TRIBAL BUSINESS STRUCTURE HANDBOOK

2008 Edition 

By 

Karen J. Atkinson, President, Tribal Strategies, Inc. 

and

Kathleen M. Nilles, Partner, Holland & Knight LLP 

A Tribal Self-Governance Project of the Tulalip Tribes 

Sponsored and Published by 

The Office of the Assistant Secretary – Indian Affairs 

Credit: This Handbook was funded by an economic development grant awarded by the

U.S. Department of the Interior’s Office of Indian Energy and Economic Development

(IEED) to the Tulalip Tribes of Washington for the development of a tribal biogas plant

in Snohomish County. 

Disclaimer: Nothing in this Handbook should be construed or relied upon as legal

advice. Instead, this Handbook is intended to serve as general guidance and an

introduction to business structure from which better informed requests for legal advice

and tax advice can be formulated. 

Published by: 

The Office of the Assistant Secretary – Indian Affairs 

U.S. Department of Interior 
Foreword by the Sponsor and Publisher

The Office of Indian Energy and Economic Development (IEED) was established in 

2006. IEED is responsible for expanding reservation business opportunities and Indian 

employment with emphasis on the development of energy and mineral resources on Indian trust 

lands; providing oversight of initiatives designed to assist tribes in developing stronger 

reservation and/or tribal economies; developing policies and procedures for job placement and 

training under the Indian Employment Training and Related Services Demonstration Act of 1992 

(P.L. 102-477), as amended; and providing credit under the Indian Financing Act of 1974. The 

office formulates policies and procedures to surmount barriers to reservation economic growth 

and assists tribes in developing economic infrastructure, augmenting business knowledge, 

increasing jobs, businesses, and capital investment, and developing energy and mineral 

resources. IEED helps tribes develop their energy and mineral resources on trust lands and 

manages special economic programs, grants, projects and initiatives to advance reservation 

economies. In addition, the office is responsible for implementing P.L. 102-477, as amended; 

the Indian Financing Act of 1974; and Title V of the Energy Policy Act of 2005. The office 

consists of the Division of Energy and Mineral Development, the Division of Economic 

Development, the Division of Workforce Development, the Division of Capital Investment, and 

the Division of Indian Energy Resource Agreements. 

We undertook this project to further our mission of developing economic infrastructure 

and increasing business knowledge. We think tribal governments will find the Handbook filled 

with many specifics that will help them and their business managers pinpoint issues for analysis 

in the quest to select the best business structure. 

For tribal governments starting to think about launching a business enterprise, the 

Handbook will become a primary reference. The authors have taken care to streamline the 

discussions about each of the business structures. This should enable tribal governments to make 

informed decisions about which structure to discuss with tribal legal counsel and the tribal 

accountant. 

For tribal government officials who are unfamiliar with business structures, the 

Handbook can also impart an understanding of how various Indian business enterprises function 

by comparison. We hope that this will encourage tribal governments to consult with one another 

regarding the success tribal businesses have achieved because of (and not in spite of) their 

structures. 

There will be a second edition of the Handbook in the next several years. 

 

Robert W. Middleton, Ph.D. 

Director, Office of Indian Energy and Economic Development 
The Authors 

Karen J. Atkinson is Mandan, Hidatsa, and Tsimshian and President of Tribal Strategies, Inc. in 

Washington, D.C. Karen has extensive experience as a legal and policy advisor on federal 

Indian law and tribal economic development. She has experience in energy planning and 

development, business consulting for Indian tribal governments, and advising companies seeking 

to work with tribes. Karen focuses on creating public/private partnerships that increase 

economic development in tribal communities. She has provided advice on how to form tribal 

business entities, on how to create tribal business partnerships, and on financing options and tax 

incentives for projects in Indian Country. 

Kathleen M. Nilles is a partner with Holland & Knight LLP (resident in its Washington, D.C. 

office) and a member of the firm's Indian Law practice group. Kathleen has almost twenty years 

of experience advising tribal governments on tax and corporate issues. In the course of her 

practice as a tax attorney, she has assisted tribes in structuring numerous types of business 

entities and has secured IRS rulings and determinations to confirm their tax treatment. Kathleen 

has also provided legal advice on joint ventures, tax-exempt financing, energy tax incentives, and 

employment tax issues. She is a member of the Board of Directors of the National Intertribal 

Tax Alliance. Kathleen gratefully acknowledges the assistance, advice and contributions of her 

colleagues at Holland & Knight, particularly Telly Meier, Jerry Levine, Allyson Saunders, Brian 

Guth and Sam Kastner.

i

Table of Contents 

Page

TABLE OF CONTENTS.................................................................................................i

I. INTRODUCTION..................................................................................................... I-1 

A. WHY CHOOSING A BUSINESS STRUCTURE IS IMPORTANT................................... I-2 

B. SUCCESS FACTORS............................................................................................. I-2 

C. OVERVIEW OF STRUCTURES ............................................................................... I-4 

D. SUCCESS FACTORS............................................................................................. I-6 

II. TRIBAL GOVERNMENT ENTITIES....................................................................II-1 

A. UNINCORPORATED AGENCIES, DIVISIONS AND INSTRUMENTALITIES...............II-1 

B. POLITICAL SUBDIVISION OF TRIBAL GOVERNMENT ........................................II-13 

III. TRIBAL CORPORATIONS................................................................................ III-1 

A. TRIBALLY-CHARTERED CORPORATIONS........................................................ III-1 

B. SECTION 17 CORPORATION—FEDERAL LAW CORPORATION ........................III-10

IV. STATE LAW ENTITIES..................................................................................... IV-1 

A. STATE LAW CORPORATIONS ........................................................................... IV-1 

B. SUBCHAPTER S CORPORATIONS ..................................................................... IV-6 

C. STATE-LAW LIMITED LIABILITY COMPANIES.................................................. IV-7 

D. ADVANTAGES AND DISADVANTAGES OF STATE-LAW BUSINESS ENTITIES .....IV-10 

V. JOINT VENTURE ENTITIES................................................................................V-1 

A. LIMITED LIABILITY COMPANIES .......................................................................V-2 

B. GENERAL PARTNERSHIPS AND LIMITED PARTNERSHIPS...................................V-3 

C. CONSIDERATIONS COMMON TO LLCS AND LPS................................................V-4 

VI. EVALUATING YOUR OPTIONS...................................................................... VI-1 

A. COMPARISON OF EACH FORM ........................................................................ VI-1 

B. KEY FACTORS TO CONSIDER .......................................................................... VI-4

CHART: STRUCTURES AT A GLANCE

APPENDIX A: SOVEREIGN IMMUNITY FACTORS IN RECENT JUDICIAL 

DECISIONS......................................................................................A-1 

APPENDIX B: KEY STEPS TO PROTECT THE CORPORATE VEIL AND 

TO LIMIT LIABILITY .....................................................................B-1 

 ENDNOTES

I-1 

I.

INTRODUCTION

The late 20th century brought a new era of federal-tribal relationships and a policy of selfdetermination to Indian country. Indian Tribes are increasingly asserting control over their land, 

resources, and governance of their communities. Tribes are involved in a wide range of 

economic activities from tourism, gaming, energy, agriculture, forestry, manufacturing, federal 

contracting, and telecommunications. In many parts of the country, Tribes are becoming 

regional economic and political power houses. They are the largest employer in many counties. 

Tribal governments and tribal businesses engage in a wide range of business and financial 

transactions. 

The unique legal status of tribes is only now beginning to be used by Tribal governments 

to contribute to their business and economic development efforts. This century marks a new era 

for tribes using their sovereign status and governmental authority to achieve economic selfsufficiency and cultural preservation. There are still high levels of poverty and unemployment in 

Indian country and a lack of the basic infrastructure crucial to the building blocks of economic 

success. There are, however, increasingly more examples of tribes breaking their dependence on 

federal programs and creating the necessary legal infrastructure to build the foundations for 

successful economic development. 

As tribal business transactions become increasingly more sophisticated and involve nonIndian partners, investors, and lenders, there is a need to understand the basic methods for doing 

business in Indian country. In particular, in the energy industry, Indian tribes are shifting from 

being passive owners of their energy resources by evaluating ways in which they can own, 

develop, and produce their resources. Tribes are increasingly looking at ways to develop their 

resources in a manner that gives them an active ownership interest in the development of the 

project, often with a non-Indian business partner. 

