant.
And so one of the recommendations they gave was to reach out to CAI as perhaps
a top trade organization in this space.
And that's how we found CAI. And it's been a wonderful partnership to this point.
(25:54):
Now, going back to what we do. I touched on it a little bit at the beginning
in terms of the full slate of services we provide to dig a little more into
our corporate transparency act compliance service specifically.
At a high level, we take folks from beginning to end in terms of CTA compliance.
And by end, I mean getting them set up with an ongoing compliance service to
(26:14):
make sure their entity stays compliant.
So from the beginning, we are consulting with clients on what needs to be be
reported, how to go about getting the information.
There's somewhat of an educational component to that and helping them formulate somewhat of a strategy.
Once they've obtained the information we'll need from them, they onboard that
into our secure software platform.
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We're taking that information, we're reviewing it, we're building out a client
portal for them to keep that information organized, to keep it,
to build out a dashboard for them where they can always easily go in and change
it if they need to or see their filing status.
And we're then taking the information and completing and filing the BOI report with FinCEN.
And then on an ongoing basis, we are filing as many updated reports annually
(26:58):
as that entity or company may need based on changes to previously reported information.
So for associations specifically, well, we can do this with anyone,
but it's been especially helpful with associations where we set them up with
automatic reminders based on when they onboard with us.
Reminding them of the requirements of the CTA, the easy steps they need to take
(27:22):
on our platform to notify us of changes so we can put those updated reports
together and file them for them.
And so a lot of those automatic reminders we have set for our association clients
are based on when their annual meetings are.
So based on when the most likely board turnover is going to be,
but we can also set them up on whatever cadence they want to reach out to them periodically,
you know, asking if any changes have occurred and if they have reminding them
(27:44):
of, you know, how easy it is to go into their portal and simply notify us of
them so we can file their updated report.
So it's really a soup to nuts service in terms of CTA compliance.
We're trying to do every single possible thing we can to make this as easy on folks as possible.
Because one, folks don't want to think about it. They don't want to have to
dig into the meanings of the terms.
(28:06):
They don't want to have to think about this on an ongoing basis.
They're not going to remember simply to update their information.
So us, you know, figuring out a strategy with them to be be in their ear periodically
about this has proved really helpful.
And so our goal is just to make compliance, initial compliance easier and faster,
but also make ongoing compliance easier and faster and just more likely, right?
(28:28):
Because again, without a system or a process in place internally,
I think the ongoing compliance piece is just going to be missed by so many,
especially with that tight 30-day update window. Yeah.
Yeah, you made that point a couple of times, and I think that's good to emphasize.
This is not just a one-time thing.
So, you know, associations need to stay on top of this.
Any final thoughts before we wrap up?
(28:49):
No, I think that covers it. I mean, for folks who have made it this far,
you've probably heard enough of my voice and you've probably got enough on the
CTA, not only from this podcast, but probably before as well.
I know you guys have been putting out a lot of information about it.
So thanks to everyone who tuned in and thanks to you, Tony, for having me.
Well, Paul, this has been great information for our listeners who are really
(29:12):
tuned into what's going on with the Corporate Transparency Act,
or even if they're not, this is an important topic.
So I appreciate you joining me today for this episode of Community Matters Podcast
and its potential impacts on community associations.
You can contact Paul at Perfect Form via email,
paul at perfectform.com, or phone at 980-231-0232, and visit their website at perfectform.com.
(29:43):
And for our listeners, thanks for tuning in to Community Matters.
We're glad to have your attention for a short time. And thanks once more to
the sponsor of Community Matters podcast, Hoffman Law LLC.
You can find them on the web at hoffmanhoalaw.com. If you're interested in being
a guest on an upcoming episode of Community Matters, reach out to me at tony, T-O-N-Y,
(30:09):
at caikeystone.org.
And don't forget to subscribe to the podcast so you'll get notifications every
time we post a new episode.
And please share our podcast with your colleagues, friends, and social networks.
For more resources and best practices on managing and governing your condominium,
cooperative, or homeowners association,
(30:31):
please contact CAI or visit our website at www.caikeystone.org.
Thanks again.
Music.
Music.
