Megan George, Articling Student
[email protected]
604-519-0660
**Please note, this article is part of a two-part series on Indigenous Business Organizations.
Indigenous Peoples have long maintained sophisticated systems of trade and governance, a practice that continues today as Indigenous governments further advance economic self-determination within Canada’s legal landscape.
Because Indigenous governments benefit from unique tax treatment and operate within distinct legal frameworks, selecting the appropriate structure for business ventures is essential.
Whether your Indigenous organization is launching a new business or looking to optimize an existing one, the considerations below can help ensure your structure fully leverages available legal and tax advantages while supporting your long-term goals.
Two Structuring Solutions
In Canada, businesses can be organized in various ways, the three primary structures being sole proprietorships, partnerships, and corporations. The most appropriate structure depends on the nature of the business venture and your organization’s objectives, such as limiting liability, maintaining control over major decisions, and optimizing tax outcomes.
For Indigenous businesses, two of the most effective ways to achieve these objectives are through Economic Development Corporations and Limited Partnerships.
Economic Development Corporations
“[Economic Development Corporations] are the economic and business development arm of a First Nations, Métis or Inuit government, and are a major economic driver for Indigenous communities. These community-owned businesses invest in, own and/or manage subsidiary businesses with the goal of providing financial support to advance community interests.” [1]
Economic Development Corporations, or “EDCs,” benefit from the various advantages of incorporation, including:
- Separate legal identity — A corporation is a distinct legal entity that can enter into contracts, own property, borrow funds, and commence or defend legal proceedings in its own name.
- Corporate governance — Control is divided between directors, who manage and oversee the business, and shareholders, who elect the directors and vote on major decisions.
- Limited liability — Shareholders are not responsible for the corporation’s debts beyond their investment, and the corporation is not liable for the personal obligations of its shareholders.
- Continued existence — A corporation continues to exist until formally dissolved, regardless of changes in leadership or personnel.
- Tax advantages — Corporations are taxed separately from their shareholders, and corporate tax rates are generally lower than personal income tax rates.
These corporate benefits are particularly significant in EDCs, which are typically structured so that the Indigenous government is the sole shareholder. This model allows the Indigenous government to determine the overall vision and strategic direction of its economic development initiatives, retain full ownership, and receive the profits of the business, while delegating day-to-day operations to a board of directors with relevant business or investment expertise.
In addition, certain Indigenous governments may benefit from specific tax exemptions under federal legislation, which can extend to qualifying corporations where ownership and geographic requirements are satisfied.
For these reasons, many Indigenous governments choose to structure their business ventures through EDCs. Given their prevalence, established governance models and best practices are widely available. EDCs are recognized by lenders, regulators, and potential business partners, and legal and accounting professionals are experienced in their formation and ongoing administration.
Limited Partnerships
Another effective structure for Indigenous governments to carry out business ventures is a limited partnership.
A limited partnership involves at least one general partner and one or more limited partners carrying on business with a view to profit. The general partner (typically a corporation) manages and operates the business and is responsible for its obligations, while the limited partner contributes capital and shares in the profits but does not participate in management.
Limited partnerships offer several advantages, including:
- Flexibility — A limited partnership is largely governed by contract, and there are few legal requirements dictating how the partnership agreement must be structured. The agreement can be tailored to reflect the commercial realities of the venture, including how profits are allocated among the partners.
- Limited liability — Limited partners are shielded from liability beyond the capital they contribute, provided they do not participate in management.
- Flow-through tax treatment — A partnership is not taxed as a separate entity. Instead, income or loss is calculated at the partnership level and allocated to the partners pursuant to the partnership agreement.
Accordingly, many Indigenous governments establish an Economic Development Limited Partnership wherein the Indigenous government acts as the limited partner, receiving the profits of the business, and the EDC acts as the general partner, managing operations.
This arrangement is common because limited partners must not participate in management or risk losing their limited liability protection. By having the EDC serve as general partner, the Indigenous government—as sole shareholder of the EDC—can appoint the board of directors of the general partner and maintain some oversight, while preserving limited liability at the partnership level.
So, if an EDC is already involved, why not simply operate the business through the corporation? Why use a limited partnership instead of only an EDC?
Next Steps
Economic Development Corporations and Limited Partnerships are both powerful tools for Indigenous governments pursuing economic development. The appropriate structure will depend on your specific objectives, partners, and long-term plans. Because each situation is unique, obtaining experienced legal advice at the outset is essential to ensure your business is structured effectively and aligned with your strategic goals. Please contact your ATAC LAW lawyer or book a consultation to discuss structuring your business in the most advantageous way. Stay tuned for the next article in this series where we’ll explore tax implications related to these structures.
[1] Canadian Council for Aboriginal Business, “National Perspectives on Indigenous Prosperity: Aboriginal Economic Development Corporation Capacity” (2020) at 34, online (report): <https://www.ccib.ca/wp-content/uploads/2020/02/CCAB-Report-1-web.pdf>.