There are unique factors that a tribe should consider when deciding how to structure a 

business transaction or how to partner with a non-Indian business. This Handbook will provide a 

general guide to the key factors that an Indian tribe should consider when structuring a business 

or project. It will look at the basic structures available to tribal governments when organizing for 

economic development activities and will consider whether business formation should occur 

under tribal, federal or state law. It will also consider the tax consequences of each type of 

business structure. The Handbook will assist tribal managers in determining which structure will 

work best to protect tribal assets, preserve tribal sovereignty, and maximize the use of tax and 

other incentives available for tribal economic development. This guide is general in nature. You 

should consult legal counsel and accountants to determine the best business structure for your 

particular circumstances. 
I-2 

A. Why Choosing a Business Structure is Important

The choice of business structure will have long-term and far-reaching consequences for a 

tribal government and tribal business. The business structure you choose will have a major 

impact on how tribal assets are protected, how tribal sovereignty is preserved, and how potential 

liability is minimized. Critical decisions regarding the tax status of the business entity and 

whether or how sovereign immunity is waived must be made early in the decision making 

process. The choice of business structure may also be determined by the requirements a lender 

imposes as a financing condition or be determined by a business partner seeking certainty and 

predictability in the legal framework chosen to organize for economic development. This 

Handbook will help you to compare and analyze different structures and help determine which is 

best for you. 

B. Success Factors

In the last decade, a substantial amount of research has been done to determine what 

impediments exist to creating long term sustainable economic development on Indian 

reservations and to identify the factors that have lead to significant progress on some 

reservations. Most tribes are committed to improving the economic welfare of its people and at 

the same time are concerned that this not be done in a way that diminishes their sovereignty. 

The Harvard Project on American Indian Economic Development (Harvard Project) has found 

that a key factor to achieve economic self-determination is to have institutions in place which 

promote self-governance and to provide a political environment in which investors will feel 

secure.1

Indian reservations have to compete with other venues to attract economic activities. To 

be successful, tribes must offer investors the opportunity to earn economic returns commensurate 

with the returns they might earn elsewhere. Investment dollars have to come from somewhere. 

Investor risk is raised if there is uncertainty in tax and regulatory policies that apply to onreservation businesses or transactions. Risk is also raised if there is uncertainty regarding the 

enforcement of contracts or agreements. Governmental policies requiring preference hiring or 

policies that change frequently can also raise the risk and costs for investors or business partners. 

The Harvard Project has identified a number of success factors geared to create a political 

environment that promotes sustained economic growth by providing a safe environment for 

investors. Such an environment helps investors--whether they be tribal members or outsiders--to 

feel secure and willing to put their time, energy and capital into the tribal economy. The first 

critical factor is for tribes to have a separation and allocation of governmental powers. This can 

be accomplished through formal or informal governmental structures. 

The second critical factor is the separation of tribal electoral politics from the day-to-day 

management of business enterprises. This relates to the direct role that tribal governments often 

have in development projects. Tribal governments should have a role in strategic decisionmaking. However, tribal governments should not make the day-to-day business decisions of 

tribal enterprises. Maintaining this separation can be difficult for tribal officials since enterprises 

and its assets belong to all tribal members. However, not insulating tribal politics from tribal 
I-3 

businesses can create an uncertain and risky business environment for investors and business 

partners. Political instability, the possibility of opportunism on the part of tribal officials, and the 

difficulties in enforcing agreements can discourage investment. This can place tribes at a 

competitive disadvantage for attracting capital as well as technical and management expertise. 

Inserting politics into day-to-day business decisions can drain the resources of the entity, 

and run a tribal enterprise into the ground. This type of governance will result in inefficiencies 

and loss of productivity that is difficult to absorb in a highly competitive environment. 

Successful businesses in Indian country are typically insulated and their day-to-day 

business management is free from political interference. The Harvard Project found that triballyowned enterprises that are insulated from political interference are about four times as likely to 

be profitable as those that are not.2

 The way tribes’ have insulated business from politics has 

ranged from traditional culture-based separation of power to legal or tribal constitutional limits 

to the establishment of separate tribal entities and manage businesses. Insulating tribal business 

entities from political interference is accomplished by establishing a managing board of directors 

and a corporate charter that is beyond the direct control of tribal council members. 

Businesses require a stable operating environment while managers need to make 

decisions in a business environment. The creation of a tribal business development corporation 

or other business entity separated from tribal government can provide a number of advantages: 

• Free the tribal council from micro-managing tribal businesses and allow the 

council to focus on long-term development strategies and goals 

• Assign responsibility to operate and manage tribal businesses to those who have 

business skill and knowledge 

• Provide a buffer between managers and tribal politics 

• Provide continuity and stability to business management by promoting the 

development of economic development and business policies that are less subject 

to change by electoral politics.3

This Handbook will describe a variety of options for tribes to consider when structuring 

tribal businesses in a way that segregates business from politics. 

Key factors to consider when trying determining the best structure for a particular activity 

are: 

Segregate politics from business--Free the tribal council from micro-managing tribal 

businesses while allowing the council to focus on long-term development strategies and goals. 

Assign responsibility to operate and manage tribal businesses to those who have business skill 

and knowledge. 

Organizational considerations--How the entity is formed, under what law is the entity 

formed, and who manages the entity. 
I-4 

Sovereign Immunity--Tribes as governmental entities are not subject to suit unless they 

clearly waive immunity or Congress has waived their immunity. This raises questions regarding 

the ability of lenders, investors, and business partners to enforce agreements and to protect their 

investment. Each entity has different sovereign immunity implications that must be considered. 

Liability--Some business structures effectively shield business owners from liability for 

the financial obligations and debts of the business. Others do not effectively separate owner 

obligations from business entity obligations. 

Tax considerations--Different federal income tax rules apply to different business types. 

State tax liability frequently depends on whether the business activity is conducted on or off an 

Indian reservation. 

Financing--Money for a business comes in two forms: (1) debt--whereby the business 

borrows and then owes money to others; and (2) equity--where investors provide funding and 

then own part of the business. Lenders generally do not dictate choice of business entity, but 

equity investors may specify what business structure you can choose. 

C. Overview of Structures

Tribal governments are distinct political entities in our federal system of government. 

They have the power of self-government and exercise sovereignty over their members and 

territory. Their sovereignty pre-dates the Constitution and is derived from the fact that they 

owned all the land that is now the United States. The U.S. Constitution acknowledges the 

sovereign status of Indian tribes in the Treaty Clause, in the 14th Amendment as "Indians not 

taxed," and in the Commerce Clause. The sovereign nature of Tribes has been recognized in the 

Constitution, treaties, court decisions, and the course of dealing with tribes. As sovereign 

Nations, Indian tribes have powers and capabilities not available to individuals. This Handbook 

will assist you in evaluating the different forms available for organizing economic development 

and to begin to take steps to achieve financial and economic independence. 

When developing a new tribal enterprise, an important consideration is the applicable law 

and regulations governing its formation and operation. In Indian country, business entities can 

be formed under tribal law, state law or federal law. Your choice of law and the entity that is 

chosen will have consequences on issues relating to tax, financing, and sovereign immunity. It 

will also determine how you can maximize risks and liability. An important consideration for 

tribes is how to preserve tribal control and to protect tribal assets while providing a business 

partner or lender with certainty. 

A tribe, because it is a sovereign nation, can form a governmental entity to perform 

business functions. This entity can be an instrumentality of tribal government, a political 

subdivision of the tribe, or an agency or division of the tribe. A tribe can also form a separate 

business entity formed under federal, tribal, or state law. 

Below is a brief description of the main business structures. 
I-5 

1. Tribal Government

Many tribes conduct business through an economic development arm of the tribe. This is 

often referred to as in unincorporated instrumentality of the tribe. The business operation is 

generally overseen by the governing body of the tribe--sometimes by a business committee or a 

separate board, but they generally do not have a separate legal structure. Therefore, the same 

privileges and immunities of the tribe can apply to contractual agreements entered into by the 

tribe and to business instrumentalities of the tribe. Tribes and its business instrumentalities 

organized as an arm of the tribal government are not taxable entities for purposes of federal 

income tax. 

2. Section 17 Corporations

Many tribes conduct their commercial activities through federally-chartered corporations 

formed under Section 17 of the Indian Reorganization Act (IRA).4 To form a Section 17 

Corporation, a tribe must petition the Secretary of the Interior for issuance of a corporate charter. 

A Section 17 corporation provides a framework by which a tribe can segregate tribal business 

assets and liabilities from the assets and liability of tribal governmental assets. It also preserves 

the integrity of the decision-making process of tribal governmental officials by separating 

business decisions. The charter defines the powers of the corporation which can include the 

power to buy and sell real and personal property and to conduct such further powers as may be 

incidental to the conduct of corporate business. Several courts have held that tribal sovereign 

immunity applies to the business activities conducted by a Section 17 Corporation; other courts 

have found a waiver of sovereign immunity in the "sue and be sued" clause of the corporate 

charter. Tribal corporations formed under Section 17 of the IRA have the same tax status as the 

tribe and are not subject to federal income taxes for income derived from on or off reservation 

activities. 

3. Tribally Chartered Corporations

Some tribes have adopted tribal laws that govern the formation of tribally chartered forprofit corporations. These laws authorize the formation of tribal business entities owned by the 

tribe. Several courts have held that sovereign immunity applies to activities of a tribally 

chartered corporation owned by a tribe. The issue of whether tribally charted corporations are 

subject to federal income taxes for income derived from on-reservation activities is up in the air. 