(00:16):
The podcast that brings you conversations that are critical to managing and
governing condos, cooperatives, and homeowner associations.
I'm your host, Tony Campisi, Executive Director of the Keystone Chapter of Community
Associations Institute.
Tune in each episode for the insights and information that are key to inspiring
(00:38):
professionalism, effective leadership, and responsible citizenship,
ideals reflected in community associations that are preferred places to call home.
There's been a lot of talk in the last year or so around the Corporate Transparency
Act and what its impact will be on community associations.
(00:58):
This is a federal act adopted by Congress, took effect in 2024,
and as the deadline to file under the Corporate Transparency Act approaches,
it's a good time for community associations to start preparing to meet the requirements of the act.
We'll talk about this subject today with my guest, Paul Formella,
(01:18):
co-founder of Perfect Form, a corporate services company.
Before we get to our topic today, here's a brief word from our sponsor, Hoffman Law, LLC.
I'm Ed Hoffman with Hoffman Law, LLC. Hoffman Law, LLC is a recognized leader
in community association law.
(01:38):
We're known Known for our responsiveness, legal acumen, leadership in the association
industry, and our unwavering focus and commitment to education.
You can learn more about us at our website, HoffmanHOALaw.com.
Hoffman Law LLC is proud to sponsor this episode of the Community Matters Podcast. podcast.
(02:02):
Paul, welcome to Community Matters Podcast. And please tell our listeners a
little bit about yourself in your company perfect form.
Hi, Tony, and hi to your listeners. I'm happy to be here, and thanks very much
for having me. As you mentioned, my name is Paul Formella.
I am a co-founder of a full-suite corporate services company called Perfect Form.
(02:23):
We offer services anywhere from entity formation, registered agent service,
UCC searches, independent managers and directors.
But our core area of focus is our Corporate Transparency Act compliance service.
And I can get into a little bit more detail about that. My background is in real estate.
I graduated with degrees in finance and real estate from undergrad,
(02:47):
went to law school with the goal of becoming a real estate lawyer.
I graduated from the University of Chicago Law School in 2015 and was fortunate
enough to be able to make that goal a reality. when I joined Goodwin Proctor's
commercial real estate group.
Goodwin Proctor is a large law firm with one of the top real estate practices in the world.
(03:08):
So it was a privilege to be able
to work for them for a little over eight years is how long I was there.
Got wonderful experience working with fantastic clients, fantastic colleagues.
And Goodwin is fantastic as our most bigger law firms about training their lawyers
on client service first and foremost.
(03:29):
If you've ever worked with a large law firm, you have hopefully experienced
super fast response times, attention to detail.
That is a lot of what we were trained on. And so when I decided to leave Goodwin
after a little over eight years to co-found Perfect Form, the core thing I wanted
to bring with me was that attention to top-notch client service.
And that's been our focus. We obviously complement that with some software to,
(03:54):
to enhance the client experience.
And it's that combination that, that we're trying to bring to the table.
But yeah, that's, that's a quick background on myself.
And Perfect Form is a relatively new company? Yeah. So I left Goodwin in January
of this year to start the company.
And that coincided with the Corporate Transparency Act taking effect.
(04:16):
And so that was the main reason I left exactly when I did.
The reasons I left were really twofold.
Well, one was I've always had an entrepreneurial itch, had just a desire to
start my own company and decided to start one specifically in this niche for a couple of reasons.
One, I'd worked with a number of companies in this space, had oftentimes found
(04:41):
the level of client service to be lacking.
And secondly, though, it was the passing of the Corporate Transparency Act,
which was in 2021, but then taking effect in January of this year, had a significant...
I knew it was going to have a significant impact on this industry,
thought we could come in and as a former lawyer, really design an optimized
system around compliance.
(05:02):
And so that's why I left exactly when I did. Left in January,
we built out the software, took us a few months to do that.
Officially launched the company in April.
And here we are a few months in, we're servicing a lot of clients and having a ton of fun.
And like I said, trying to provide the best, absolute best client service that we can.
And you're not in Pennsylvania, right? Where are you located?
(05:24):
Correct. I'm in Charlotte, North Carolina. So started my career with Goodwin
in Boston, moved to Charlotte a few years ago and remained with the firm and
worked remotely actually before COVID even made that cool.
