Sask Polytech May 2020
Risk

Business Structure for Expanding Economic Development for First Nations

Lorne R. Fagnan
Lorne R. Fagnan

For Indigenous entrepreneurs, there are many opportunities presenting themselves daily, perhaps more than ever. With these opportunities come large decisions from a business standpoint. Of particular importance is the structure of the business. Whether an entrepreneur is a Status First Nation individual or a First Nation seeking to start a business, several options may work for the business structure, including the Sole Proprietorship, Partnership, Limited Partnership, Corporation, and Joint Venture.

The choice of business structure for Indigenous entrepreneurs is dependent upon many factors, but for many First Nations looking to expand their economic development, a Limited Partnership is often the preferred option.

First NationsA Limited Partnership is a Partnership that has two different types, or classes of Partners: a General Partner and a Limited Partner. Limited Partnerships can only be created by registering pursuant to the legislation in the appropriate jurisdiction. Like a Partnership, the Limited Partnership is not a separate legal entity, and the assets of the business belong to the Partners, rather than to the Partnership. This type of Partnership has differences relating to investment and subsequent liability.

For General Partners, liability is similar to a standard Partnership, because their liability is not limited. For Limited Partners, however, liability is restricted to the amount of a partner’s investment into the Partnership. As such, a Limited Partner is normally an investor who is not permitted to play a role in the management of the business. This is an attractive option for First Nations looking to expand their economic development, as it minimizes the risk to the First Nation itself. For example, if the business fails, the liabilities of the business stay with the General Partner, who is usually a Corporate entity operated separately from the First Nation itself.

Advantages

For First Nations, setting up a Limited Partnership is done as follows, and can provide the following advantages:

  • It is a Partnership consisting of a one (1) General Partner, a Corporation, and one or more Limited Partners — in this case, only the First Nation.
  • The Limited Partners and the General Partner own “units” in the Limited Partnership (i.e. like owning shares in a Corporation).
  • A Partnership is not a person for the purposes of the Income Tax Act. Income of the Partnership is taxed in the hands of each Partner.
  • Generally, Partnership income earned by a First Nations Partner will be exempt from income tax, based on the exemption for municipal Corporations in the Income Tax Act.

Disadvantages/Risks

  • Although liability is limited to the amount of the investment, Limited Partners may be vicariously liable for the actions of the General Partners or actions of the employees in the course of doing business. General Partners have the same risks of liability as they would in a regular Partnership structure.
  • If Limited Partners become too involved in the management of the business, they may become subject to liability, rather than being treated as a Limited Partner.
  • Limited Partnerships are fairly costly and complex to create. Unlike Partnerships, which can arise from the nature of the relationship between two parties, a Limited Partnership requires filing of a declaration.
  • As with Partnerships, upon the death or bankruptcy of a Partner, whether it is the General or Limited Partner, the Partnership comes to an end.

Each business will have a different reason for organizing under a specific business structure, or a combination of structures. For example, a First Nations’ individual in a startup situation, such as a small clothing company, would typically start out as a Sole Proprietorship. Incorporation typically becomes a more realistic option as the business grows. For a First Nation, they may choose to establish a Corporate Entity in order to partner with another company. Many options exist.

Recently, many Saskatchewan First Nations have pursued economic development by utilizing a Limited Partnership structure, which has proven to be a successful option.  For those Status First Nation individuals or First Nations that are deciding which business structure is best suited for their needs, legal consultation with a law firm that has experience in this field will often assist in finding the best solution.

Lorne R. Fagnan
McKercher LLP
374 Third Avenue South, Saskatoon, SK
(306) 653-2000
info@mckercher.ca
mckercher.ca