The Internal Revenue Service has this issue under consideration and has indicated that it will 

issue guidance, but has not yet done so. 

4. State-law Corporation

A corporation is a legal entity that is formed under the laws of the state by filing a 

certificate of incorporation or articles of incorporation with the jurisdiction in which it is formed. 

Corporations are owned by shareholders and governed by a Board of Directors elected by the 

shareholders. Corporations are governed by the terms and conditions contained in its articles of 

incorporation. The main benefit of a corporation is that shareholders are not personally liable for 

the debts, obligations, or liabilities of the corporation. Shareholders are liable only for the 
I-6 

amount of their investment in the corporation. This insulates tribal government assets from the 

liabilities of a tribal corporation. However, a corporation is a separate taxpayer. Income is taxed 

twice, once at the entity level and again when distributed to shareholders as dividends. A 

corporation owned by a tribe, but chartered under state law is considered to have a different tax 

status than the tribe and is likely subject to federal income tax. 

5. Limited Liability Company 

The limited liability company (LLC) is a relatively new form of business entity that rose 

to prominence in the last ten years. Almost every state has enacted laws permitting the 

formation of an LLC. LLCs are formed by filing articles of organization with the state in which it 

is formed. It is a hybrid between a partnership and a corporation. It combines the primary 

advantage of a partnership--ease of formation and maintenance, and favorable taxation--with the 

key advantage of a corporation--limited liability protection for its owners. The owners of an 

LLC are typically called members. Individuals, corporate entities, tribes and tribal entities can 

be members of an LLC. Most states allow an LLC to have only one member. Like a 

partnership, its income is only taxed once. The tax attributes are passed down from the entity to 

its owners in proportion to their ownership interest--known as "pass through tax treatment." 

Therefore, a tribe’s share of income from a LLC would not be subject to federal income tax. 

D. Success Factors

When choosing a business structure, there are many things a tribe should consider 

regarding business issues and tribal governmental issues. One of the key factors is how to 

preserve tribal control while also insulating business decisions from tribal governmental 

decisions or tribal politics. Another critical factor for tribes is how to preserve tribal assets and 

limit exposure to business liabilities. Other factors are: how to effectively manage the entity, 

how to maximize tax benefits, how to minimize financial risks, the location of business 

operations--on or off the reservation, what assets will be pledged, how the business will be 

capitalized, which structure enables the preferred method of equity or debt financing, and the 

requirements of one’s business partner or lender. 

This Handbook will look at key attributes to consider as you determine the ideal structure 

for your business. These include: 

• Organizational considerations 

• Sovereign immunity 

• Legal Liability 

• Federal tax treatment 

• Financing considerations. 

As you learn about each entity and evaluate these factors, you will be able to see how 

these factors all come together to create a business structure which best meets your needs. You 
I-7 

will see which businesses fit best with which entity type. You will have a working knowledge of 

the impact each of these factors will have on your business. When looked at together, these 

factors will point to the best entity choice for a particular tribal business enterprise. 

 II-1 

II. 

TRIBAL GOVERNMENT ENTITIES

A. Unincorporated Agencies, Divisions and Instrumentalities

1. Description and Examples 

Tribes are self-governing sovereigns with traditions of self-government that predate the Constitution. Accordingly, Tribal governments do not derive their powers or 

sovereignty from the United States. The sovereignty of tribes is recognized in the 

Commerce Clause and Treaty Clause of the U.S. Constitution. Tribes, generally exercise 

powers of self-government that are derived from their status as separate and distinct 

sovereigns.5

Tribes exercise inherent rights of self-government including the power to engage 

in business and commercial activities. Many tribes operate under traditional forms of 

government, or by adopting constitutions or codes under tribal law allowing them the 

power to engage in business and commercial activities.6

In addition, in 1934, Congress enacted the Indian Reorganization Act (IRA) to 

encourage economic and political self-determination by permitting tribes to organize their 

tribal governments under constitutions adopted pursuant to Section 16 of the IRA. Tribes 

had the option to accept or reject the IRA. Tribes that chose to organize their government 

under Section 16 of the IRA adopted a Tribal Constitution that was reviewed and 

approved by the Secretary of the Interior. Alaska and Oklahoma tribes were originally 

excluded from the IRA, but the provisions were later extended to Alaska Natives and 

similar provisions were extended to some Oklahoma tribes.7

Tribal constitutions adopted under Section 16 of the IRA typically established a 

system of centralized government with a chief executive, usually a Tribal Chairman or 

President, a legislature, usually a Tribal Council, a Tribal Business Committee, or Board 

of Directors that was vested with legislative and executive powers, and a weak judiciary. 

Tribal governments often directly control or participate in business activities 

through unincorporated instrumentalities of the tribe. These are often referred to as an 

economic arms of the tribe. These instrumentalities or arms of tribal government are not 

considered to be distinct legal entities. Examples are tribal casinos, tribal enterprises, and 

tribal utilities. 

2. Organizational Characteristics

Formation--Unincorporated instrumentalities of a tribal government are formed 

under tribal law for commercial purposes and share the same legal characteristics of the 

tribal government because they are not separate legal entities. A tribe’s constitution and 
 II-2 

by-laws or codes may provide tribal governments with the power to create and operate 

subordinate economic entities. These entities are generally established by tribal 

resolution or by tribal ordinance.8

Management--These entities are usually directly controlled by the tribal 

government and its tribal council to serve as the development arm of the tribe. 

Sometimes a tribal enterprise may have a board of directors, but it is usually comprised of 

tribal council members. An unincorporated instrumentality often has a manager in 

charge of its day-to-day operations. 

General Characteristics--Tribes have operated ski resorts, farming ventures, 

cigarette sales and gaming through unincorporated tribal entities. There is no separation 

of the business entity from the tribal government body and such enterprises do not hold 

assets or property separately from the tribe. Land and assets used by the unincorporated 

enterprise are held by the tribal political body and are not specifically conveyed or set 

aside. In some instances, there are no separate bank accounts, separate directors, or 

assets.9

 The enterprise is wholly-owned by the tribe. The tribal council is typically 

involved in day-to-day management decisions either directly or indirectly. 

For example, the Navajo Nation formed the Navajo Forest Products Industries 

(NFPI) which is wholly-owned and operated by the tribe on the Navajo Reservation.10

NFPI is an instrumentality or arm of the tribal government. The enterprise manufactures 

wood products. NFPI conducts day-to-day operations and is supervised by a general 

manager who is appointed and responsible to a nine-member management board. The 

board is appointed by the Navajo Tribe’s advisory committee which is ultimately 

responsible for the operation of the business enterprise. The advisory committee is 

comprised of the Navajo Tribal Council. 

Researchers with the Harvard Project have described the unincorporated tribal 

instrumentality as a Council-Run Model.11 See adapted diagram below. 
 II-3 

3. Sovereign Immunity and Liability Issues

Sovereign Immunity--As a matter of federal law, judicial relief to enforce contracts or 

agreements against an Indian tribe in state or federal court is permitted only where 

Congress has authorized the suit or the tribe has waived its immunity.12 Sovereign 

immunity protects the limited and irreplaceable tribal resources from large judgments and 

safeguards tribal self-governance. The doctrine of sovereign immunity recognizes that a 

tribe’s sovereign status is directly related to its ability to generate revenues through the 

regulation of commercial activities on the reservation. The ability to contract impacts a 

tribe’s fiscal resources by binding or obligating the funds and assets of the tribe. 

Therefore, courts have found that corporate contractual provisions are economic matters 

that directly affect a tribe’s right to self-government. From this perspective, a tribal 

business entity under certain circumstances can be determined to be a tribe’s alter ego 

and share the same attributes of tribal sovereignty as the tribe such as sovereign immunity 

from suit in order to protect tribal assets and property.13

Indian tribes possess the common-law sovereign immunity from suits similar to 

that enjoyed by other sovereigns.14 Tribal enterprises which serve as subordinate 

economic tribal entities created by an Indian tribe possess attributes of sovereignty such 

as sovereign immunity. Consequently, they cannot be sued absent a clear waiver of 

sovereign immunity.15 Indian tribes are generally immune from suits on contracts that 

involve governmental or commercial activities on or off a reservation.16 A business 

entity that is an instrumentality or arm of the tribe or an unincorporated entity of a tribe 

The Tribal Instrumentality Model 

Council

Enterprise Board 

CEO

Employees

• The Council sits on the Enterprise Board and is

involved in day to day management of the

business. 