And so I've been in Charlotte since 2018.
And this is not a Pennsylvania issue. I mean, our listeners are probably primarily
located in our chapter, which is Pennsylvania, South Jersey, Delaware.
(05:45):
But the Corporate Transparency Act is, this is a nationwide issue.
And so let's talk about that. That's the topic for today.
So for For anybody who might not be familiar, hard to imagine,
community association practitioners who are not familiar with the Corporate Transparency Act.
We've been talking about it for the better part of a year.
Explain what the Corporate Transparency Act is and why it's been such a hot
(06:08):
topic the last year or so.
Yeah, that's right. It's a federal law. So it doesn't discriminate based on
where you're located within the United States.
It's going to apply for any entity that's formed here and also any entity that's
formed internationally, but registered to do business here.
So it's a federal law that was passed back in 2021, like I said.
(06:29):
Didn't take effect, though, until January 1st of this year.
And its key requirement is that it requires every legally formed entity, again.
Either formed in the country or registered to do business in the U.S.,
to file with the federal government what's called a Beneficial Ownership Information
Report, and to file specifically with FinCEN, which is the Financial Crimes
(06:51):
Enforcement Network, a bureau of the U.S.
Treasury Department, which is the bureau that's been tasked with implementing
and enforcing the CTA. So it requires the filing of this BOI report is what folks call it.
And the goal behind the Corporate Transparency Act when it was passed is to
provide a higher level of transparency into who is standing behind entities
(07:15):
that are operating businesses in this country.
So prior to the enactment of the Corporate Transparency Act,
take any state, it's actually not all that hard to form an LLC.
Form a corporation, and potentially with some somewhat complex flex corporate
structuring, operate that entity without anyone necessarily really knowing who's standing behind it.
And so a lot of money laundering, sanctions evasion, fraudulent,
(07:38):
illicit financial activity happens.
And it can be extremely difficult, sometimes impossible, but oftentimes extremely
difficult, time consuming and expensive for the federal government to investigate
those cases and ultimately bring the nefarious actors to justice.
So the idea behind it was, hey, let's form this database of entities that are
(07:59):
operating in the country with information on their owners and the control parties
behind them so that as the government is looking to investigate illicit financial activity.
They've got this database to use as a tool to help bring the bad guys to justice.
Now, the question that obviously stems from that is, well, won't the good guys
(08:22):
simply report, the bad guys won't, or we'll report fraudulent information and
we'll be back to where we started. I think it's a really good question.
And I don't think FinCEN has given us great insight into a good answer to that.
But I've talked to a number of folks in upper levels of government.
And what they've told me time and time again is, don't think of this as FinCEN
(08:44):
using just this database to try to crack down on illicit financial activity.
They'll use it as one of a number of tools to help connect dots,
to help put puzzle pieces together,
to prevent, to stop illicit financial activity, and hopefully to deter it in
the first place once nefarious actors understand that it's going to be much
easier for them to get caught.
(09:05):
So that's the purpose behind the law. Now, what does the law itself actually
require? Back to the BLI report requirement.
It requires reporting both at the entity level and at what's called the beneficial
ownership level and for entities formed in 2024 or later, the company applicant
level. So taking each of those in turn.
At the entity level, the report's going to require that you report the entity
(09:28):
name, any alternate names that the entity is using, whether officially registered
or not, the entity's principal place of business and where it was formed or registered.
And then at the beneficial owner level, and by the way, let's talk about what
it means to be a beneficial owner.
Beneficial owner is going to mean both 25% or more owner slash control parties of the entity.
(09:50):
So think about that in terms of, you know, think about that like traditional
sense of the term owner, but it's also going to include folks that are what
are called that have substantial control over the ND.
And the term substantial control is deemed to include folks that have a significant
decision-making authority involved in significant decision-making for the entity.
(10:12):
So that's going to pull in folks like, you know, at a traditional company,
the C-suite, wheat, the CEO, CFO, et cetera.
But it's really a subjective test and it can also pull in really anybody else
at the company and it's up to
the entity to decide for itself who has substantial control at the entity.