• The board (if it exists) advises the Council and the

CEO about strategy but generally has no power to

act on important corporate policy issues. 
 II-4 

can share the same attributes of the tribe including sovereign immunity from suit. When a 

tribe establishes an entity to conduct certain activities, the entity is immune from suit if it 

is functioning as an arm of the tribe such that its activities are appropriately deemed to be 

those of the tribe.17 Courts have rejected attempts to limit sovereign immunity to the 

governmental activities of a tribe and have found tribes to be immune from suit for 

business activities if operating as an arm of the tribe.18 A tribal instrumentality or 

unincorporated enterprise of a tribal government, however, can not unilaterally act to 

waive tribal sovereign immunity except in accordance with tribal law.19

Tribal commercial enterprises cover a broad range of activities that include 

gaming, smoke shops, convenient stores, business parks and other enterprises. Many 

courts have found that subordinate economic entities of the tribe created for commercial 

purposes share the same immunity as the tribe itself.20

Tribal sovereign immunity can create uncertainty and risks for would-be investors 

or business partners. For instance, agreements may not be enforceable where one party 

(e.g., a tribe or tribal entity) is immune from suit. 

In many disputes regarding tribal commercial activities, an issue is raised 

regarding whether a tribe has waived sovereign immunity. An Indian tribe cannot be 

sued unless there is a clear waiver of sovereign immunity by the tribe itself or a clear 

abrogation of immunity by an Act of Congress.21 A tribe may waive immunity by 

contract or agreement, by tribal ordinance, by resolution, or by its corporate charter. 

Such waiver must be in accordance with valid tribal law, such as a constitution and bylaws, by tribal code, or other provision which authorizes the waiver and permits tribal 

officials to execute contracts.22

Tribes have granted limited waivers of sovereign immunity. Waivers can be 

limited in a number of ways. A waiver can be limited to (1) a specific tribal asset or 

enterprise revenue stream, (2) a specific type of legal relief sought by performance of the 

contract and not money damages, (3) a claim limited to the amount borrowed, or (4) a 

specific enforcement mechanism, such as court or arbitration. 

The Supreme Court has recently construed an arbitration clause contained in a 

contract executed by a tribe as constituting a clear waiver of sovereign immunity.23 In 

this instance, the tribe entered into a contract that did not contain an express waiver of 

sovereign immunity or express consent to state court jurisdiction. Rather, the contract 

contained an arbitration provision in which the tribe agreed to arbitrate claims under the 

contract, agreed to the governance of state law, and agreed to the enforcement of the 

arbitrator award in "any court having jurisdiction." The Court concluded that the tribe 

waived immunity from suit and enforcement of the arbitration award with requisite 

clarity. 

When a tribe engages in commercial activities as an unincorporated arm of the 

tribal government, it will need to address questions regarding tribal sovereign immunity. 

When a tribe enters into a commercial endeavor it is investing its time, energy, and 
 II-5 

resources, and its business partner is doing the same. It is a reasonable business practice 

for all parties to want to protect their business investments. Tribal sovereign immunity 

can prevent a lender or business partner from protecting its investment. Whenever a tribe 

or an unincorporated instrumentality of the tribe enters into a contract or agreement, 

sovereign immunity is implicated. A lender or business partner will likely seek a method 

to protect its investment through a limited waiver of sovereign immunity. The decision 

to waive immunity is a governmental decision. 

One of the disadvantages of forming a tribal business entity as an unincorporated 

instrumentality of a tribal government is that the sovereign status of the tribe may impede 

a tribe’s ability to obtain credit and financing for its business transactions if agreements 

are not enforceable through judicial action. Also, if a tribe does waive it’s immunity 

from suit through a tribal instrumentality, it may subject the assets of the tribe to potential 

liability for the obligations of the tribal instrumentality. Since there is no separate legal 

entity conducting business, the assets and obligations of the tribe are intermingled with 

the business. 

4. Tax Treatment

Tax Treatment--There is no federal statutory provision that exempts Indian 

tribes from federal income taxation. However, the Internal Revenue Service has 

concluded that federally recognized tribes and their federally-chartered corporations are 

not subject to federal income taxes.24 With respect to tribal governments, the IRS in 

Revenue Ruling 67-284 based its conclusion on the fact that tribes are political bodies 

that Congress did not intend to include within the meaning of taxable entities subject to 

the income tax provisions of the Internal Revenue Code regardless of whether the 

business activity is inside or outside of Indian-owned lands. With respect to tribal 

federally-chartered corporations, the IRS takes the view that no taxable entity separate 

from the tribe exists. Any income earned by a tribe is not subject to federal income tax 

regardless of whether a tribal business activity is on or off Indian-owned lands.25 The 

federal tax treatment of a tribal enterprise will depend on how a business is structured. 

The IRS has generally treated an unincorporated instrumentality or business 

operated directly by a federally recognized tribe as not subject to federal income tax, 

again because it is not considered to be an entity separate from the tribe itself. As a note 

of caution, there is no per se exemption from federal income taxation when a tribe 

organizes as an "instrumentality." To be considered a nontaxable entity, the 

instrumentality must be operating as an arm of the tribe, and not organized as a separate 

legal entity. In determining whether an entity qualifies as a government instrumentality, 

the IRS generally looks at the following six factors: 

1) whether the organization is used for a governmental purpose and performs 

a governmental function; 

2) whether performance of its function is on behalf of one or more 

governmental units (e.g., a state, a tribe or political subdivision); 
 II-6 

3) whether there are any private interests involved, or whether the 

governmental unit has the power and interest of an owner; 

4) whether control and supervision of the organization is vested in a public 

authority or authorities; 

5) whether express or implied statutory or other authority is necessary for the 

creation and/or use of the organization, and whether this authority exists; 

6) and the degree of financial autonomy of the entity and the source of its 

operating expenses.26

If it meets this multi-factor test, an instrumentality will qualify for tax benefits 

reserved to governmental entities--such as the ability to receive charitable contributions 

or to issue tax exempt bonds. 

Recognizing that for some purposes tribal governments have similar qualities to 

state governments, Congress passed the Indian Tribal Governmental Tax Status Act in 

1982 to provide similar governmental tax treatment to tribes.27 The Tribal Governmental 

Tax Status Act, codified as section 7871 of the Internal Revenue Code, provides that 

federally recognized tribes are treated like states for purposes of a number of tax benefits, 

including:

• Charitable contributions are tax deductible 

• Gifts and bequests are deductible 

• Tax exempt bonding authority 

• Exemption from certain excise taxes 

• Treatment as a government under the private foundation excise tax rules. 

Although Code Section 7871 did not codify the basic tax immunity of tribal 

governments, the legislative history indicates that Congress was aware of the Internal 

Revenue Service’s position and did not wish to alter it. 

5. Financing Considerations

Two major considerations in obtaining credit through conventional lending are: 

(1) the lenders need to be able to enforce an agreement, and (2) they need to protect their 

investment in the event of a default. A tribe operating an enterprise as an arm of the 

tribal government may have difficulty obtaining conventional financing. 

Ability to enforce agreements--Lenders will be reluctant to provide credit if they 

are not certain that they can enforce their contract against a tribal enterprise that is an arm 

of the tribe because, like the tribe, it will be immune from suit. A tribe and lender can 

address this in a number of ways. The tribe can waive sovereign immunity for a 

particular transaction. Or, as addressed later in this Handbook, the tribe can form an 
 II-7 

entity separate from the tribal governing body that does not have sovereign immunity 

from suit or which has been vested with limited sovereign immunity. 

Collateral and Security Interest--In addition to sovereign immunity concerns, a 

conventional lender will also want collateral or a security interest so that its investment is 

protected if there is a default or the enterprise is not successful. An enterprise operating 

as an unincorporated instrumentality of the tribe and its governing body will not have 

separate assets or property to pledge as collateral. Rather, tribal assets would have to be 

pledged and there will be no limitation of liability. 

Loan Guarantee Programs: 

U.S. Department of the Interior Capital Investment Program. The Department of the 

Interior, Office of Indian Energy and Economic Development ("IEED") has an "Indian 

Affairs Loan Guaranty, Insurance, and Interest Subsidy Program" with two key loan 

programs. The first is a loan guaranty program in which a loan from a lender to a Tribe 

or an Alaska Native group may be provided a guaranty of up to 90% of a loan if the 

business activity will contribute to reservation economic development. 

The IEED does not make direct loans. Loans may be made to finance Indian-owned 

businesses organized for profit, provided that Indian ownership constitutes at least 51% 

percent of the business. In 2006, the maximum loan amount that could be guaranteed for 

tribes is $12 million dollars. Each year Congress determines the limit on the total amount 

that IEED may guaranty. In 2006, the Office of IEED had $107 million dollars. In 

recent years, the Office of IEED has exhausted its limit before the end of the fiscal year. 

In some circumstances, IEED may subsidize the interest rate guaranty under the program 

by paying the difference between the yield on outstanding obligations of the United 

States of comparable maturity and the rate the bank is charging the Indian borrower. 

The second is a new loan insurance program that may provide a more efficient 

process for tribally-owned firms to obtain loans under the $250,000 amount and at a 

lower cost than the IEED loan guaranty program. Under the insurance program, a bank 

that has been certified for the program may issue loans up to $250,000 to tribal firms 

without obtaining IEED approval. The IEED fees for this program are 1% less than the 

guaranteed loan program. Under this program, IEED will insure the lesser of 90% of the 

loan or 15% of the total dollar amount of the bank's loan portfolio issued under the 

insurance program. 

U.S. Department of Agriculture ("USDA") Business & Industry ("B&I") 

Loan Guarantee Program. The Business & Industry Loan Guarantee Program is 

intended to improve, develop, or finance business, industry, and employment, to improve 

economic conditions in rural communities. The guarantee fee charged, which may be 

passed on to the borrower, is two percent of the original loan amount. The fee may be 

reduced to one percent if certain criteria are met. Eligible borrowers include Indian tribes 

or federally recognized groups.28
 II-8 

Loan proceeds can be used for machinery and equipment, buildings and real 

estate, working capital, and certain refinancing. Generally, the maximum amount 

available to a borrower is $25 million; however, the maximum amount for rural 

cooperatives processing value-added commodities is $40 million. The USDA will 

guarantee up to 90 percent of the amount of the loan under $2 million, 80 percent of a 

loan between $2 million and $5 million, 70 percent of a loan over $5 million, and 60 

percent of a loan over $10 million. 

Small Business Administration ("SBA") 7(a) Program. The SBA 7(a) 

Program provides commercial loan guarantees to American small businesses for general 

business purposes.29 Loan proceeds may be used for working capital, machinery and 

equipment, furniture and fixtures, land and buildings, leasehold improvements, and 

certain refinancing. The loan term is up to 10 years for working capital, and up to 25 

years for fixed assets. 

7(a) loans are only available on a guaranty basis. This means they are provided by 

lenders who choose to structure their own loans by SBA's requirements and who apply 

and receive a guaranty from SBA on a portion of this loan. The SBA does not fully 

guaranty 7(a) loans. The lender and SBA share the risk that a borrower will not be able to 

repay the loan in full. The guaranty is a guaranty against payment default. 

Tribally-owned businesses may be eligible to receive loan guarantees if they meet 

other SBA requirements regarding size, nature of the business, use of proceeds, and lack 

of available credit elsewhere. SBA regulations provide that businesses deriving more than 

one-third of their gross annual revenue from "legal gambling activities" are ineligible to 

for SBA loans.30

Tax-exempt Bonding. Section 103 of the Tribal Governmental Tax Status Act 

permits tribal governments to issue tax exempt bonds. When a tribe issues tax exempt 

bonds, the investors in such bonds are able to earn interest free of tax. Thus, all other 

factors being equal, such bonds should yield lower interest rates than taxable debt. Bond 

financing (whether taxable or tax-exempt) also has the advantage of allowing the 

borrower to spread repayment of principal and interest over a longer period. 

Only Indian tribal governments and their political subdivisions are qualified 

issuers of tax exempt debt. Furthermore, the IRS has ruled privately that certain entities 

that qualify as "integral parts" of the tribe may also issue such debt.31 In addition, the 

IRS has ruled that Indian entities qualifying as an "instrumentality" of one or more 

government units may use tax exempt financing, and such use will not constitute a 

"private business" use.32

In addition to meeting these tests, which focus on the identity of the person 

issuing the bonds (or on whose behalf the bonds are issued), all tribal tax-exempt debt 

must finance facilities that serve an "essential governmental function." Section 7871 

does not define an essential government function, but Section 7871 states that it does not 

include functions not customarily performed by state or local governments. The 
 II-9 

interpretation of the "essential governmental function" test has spawned a number of 

controversies between the IRS and tribes. Recently, the IRS announced a proposed 

rulemaking to bring more clarity to this area of the law.33

Tax Credit Financing. The Energy Policy Act of 2005 includes authority for 

nonprofit utilities and governmental entities, including tribal governments, to issue tax 

credit bonds to finance the cost of renewable energy projects--known as Clean 

Renewable Energy Bonds ("CREBs"). These entities may issue a total of up to $800 

million in tax-credit bonds between January 2006 and the end of December 2007 to 

finance solar, wind, biomass, landfill gas, geothermal, and small irrigation power 

facilities that generate electricity. No more than $500 million of the CREBs can be 

allocated for projects of government entities. The project must be owned by a 

governmental entity or non-profit entity. Initial applications for allocation of these bonds 

were due April 26, 2006. 

H.R. 6408, the Tax Relief and Health Care Act of 2006, recently extended and 

expanded the availability of CREBs. Section 202 of the bill authorizes an additional 

$400 million of CREBs and extends the authority to issue such bonds through the 

December 31, 2008. The bill is expected to be signed into law by President Bush. 

Assuming that the bill is enacted, it is expected that there will be a new round of 

applications that eligible issuers may submit. 

Project Financing/Non-Recourse Debt Financing. Project financing involves 

non-recourse financing of the development and construction of a particular project in 

which a lender looks primarily to the revenues expected to be generated from the project 

for the repayment of its loan and to the assets of the project as collateral for its loan rather 

than the general credit of the project owner or developer. Capital-intensive projects 

requiring large investment of funds such as power plants, pipelines, and power generation 

facilities, are increasingly funded using project finance. Developers of these projects are 

frequently not sufficiently creditworthy to obtain traditional financing or are unwilling to 

take the risks and assume the debt obligations for traditional financing. 

Project financing permits the risks associated with such projects to be allocated 

among a number of parties at levels acceptable to each party. For example, for an 

energy generation facility, there usually has to be a long-term off-take agreement or 

power sales agreement and the purchaser has to have good credit.34 A tribe developing 

wind power generation may obtain a power sales agreement from a utility who agrees to 

purchase the power generated by the project for a stated term. Any utility that agrees to 

purchase the product must have good credit. The power sales agreement and the 

anticipated revenues could be pledged as security to obtain a loan for the construction and 

development of the project. The tribal developer would not have an obligation to make 

payments on the project loan if the revenues generated by the project are insufficient to 

cover the loan payments. This type of financing allows the developer to finance the 

project on a highly leveraged basis. Often, projects are financed using 80 to 100 percent 

debt financing. A developer’s funds are at less risk as it permits a developer to finance 

the project without diluting its equity investment in the project. 
 II-10 

6. Advantages and Disadvantages

Advantages and Disadvantages--It can be challenging for a tribe that chooses to 

operate and manage a commercial enterprise through an unincorporated arm of the tribe. 

Since an unincorporated commercial enterprise of the tribe is acting as an extension of 

the tribe it is not set up as a separate legal entity from the tribe itself. The tribe will enter 

into a contract in its own name. The assets and property of unincorporated enterprise is 

not conveyed to a separate legal entity and can not be separately pledged as collateral. 

Thus it is more difficult to minimize the financial risks of the tribe by segregating the 

assets of the unincorporated enterprise. 

The advantages of operating a business as an unincorporated instrumentality of 

the tribe include: 

• Easy to form since it is formed as an arm of the tribal government--no 

need to set up a separate legal entity 

• Management is centralized through tribal governmental officials 

• Entity will have the same privileges and immunities as the tribal 

government including tribal sovereign immunity 

• Not subject to federal income tax 

• Section 81 approval by the Secretary of the Interior required if contracts or 

agreements encumber Indian land for a term of 7 years or more. 

Disadvantages include: 

• Politics and business not separated 

• Assets and liabilities of the enterprise are not segregated from 

governmental assets 

• Wholly-owned tribal entity--would preclude equity ownership in 

enterprise by outside investors. 

A major disadvantage of an unincorporated instrumentality of the tribe is that it 

does not separate politics from the day-to-day business operation of the tribe and the tribe 

assumes liability for all of the obligations and liabilities of the enterprise. This can result 

in micro-managing of a business enterprise which may hinder the tribal council’s ability 

to set overall strategic economic development objectives. 
 II-11 

Case Study—Mohegan Tribal Gaming Authority 

In 1995, the Mohegan Tribe of Indians of Connecticut, a federally-recognized

tribe, adopted a tribal ordinance that established the Mohegan Tribal Gaming Authority

as an instrumentality of the tribal government. The Authority was created under an

ordinance established under tribal law. 

The Authority is governed by a Management Board comprised of the same nine

members that serve on the Tribal Council. The nine-member Tribal Council serves

four-year staggered terms; any change to the Tribal Council results in a corresponding

change to the Management Board. The Authority is managed by a CEO who is hired

by the Management Board. The CEO makes the day-to-day business management

decisions for the Mohegan Sun. 

The Authority has been granted the exclusive power to conduct and regulate

gaming activities on the existing reservation of the Tribe and non-exclusive authority

to conduct activities elsewhere. In 1996, the Authority opened the Mohegan Sun casino

and entertainment center on their reservation. In 2005, the Authority purchased a

racing facility and five off-track wagering facilities in Pennsylvania, and formed the

Mohegan Sun at Pocono Downs. 