So when you're thinking about substantial control in the context of an association.
(10:32):
From associations we've talked
to, typically it's going to be the board members, but it could be others.
And so it's up to that association to decide who do they think has substantial
decision-making authority and influence at the association. And those are the
folks that should be reported.
Typically though, reporting the slate of board members is going to be sufficient.
(10:54):
And then the last piece of it is company applicants.
And again, that's only going to apply to entities form on or after January 1 of this year.
Those are the folks who are involved in the actual formation of the entity.
So company applicant one would be the person who actually forms the entity.
Company applicant two is going to be the person, if there's more than one person
(11:15):
involved in the formation, the person who has primary responsibility for the
formation of that entity.
And certainly this applies to community associations. And we should say,
before I get to the next question, CAI is working on two fronts to change this
legislatively to exempt community associations or to delay the requirements.
(11:35):
And through a federal lawsuit, which we can talk about the court situation a little bit later.
But as of this episode will come out in September 2024, community associations
still have to comply with these requirements.
So who exactly is required to file under the Corporate Transparency Act?
(11:57):
Right. So, yeah, I know there's been a lot of efforts made to get associations
exempt, I think, for in many cases, good reason.
I think, as your listeners are all going to know, as you know,
they haven't been successful to date, but obviously that could change at any time.
So I know those efforts remain ongoing. going.
Filing under the CTA applies to any entity formed by the filing of a document
(12:19):
with the Secretary of State or similar office.
So there is a good argument that filing doesn't apply to unincorporated associations.
I think that conversation should be had with counsel if you're an unincorporated
association to see if you can fit within that exemption, that you're not an
entity that's formed by the filing of a document.
For every other association, it likely is going to apply as of now.
(12:41):
And so when we think about what does the association required to report,
it's going to be those core categories of information that I talked about.
And I think really the key question for each association is going to be that
beneficial ownership question, whether they should report just their board members,
whether they should report folks other than their board members.
I think that's the tough one to answer.
(13:03):
And I think where associations are going to run into the most difficulty,
and the reason why my My recommendation would be to get the process started
sooner rather than later is,
you know, you think about an association typically made up of voluntary board
members who are, you know, working day jobs and doing this, you know,
really as a charitable activity,
(13:24):
you know, you hit them with this, hey, we need your driver's license.
We need your residential address to file this report.
I think you're going to run into a lot of folks that at least question it and
probably some folks that resign or even just refuse to report.
And so getting those conversations started earlier, I think,
is going to benefit everyone in order to make sure that you're able to get compliant
(13:45):
by year end if certain board members want to resign or things like that.
But it's really that beneficial ownership question that's the tricky part for associations.
But again, typically, board member slates is going to be sufficient,
but it's worth thinking about whether anyone else should be reported.
So we talked about who's required to file for a community association,
what information is required to report to be reported under the CTA?
(14:09):
Yes. Okay. So that's who's required to file in terms of the information required
to be disclosed at the entity level.
It's going to be, it's going to be that same general category of information.
So it's going to be the name of the association. If the association has filed
any doing business as, or even if they haven't, but they're They're operating
under a different name that would be reported as an alternate name for the association,
(14:31):
where the association was formed, where that association's principal place of business is.
Those are really the core pieces of information that the association will need to report.
So nothing all that invasive when it comes to the entity itself.
Again, it's really once you start getting down to the individual level,
the beneficial owners and for entities on or after January 1 to 2024 company applicants,
(14:52):
where what's It's called personally identifiable information starts to come
into play and where folks are probably going to have the most pushback.
So not surprisingly, CAI has been getting a lot of questions about this over the last year or so.
And one of the questions we get most often on this topic has to do with changes
in members of the board. People resign all the time.
(15:12):
People might be removed for whatever reason from a board midway through their term, through the year.
Does that require an additional filing? Filing, it sounds like this could be
an ongoing thing, not just a one time a year thing.
That does require an updated filing. So the rule under the CTA is that,
hey, we're not going to require any automatic annual updated report.
(15:36):
We're not going to have an automatic annual updated report requirement.
But if any previously reported information changes, so except for information
about company applicants, so put that to the side. FinCEN actually doesn't need
you to report if information about your company applicants changes.