The Authority has wholly-owned subsidiaries: Mohegan Basketball Club LLC,

Mohegan Ventures-Northwest LLC, and Mohegan Commercial Ventures PA, LLC. As

part of its diversification efforts, Mohegan Ventures-NW owns a 54.15% in SalishanMohegan LLC, formed with an unrelated third party to participate in the development

and management of a casino to be owned by the Cowlitz Indian Tribe in Washington.

Both Mohegan Ventures-NW and Salishan Mohegan are designated as unrestricted

subsidiaries of the Authority and are not required to be guarantors of the Authority’s

debt obligations. 

Source: Mohegan Sun Casino and Tribal Gaming Authority 2005 Annual

Report. 
 II-12 

Case Study—Eagle Tech Systems 

Eagle-Tech Systems (ETS) is a wholly-tribally owned computer services 

company. Originally started in 1972 as an internal information technology department 

by the Warm Springs tribal government, it was renamed ETS in January 2004. The ETS 

office is located on the Warm Springs Indian Reservation in North Central Oregon. 

The Confederated Tribes of the Warm Springs Reservation is a confederation of 

three Indian tribes organized pursuant to the Indian Reorganization Act of 1934 (IRA). 

The Tribe has both a Constitution and Bylaws approved pursuant to Section 16 of the 

Act and a federal corporate charter issued pursuant to Section 17 of the Act. In both 

capacities it is governed by an 11 member tribal council. The Tribe has approximately 

4,500 members. Its lands include 640,000 acres within the reservation boundaries, and 

some thousands more acreage off reservation within its original lands ceded to the U.S. 

Government in 1855. It has a variety of enterprises including a lumber mill, vacation 

resort, casino, composite materials manufacturing plant, museum, construction 

enterprise, credit enterprise, and hydroelectric power generation enterprise. Some of 

these are formed under the federal corporate charter and others, like Eagle-Tech Systems 

(ETS), are formed pursuant to provisions of the constitution. 

Eagle-Tech Systems is not a corporation, partnership, LLC, LLP, sole 

proprietorship or other form of legal organization commonly used off the reservation. 

Rather, it is a unique entity formed under the Tribal Constitution that has many of the 

attributes of the most common forms of business organizations. The Tribal Constitution 

empowers the Tribal Council "to charter subordinate organizations for economic 

purposes and to regulate the activities of all cooperative associations of members of the 

Confederated Tribes." Pursuant to this provision the Tribal Council, by resolution, has 

chartered Eagle-Tech Systems as a "subordinate organization for economic purposes." 

Under the charter, it is governed by a board of directors appointed by the Tribal Council. 

It is managed on a day-to-day basis by a General Manager selected by the board of 

directors. As a legal entity, it can be described as a "subordinate organization of the 

Warm Springs Tribe chartered for economic purposes by the Tribal Council of the 

Confederated Tribes of the Warm Springs Reservation pursuant to the provisions of its 

Constitution adopted pursuant to the provisions of Section 16 of the Indian 

Reorganization Act of 1934". 

Source: Eagle Tech Systems 
 II-13 

B. Political Subdivision of Tribal Government

Political subdivisions are increasingly utilized by Indian tribal governments as 

quasi-business entities because of the close link between economic development (a 

governmental function) and tribal ownership and conduct of businesses. In some cases, 

such subdivisions are being formed as Economic Development Authorities that serve two 

functions: (1) as holding companies for business entities owned by the tribe; and (2) as 

regulatory bodies for business operations within the tribe's jurisdictional area. In other 

cases, political subdivisions are utilized to own and operate a specific enterprise or 

activity that has both a governmental and a business aspect to it, such as energy 

development, gaming or housing. 

1. Brief Description and Examples

A political subdivision of an Indian tribal government is a unit of the government 

that: 

• Is, to some degree, separate from the government itself 

• Is created under tribal law to fulfill a substantial governmental 

function of the government 

• Has been delegated a sufficient amount of one or more recognized 

sovereign powers of the tribe. 

Recognized sovereign powers include, for the purpose: (1) the power to tax; (2) 

the power of eminent domain; and (3) a police or regulatory power. 

This past year, the IRS ruled that a tribal business development authority (the 

"Authority") may constitute a political subdivision of a federally recognized Indian tribe 

(the "Tribe"). In Private Letter Ruling ("PLR") 200635002, the Tribe, through its Tribal 

Council, established the Authority as a political subdivision of the Tribe. Authority was 

given the power to impose and collect (1) business income or franchise taxes, sales and 

use taxes, and other business-related taxes on any persons (limited to business entities 

chartered by the Tribe), transactions, or activities within Tribe's taxing jurisdiction, and 

(2) service and licensing fees on business enterprises operating within Tribe's taxing 

jurisdiction. 

The Tribe retained significant control over the Authority even though it was a 

separate entity. For example, it provided that all five members of Authority's governing 

board could be removed by the Tribal Council at any time with or without cause. 

Furthermore, the Authority's capital and operating budgets were subject to Tribal Council 

approval before they became effective, while financial balance sheets and quarterly 

reports were required to be filed with the Tribal Council. 
 II-14 

The IRS found the Tribe effectively delegated all the power to tax, and one or 

more of the substantial governmental functions within the meaning of section 7871(d) of 

the Code. Therefore, the IRS held Authority will be treated as a political subdivision of 

Tribe under section 7871 of the Code.35

Other examples of political subdivisions that have been recognized as such by the 

IRS and the Bureau of Indian Affairs ("BIA") include the following: 

• A reservation infrastructure development authority or entity 

• Numerous tribal housing authorities, including an intertribal housing 

authority 

• An intertribal river protection and fish commission 

• An industrial development commission charged with the administration 

and development of economic activities within tribal jurisdiction. 

In certain instances, the IRS has ruled that a tribal entity did not qualify as a 

political subdivision. For example, the IRS ruled in the late 1990s that a state-chartered 

non-profit health entity was not a political subdivision of an Indian tribe because there 

was no evidence tribe had delegated any sovereign powers to the entity. Conversely, the 

IRS ruled in the mid-1980s that a tribal tax commission was not a political subdivision--

not because it lacked sovereign powers, but because it was an "integral part" of the 

government itself.36 

2. Organizational Characteristics and Requirements

Most entities that qualify as political subdivisions of a tribal government are 

created under tribal law (generally, through a special purpose ordinance or legislative act) 

for a governmental purpose. Although political subdivisions are ultimately controlled by 

the tribe and its governing body, such subdivisions generally have their own governing 

body--whether it be a board of directors, a commission or other type of decision-making 

body. As noted above, the hallmark of a political subdivision is its ability to exercise 

sovereign powers delegated to it by the tribe. 

Section 7871 of the Internal Revenue Code provides that a subdivision of an 

Indian tribal government shall be treated as a political subdivision of a state if (and only 

if) the IRS determines (after consultation with the Department of the Interior) that such 

subdivision has been delegated the right to exercise one or more of the substantial 

government functions of the Indian tribal government. The legislative history provides 

that sovereign powers of an Indian tribal government include the power to tax, the power 

of eminent domain, and police powers (such as control over zoning, police protection, 

and fire protection).37 Police powers generally include the power to promulgate and 

enforce regulations within an entity's scope of authority. 

Following passage of the Indian Tribal Government Tax Status Act in 1982, the 

IRS promulgated two revenue procedures relevant to tribal political subdivisions. The 
 II-15 

first--Revenue Procedure 84-36--lists all of the tribal entities that the IRS determined to 

be political subdivisions at that time. The second--Revenue Procedure 84-37--provides 

specific procedures that must be followed by any tribe seeking to qualify an authority or 

subordinate entity as a political subdivision.38

 Comment: Tribal political subdivisions are not required by the IRS or BIA to 

obtain official recognition of their status for federal income tax purposes, but if a 

tribal political subdivision intends to be treated like a political subdivision of a 

state for all of the enumerated federal tax benefits in Section 7871 (e.g., authority 

to issue tax-exempt bonds, entitlement to various excise tax exemptions, ability to 

receive tax-deductible charitable contributions), it must request an IRS ruling 

following specific IRS procedures. 

Under the procedures set forth in Revenue Procedure 84-37 as updated annually 

by subsequent IRS revenue procedures,39 the first step in obtaining an IRS ruling on the 

political subdivision status of a tribal entity is to secure a letter from the Department of 

the Interior ("DOI") verifying that the Tribe has delegated a substantial government 

power to the entity. The DOI letter may be obtained from the Solicitor's Office at the 

Department. There are no regulations or other administrative pronouncements on the 

format for the DOI letter request, other than the substantive guidance found in the IRS 

revenue procedures. The request should demonstrate that the subdivision has been 

validly established under tribal law and that the tribe's governing body has delegated one 

or more of the following three sovereign powers to the entity: (1) the power to tax; (2) 

the power of eminent domain; and (3) a police power. There is no filing fee for 

requesting the DOI determination letter, but such determinations generally take at least 

90 days to obtain. 

Once the DOI letter has been issued, the IRS ruling request may be filed. Even 

though the IRS is not required to make a substantive determination of its own, the IRS 

charges the normal private letter ruling "user fee" for political subdivisions 

determinations. As of February 1, 2006, the user fee was $10,000. This type of private 

letter ruling will normally be processed in 90 to 120 days if all of the technical 

requirements are met. 

3. Sovereign Immunity and Liability

Sovereign immunity generally extends to political subdivisions of Indian tribal 

governments. Like an instrumentality, a tribal political subdivision shares the same 

attributes of tribal sovereignty as the tribe. Sovereign immunity is essential in order to 

protect tribal assets and to safeguard tribal self-governance. 

When a political subdivision is utilized for economic development purposes, there 

are likely to be occasions in which the subdivision finds it useful or necessary to execute 

a limited waiver of sovereign immunity. Thus, the tribal ordinance establishing the 
 II-16 

subdivision should provide that the subdivision may execute any limited or transactionspecific waiver of its sovereign immunity. Limitations on the subdivision's exercise of 

such a right typically include (1) requiring advance approval of the Tribe's governing 

body, and (2) clarifying that a subdivision's waiver of immunity does not in any way 

waive the tribe's immunity. In addition, in establishing a subdivision, it is useful to 

provide that the subordinate entity's immunity from suit does not extend to legal actions 

against it or its officers or directors brought by the tribe itself. 

4. Tax Treatment 

The IRS has ruled that the income earned by a state, a political subdivision of a 

state, or an integral part of a state or political subdivision "is generally not taxable in the 

absence of specific statutory authorization for taxing such income."40 As noted above, 

the IRS has taken this same approach to the taxation of income earned by Indian tribes, 

their unincorporated businesses, and their section 17 corporations.41 The IRS has also 

ruled privately that a political subdivision of an Indian tribe was not required to file

income tax returns.42

Comment: Although the relative dearth of binding IRS authority on the income 

tax treatment of tribal political subdivisions is troubling, the current practice of 

the IRS is to treat political subdivisions the same as the tribe—so long as they 

qualify as such by having been delegated substantial governmental powers. 

Section 7871 treats Indian tribal governments and their political subdivisions like 

state governments for specific tax purposes. The Internal Revenue Code provides a 

relatively large number of tax benefits for state and local governments. Not all of these 

benefits are extended to tribal governments. Under Section 7871, the following benefits 

are available to tribal governments and their political subdivisions: 

• Tax deductibility of charitable contributions for income, estate and gift tax 

purposes 

• Certain governmental exemptions from specific excise taxes levied on 

fuels, manufactured goods, communications, and certain highway 

vehicles (all contingent on the purchase or sales transaction involving the 

exercise of an "essential governmental function") 

• Tax deductibility of tribal taxes 

• Authority to issue tax-exempt bonds for facilities that serve an "essential 

governmental function" 

• Certain health and retirement annuity plan purposes (but not the treatment 

of tribal pension or retirement plans generally as "governmental" plans) 

• Excise taxes rules related to excess lobbying expenditures and private 

foundations. 
 II-17 

In addition, under section 7871(a)(5), Indian tribal governments or their 

subdivisions that form colleges and universities are--like state colleges and universities--

subject to the unrelated business income tax or "UBIT" (even through state political 

subdivisions would not generally be subject to the UBIT tax). 

As noted above, in order to qualify for the tax benefits enumerated in Section 

7871, a political subdivision of a tribe must be recognized by the Internal Revenue 

Service as an entity that has been delegated one or more sovereign powers of an Indian 

tribal government. 

5. Financing Considerations

One of the major advantages of establishing a political subdivision for economic 

development or business activities is that such an entity can be both the borrower and the 

issuer in a tax-exempt financing. When the subdivision, and not the tribal government 

itself, is the issuer/borrower, overly invasive disclosure of tribal financial records may be 

avoided. 

Where the facilities or operations to be financed do not meet the essential 

governmental function test under section 7871 for tax-exempt bond financing, the 

political subdivision may seek or arrange other types of financing, such as: 

• Government-guaranteed loans 

• Taxable bond issuances 

• Private placements 

• Commercial bank financing. 

In addition, Indian tribes or their political subdivisions may seek specialized types 

of tax-credit financing (such as the "clean renewable energy bonds" recently authorized 

in the Energy Policy Act of 2005) and extended by the Tax Relief and Health Care Act of 

2006.43

These and other financing options are discussed in detail in Section II.A.5. 

6. Advantages and Disadvantages

Advantages of conducting economic development and business activities through 

a political subdivision include the following: 

• Relative certainty of federal tax treatment 

• Likely retention of state tax immunity 

• Retention of sovereign immunity (except where waived or limited for 

specific purposes) 
 II-18 

• Ability to form the equivalent of a corporate board with a governmental 

focus 

• Use of the subdivision as both a regulatory body and as a holding 

company for subordinate and separately organized business entities. 

Disadvantages of conducting economic and business activities through a political 

subdivision include the following: 

• Time and expense associated with the formation of the entity, including 

the requisite federal agency approvals that must be obtained (first by BIA, 

and then IRS) 

• Political subdivisions do not have all of the flexibility associated with 

ordinary business entities, such as corporations and LLCs 

• Certain business partners may not be comfortable dealing with any type of 

governmental entity. 

In sum, once an economic development or other authority is established as a 

political subdivision, it makes an excellent platform for both conducting and overseeing 

business operations. However, its formation is not likely to be quick and easy. 

Implementing this option requires careful advance planning and a minimum of six 

months to obtain the requisite agency approvals. 
III-1 

III. 

TRIBAL CORPORATIONS

A. Tribally-Chartered Corporations

Tribally chartered corporations have been utilized with increasing frequency by 

Indian tribal governments to conduct various types of economic development and 

business activities. One compelling reason for their use is that they are relatively easy to 

establish compared to federally chartered corporations (e.g., corporations organized under 

section 17 of the Indian Reorganization Act or section 3 of the Oklahoma Indian Welfare 

Act). In addition, tribally chartered corporations, unlike state chartered entities, are 

considered to be largely exempt from state regulation--depending, of course, on the locus 

of their operations and whether they are wholly owned by the tribe. They are also more 

likely to be immune from taxation than state-chartered corporations are. However, the 

federal tax treatment of such corporations is currently the subject of a pending IRS 

guidance project, and thus remains somewhat uncertain. In addition, the immunity from 

suit of such corporations depends on the facts and circumstances of their creation, 

ownership and operation, and can be difficult to predict. 

1. Brief Description and Examples

A tribally chartered corporation is a corporation that is organized under a tribal 

statute or code or pursuant to a resolution of an authorized tribal legislative body. A 

corporation is a business entity that has the following characteristics: (1) limited liability 

(i.e., the liabilities of the corporation do not automatically become liabilities of the 

corporation's owners); (2) transferability of ownership interests; (3) centralized 

management, generally in the form of a board of directors; and (4) continuity of life (i.e., 

it exists until formally dissolved). By definition, a corporation has separate legal 

existence as an entity distinct from its owners or shareholders. 

The tribe under whose laws a corporation is organized will typically issue a 

charter or certificate of organization. Such a corporation may be organized as a for-profit 

or nonprofit corporation. Ownership may be evidenced by shares (in the case of a stock 

corporation) or simply by governance control (non-stock corporation). Although for 

purposes of this chapter, we are focusing on tribally chartered corporations that are 

wholly-owned by an Indian tribe, such corporations may be owned in whole or in part by 

third parties so long the tribe's laws authorize the formation of such corporations. 

The legal characteristics, capabilities and limitations of tribally-chartered 

corporations are all determined under the law of the chartering tribe. In some cases, such 

law may spell out the corporation's powers and limitations in great detail–especially 

where the tribe has taken the time to draft and promulgate a corporation code. In other 

instances, the tribal law merely establishes an entity for a specific purpose, and leaves the 

details to the organization's articles and bylaws. 
III-2 

Examples of tribally chartered corporations include the following (drawn from 

IRS rulings, reported cases and other sources): 

• A tribally chartered college 

• A tribal law corporation (or an instrumentality with corporate 

characteristics) used to conduct the gaming operations of the tribe 

• A nonprofit corporation chartered by a tribe to provide educational and 

health programs for its members 

• A tribally chartered corporation used as a holding company for a variety of 

economic development and business entities. 

Numerous tribes have established and utilized tribal corporations for a wide 

variety of purposes. 

2. Organizational Characteristics and Requirements

The organizational characteristics and requirements for a tribally chartered 

corporation will vary according to the applicable law of the tribe. Several tribes have 

adopted very detailed corporation codes (in some cases, with specific provisions for forprofit and nonprofit corporations), while others provide for the organization of tribal 

corporations on a more ad hoc basis. However, there are common characteristics and 

organizational procedures for forming and managing corporations that are found in many 

tribal statutes. 