But for anything else, information you've reported on the entity,
(15:56):
information you've reported on the beneficial owners or the slate of beneficial
owners themselves changes.
And that can be as simple as somebody moving down the street,
somebody's driver's license expiring, the ID document that they give.
If any of that changes, an updated report needs to be filed within 30 days of the change occurring.
And it's not just an update to that information. It's the information that's
(16:19):
changed along with all the information that stayed the same.
So it's really a full updated report that needs to be filed.
And you've only got 30 days to do it. And so my recommendation to folks is,
as you're thinking about getting initially compliant, you also want to be thinking
about what is going to be your system, what's going to be your process for making
sure you stay compliant.
(16:39):
And that's a big piece of where a company like ours can help and comes into
play. and I can talk more about that.
But to me, that's really the big lift here.
Once you've heard about it, you can get your arms around the initial filing fine.
It's keeping up with changes, especially in the context of associations where
you've got board member turnover that becomes the heavier lift.
(17:00):
And so I agree that is that is going to be a heavy lift with with because,
you know, that information can change quite often.
What are the penalties for failure to comply with this?
They must be substantial. Substantial.
The penalties are substantial. So I have, we'll start with that as the bad news,
and then we'll go to some good news.
So first of all, in terms of deadlines, entities formed prior to this year have
(17:23):
until the end of the year to file.
Entities formed on or after January 1 of this year have 90 days from the date of formation to file.
And just for anyone potentially listening, thinking, oh, we formed back in February
and we haven't filed yet.
The best thing you can do is go ahead and file as soon as you can.
There's There's no delinquency report.
There's no notice you need to give the government that you missed the deadline.
(17:46):
The only thing you can do is go ahead and file.
And obviously, I can't make any promises. No one can make any promises.
But I would be shocked if anyone who's missed that 90-day deadline this year,
as long as they file this year, as soon as they can, after they understand they've
missed it, I'd be shocked if they suffer any noncompliance penalties.
(18:06):
The reason being, FinCEN's got its hands full just getting people to hear about
this law in the first place and to file in the first place.
I think we see the numbers of entities that have reported.
I think the most recent numbers I've seen is we're at something like 3.75 million
and FinCEN's estimated something like 32 and a half million entities are going
to need to report this year.
(18:27):
So unless there's an absolutely massive rush the last four months of the year,
which I think there will be somewhat of a rush, but I don't think it's going
to be to the tune of 28, 29 million entities, there's going to be millions of
folks that miss the year end deadline anyway.
And so as long as you get that filing in in 2024, I would be utterly shocked
if FinCEN actually takes noncompliance action against those folks.
(18:50):
Again, can't make any promises.
And it's the only thing you can do anyway is get the filing in.
So go ahead and do that. But just to hopefully give people a little bit of comfort.
So those are the deadlines. In terms of the penalties, if FinCEN does want to
enforce noncompliance, both civil penalties and potentially criminal penalties at play.
Civil penalties of up to what it says in the legislation is $500 per day of
(19:13):
noncompliance to be indexed for inflation. deflation.
And so the latest figures we've seen is that's up to $591 per day of continued
noncompliance on a per entity basis and criminal penalties of up to two years
imprisonment and up to $10,000 in fines.
That's the bad news. Really significant penalties if you are an entity that they want to come after.
(19:36):
The good news is in order to even be at risk of noncompliance penalties in the
first place, violation has to be willful.
So going back to what I mentioned a little bit earlier you're sitting here this
is the first you've heard of the cta you realize you missed the 90-day deadline
you go ahead and file you know as as soon as you reasonably can.
It's going to be very hard to argue that you've willfully failed to comply with the CTA.
(20:01):
And the way the legislation defines the term willful is that it's got to be
a voluntary intentional violation of a known legal duty, right?
So really who that's going to apply to are going to be folks who hear about
the CTA, simply choose to ignore it.
Obviously the bad guys who either don't report at all or report fraudulent information.
It's going to be very difficult though to ever try to prosecute a case against
(20:24):
someone where they either haven't known about it or they've reported,
but, you know, made some type of an error that, you know, was,
you know, at least arguably reasonable, right?
Let's say you decide not to report somebody as a beneficial owner because you
don't really think they have substantial control power.
If later FinCEN investigates your entity for some reason, they decide that person
did again, going to be very hard to argue that you willfully fail to comply.
(20:48):
So to me, although the noncompliance penalties are severe.
As long as you are making a good faith effort to report on time and to report correctly,
I wouldn't get super caught up in folks who have either just not heard about
this or forgotten about it, or being absolutely obsessed with getting really
(21:09):
complicated beneficial owner reporting correct,
where you might have someone who's, you're on the fence about whether you should report.
I didn't know the fines were tied to inflation. So good thing inflation's coming down, I guess.
Let's talk about, we talked a little bit earlier about the court cases, the court challenges.
Can you talk about that and what that means for those that haven't filed yet?
(21:32):
Yes. There was a federal district court out of Alabama.
There was a case back in March where the judge ruled the CTA unconstitutional.
And the judge had a couple options in that case. They could have,
as a result of that ruling, issued a nationwide injunction, and that would have
paused CTA compliance for everybody until that case played its way through the appeals process.
(21:55):
That judge didn't choose to do that. And instead, their ruling applied only
to the plaintiff group in that case.
And the plaintiff group was the NSBA, the National Small Business Association.
And so until that case plays out in the appeals courts, that that group,
that plaintiff's group, they're shielded from having to comply to the CTA.
(22:16):
But for everybody else, and FinCEN has come out and kind of reinforced that
they continue to expect everybody else to file, for everybody else,
the CTA continues to apply.
And so where does that Alabama case go from here? FinCEN has appealed that decision
to what is the 11th Circuit Court of Appeals.
That's the appellate court that will make a decision as to whether the judge
(22:38):
in the district court case, whether his ruling should be upheld or overturned.
If it's regardless of which way they rule, I anticipate whichever side loses
will appeal that decision to the U.S. Supreme Court.
And the U.S. Supreme Court has discretion whether to take that case or not.
And from folks I've talked to, though, I'm not a litigator, I'm certainly not
(23:00):
a constitutional expert, but from folks I've talked to that are,
most people seem to think they will simply because of how wide reaching the effects of the CTA are.
And so, but the timing in terms of how all of this is going to play out and
when it's going to play out remains to be seen.
So oral arguments in that 11th Circuit case, I believe are slated for the end of September.
(23:21):
In a typical case, you oftentimes might not see a ruling until end of 2025.
But, you know, given the significance of the CTA in 2024, maybe there's a chance
that they move a little more quickly than they otherwise typically would.
And they issue a ruling following those oral arguments prior to the end of the year.
But we'll just have to see how it plays out. And I should say a number of other
(23:44):
cases now have popped up, especially following that Alabama case,
other plaintiff groups hoping to get similar rulings.
As of now, I don't believe we've seen any rulings out of any other courts that
would pause CTA compliance for anyone else.
But again, Again, that's a moving target as well.
And we should note here that CAI is working on filing a case in the federal courts.
(24:06):
And by the time this episode is published, that may have been filed already.
But I think this is a good opportunity to note again that.
Until such time as something changes, you know, people might hope that a court
case would change these requirements for community associations.
But until such time as there's actually legislation signed into law,
which is probably unlikely before
(24:27):
the end of the year, given there's an election coming up, et cetera,
or a court case having a final decision before the end of the year,
community associations have to comply and should, like you said,
should start getting ready now.
So we talked about this at the beginning, you're co-founder of the corporate
services company, Perfect Form.
(24:48):
What exactly do you do, especially in the context of the CTA as it relates to
community associations?
And by the way, how did you find CAI? Yeah. So let me start with the CAI question.
The way we found CAI is that one of our... So we work with a lot of law firms.
So law firms who have clients that need to file into the CTA will work with
(25:10):
us to get their clients CTA compliant.
And so one of the law firms that we do a lot of work with is in this space.
And they represent a lot of associations, a lot of association management companies.
And as we started working with them, we started to think about the fact that,
hey, our service can be really helpful to associations and I can get into why that is.
(25:31):
And so we started talking about how can we spread our message just so folks
know that our service is here if they want to use something like us to get CTA compliant.
And so one of the recommendations they gave was to reach out to CAI as perhaps
a top trade organization in this space.
And that's how we found CAI. And it's been a wonderful partnership to this point.
(25:54):
Now, going back to what we do. I touched on it a little bit at the beginning
in terms of the full slate of services we provide to dig a little more into
our corporate transparency act compliance service specifically.
At a high level, we take folks from beginning to end in terms of CTA compliance.
And by end, I mean getting them set up with an ongoing compliance service to
(26:14):
make sure their entity stays compliant.
So from the beginning, we are consulting with clients on what needs to be be
reported, how to go about getting the information.
There's somewhat of an educational component to that and helping them formulate somewhat of a strategy.
Once they've obtained the information we'll need from them, they onboard that
into our secure software platform.
(26:35):
We're taking that information, we're reviewing it, we're building out a client
portal for them to keep that information organized, to keep it,
to build out a dashboard for them where they can always easily go in and change
it if they need to or see their filing status.
And we're then taking the information and completing and filing the BOI report with FinCEN.
And then on an ongoing basis, we are filing as many updated reports annually
(26:58):
as that entity or company may need based on changes to previously reported information.
So for associations specifically, well, we can do this with anyone,
but it's been especially helpful with associations where we set them up with
automatic reminders based on when they onboard with us.
Reminding them of the requirements of the CTA, the easy steps they need to take
(27:22):
on our platform to notify us of changes so we can put those updated reports
together and file them for them.
And so a lot of those automatic reminders we have set for our association clients
are based on when their annual meetings are.
So based on when the most likely board turnover is going to be,
but we can also set them up on whatever cadence they want to reach out to them periodically,
you know, asking if any changes have occurred and if they have reminding them
(27:44):
of, you know, how easy it is to go into their portal and simply notify us of
them so we can file their updated report.
So it's really a soup to nuts service in terms of CTA compliance.
We're trying to do every single possible thing we can to make this as easy on folks as possible.
Because one, folks don't want to think about it. They don't want to have to
dig into the meanings of the terms.
(28:06):
They don't want to have to think about this on an ongoing basis.
They're not going to remember simply to update their information.
So us, you know, figuring out a strategy with them to be be in their ear periodically
about this has proved really helpful.
And so our goal is just to make compliance, initial compliance easier and faster,
but also make ongoing compliance easier and faster and just more likely, right?
(28:28):
Because again, without a system or a process in place internally,
I think the ongoing compliance piece is just going to be missed by so many,
especially with that tight 30-day update window. Yeah.
Yeah, you made that point a couple of times, and I think that's good to emphasize.
This is not just a one-time thing.
So, you know, associations need to stay on top of this.
Any final thoughts before we wrap up?
(28:49):
No, I think that covers it. I mean, for folks who have made it this far,
you've probably heard enough of my voice and you've probably got enough on the
CTA, not only from this podcast, but probably before as well.
I know you guys have been putting out a lot of information about it.
So thanks to everyone who tuned in and thanks to you, Tony, for having me.
Well, Paul, this has been great information for our listeners who are really
(29:12):
tuned into what's going on with the Corporate Transparency Act,
or even if they're not, this is an important topic.
So I appreciate you joining me today for this episode of Community Matters Podcast
and its potential impacts on community associations.
You can contact Paul at Perfect Form via email,
paul at perfectform.com, or phone at 980-231-0232, and visit their website at perfectform.com.
(29:43):
And for our listeners, thanks for tuning in to Community Matters.
We're glad to have your attention for a short time. And thanks once more to
the sponsor of Community Matters podcast, Hoffman Law LLC.
You can find them on the web at hoffmanhoalaw.com. If you're interested in being
a guest on an upcoming episode of Community Matters, reach out to me at tony, T-O-N-Y,
(30:09):
at caikeystone.org.
And don't forget to subscribe to the podcast so you'll get notifications every
time we post a new episode.
And please share our podcast with your colleagues, friends, and social networks.
For more resources and best practices on managing and governing your condominium,
cooperative, or homeowners association,
(30:31):
please contact CAI or visit our website at www.caikeystone.org.
Thanks again.
Music.
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