Formation--To form a tribally-chartered corporation, the incorporators must 

generally select a name and draft articles of incorporation. Most corporate codes require 

the following items to be included in articles of incorporation of any type of corporation: 

1) the name of the corporation; 

2) the term or period of existence of the corporation (which may be 

perpetual); 

3) the purpose(s) for which the corporation is organized (with an eye toward 

consistency with whatever the tribe's corporation code define as lawful 

corporate purposes); 

4) laws regulating the governance of the corporation, including the election 

of directors and rights of shareholders; 

5) the address of the corporation's initials registered office and the name of 

its initial registered agent at such address; 

6) the number of persons constituting the initial board of directors and the 

names and addresses of the persons who are to serve as directors; 
III-3 

7) the name and address of each incorporator; 

8) provisions regarding the issuance and classes of stock by the corporation; 

9) provisions relating to the payment of dividends; and 

10) liquidation and dissolution procedures. 

If a tribal corporation is owned in whole or in part by the tribe itself, the tribe's 

legislative body must formally approve its articles. If not, the articles are simply filed 

with the tribal official who is the equivalent to a Secretary of State. Such an official will 

review and approve the articles of the corporation, and then issue a "certificate of 

incorporation" or charter to the incorporators. Unless otherwise specified, corporate 

existence begins when the certificate of incorporation is issued by the government. 

In the case of a wholly-owned tribally-chartered corporation, the corporation's 

articles will generally spell out the role of the tribe (as represented by the tribe's 

legislative body) in: 

• Electing and removing the initial and successor directors 

• Approving the initial articles of incorporation, and any amendments 

thereto 

• Approving the entity's capital and operating budgets 

• Negotiating any dissolution, liquidation or merger of the entity. 

Other issues to be resolved in the corporation's organizational documents include 

the payment of earnings or corporate dividends to the tribe, and issues relating to 

sovereign immunity. 

Management--Tribal law corporations are managed and overseen by a corporate 

Board of Directors who are elected by the corporation's shareholders. If the tribe is the 

corporation's sole shareholder (whether or not the corporation formally issues shares), the 

tribe's legislative body generally exercises the power to elect directors (and may remove 

them under certain circumstances). Directors approve budgets, approve the hiring of and 

set compensation for senior executive officers, establish the overall business strategy of 

the corporation, and hold its officers accountable for executing such strategy. A CEO or 

executive director is usually in charge of day-to-day operations. 

3. Relationship to Tribal Government

When a tribe forms a wholly-owned corporation, it generally expects to retain 

overall control of the corporation while, at the same time, segregate the corporation's 

business affairs and assets from the operations of its government. Thus, while the tribe 

may be the sole shareholder of the corporation, the corporation will likely be managed by 

its own board of directors. The board of a tribal corporation will generally have some 

degree of autonomy from the tribe's elected leadership. 
III-4 

The extent to which a tribal law corporation has autonomy from the tribal 

government may determine in large measure whether it can claim to share the same 

immunity from suit as the government itself. 

4. Sovereign Immunity and Liability Issues 

One of the key characteristics of any corporation is limited liability. In the 

corporate context, limited liability means that the shareholders of a corporation are 

generally not personally liable for the debts of the corporation in which they own stock. 

When a corporation is wholly owned by a tribe, the tribal corporation's organizing 

documents or other law should make clear that the tribe is under no obligation to the 

corporation or its creditors--other than to the extent of its contributed capital or other 

consideration for the shares that it owns. However, if a corporation that is wholly owned 

is not treated as a separate legal entity by its owner or if corporate formalities are ignored, 

the creditors of the corporation could seek to "pierce the corporate veil" in order to access 

tribal assets. See Appendix B, Steps to Protect Corporate Veil and Limit Liability.

Anticipating the possibility of corporate veil piercing, many tribal corporation statutes, 

ordinances or organizing documents also make clear that by incorporating or operating a 

corporation, the tribe should not be deemed to have waived its sovereign immunity from 

suit or any other privileges of sovereignty. 

In certain situations, corporations organized under tribal law may share the 

organizing tribe's sovereign immunity from suit. Courts have developed various methods 

of analysis for determining whether a particular tribally chartered corporation is immune. 

These inquiries tend to be highly fact specific which makes advance planning a difficult 

task. Still, several principles have emerged. 

• Whether a judgment against the tribal corporation will reach the tribe's 

assets 

• Whether the tribal corporation has the power to bind the tribe's assets or 

obligate tribal funds 

• Whether the tribe and the tribal corporation are closely linked in 

governing structure and other characteristics, including 

• tribal control over appointment and removal of board members 

• extent of board's power over the corporation 

• Whether federal polices designed to promote tribal self-determination are 

furthered by extending immunity to the corporation 

• Whether the corporation is organized for governmental or commercial 

purposes 

• Whether the corporation holds title to property in its own name 

• Whether the entity is legally separate and distinct from the tribe (e.g., as is 

normally the case with a separately incorporated entity). 
III-5 

As a general rule, the more inter-connected the tribe and the corporation, the more 

likely a court will be to find that the corporation shares the tribe's immunity from suit. If 

the entity operates in a manner that is largely independent of the government, it is not 

likely to be able to cloak itself in governmental immunity. However, if the entity is a 

mere agent or instrumentality of the tribal government created to carry out a 

governmental purpose, it should be able to claim governmental immunity from suit. 

Such immunity may be waived, however, without waiving the tribe's immunity. For 

further detail. See Appendix A, Sovereign Immunity Factors in Recent Judicial 

Decisions.

5. Tax Treatment

While the IRS has consistently ruled that federally recognized tribes and 

federally-chartered tribal corporations (e.g., corporations organized by tribes under 

section 17 of the IRA or section 3 of the OIWA) are not subject to federal income tax, it 

has not charted a clear course with regard to the tax treatment of tribally-chartered 

corporations. In fact, for the past several years, the Treasury Department and the IRS 

have listed the federal tax treatment of corporations organized under tribal law as an 

official "guidance priority," but no guidance has been forthcoming. 

The uncertainty over the tax treatment of tribal law corporations dates back to the 

issuance of Revenue Ruling 94-16 in 1994 and the subsequent issuance of regulations on 

the classification of business entities two years later in 1996. In Revenue Ruling 94-16, 

the IRS ruled that federally chartered tribal corporations should be treated the same as the 

tribe for federal income tax purposes, but that state-chartered corporations should be 

treated like ordinary corporations--taxable on their income and required to file federal 

corporate income tax returns. Revenue Ruling 94-16 did not address the tax treatment of 

corporations chartered under tribal law. 

Following the issuance of Revenue Ruling 94-16, the IRS issued new regulations 

on the classification of business entities for federal tax purposes. These so-called "checkthe box" regulations confirmed the tax-free status of Section 17 and Section 3 

corporations. They did so by stating that such federally chartered entities, although 

generally meeting the definition of a "corporation," will not be recognized as "separate 

entities."44 Thus, such corporations share the same tax status as the tribe. At the same 

time, in the 1996 preamble to these regulations, the IRS acknowledged the tax treatment 

of tribal law corporations was "unclear" and noted that the Treasury Department and IRS 

were studying the issue.45

In 2001, Treasury/IRS formally agreed to resolve the uncertainty regarding tribal 

law corporations in guidance to be issued by the IRS. Since then, the anticipated 

"guidance on the income tax status of wholly-owned corporations chartered under tribal 

law" has been an item listed on the annual Treasury-IRS Priority Guidance Plan. See

2006-2007 Priority Guidance Plan (August 15, 2006) at http://www.irs.gov/pub/irsutl/2006-2007gp.pdf. The uncertain tax treatment of tribal law corporations has also been 

referenced in a recent addition to the Internal Revenue Manual, which reads as follows: 
III-6 

In addition, many tribes form corporations utilizing 

their own corporate code or resolution process. The tax 

status of corporations chartered under tribal law and owned 

100% by the tribe is not clear. A revenue ruling is 

anticipated to address this issue. 46

The resolution of this issue is still highly uncertain. 

In the view of some commentators, the central issue is whether wholly owned 

tribal law corporations are exempt on a per se basis or only to the extent that such entities 

have been structured as "integral parts" of the tribe.47 Prior to 2005, the IRS had issued 

private letter rulings treating certain tribally chartered entities the same as the tribe for tax 

purposes after determining that such entities functioned as an "integral part" of an Indian 

tribe. 

Over the past several years, case law and IRS rulings have cited the following 

factors as relevant to the "integral part" determinations: 

• Whether the government has the authority to terminate the existence of the 

entity 

• Whether the government or a governmental body elects members to the 

entity's board 

• Whether the government has the power to recall or remove the members 

of the entity's board 

• Whether the government has made a significant financial commitment (or 

transferred significant property) to the entity 

• Whether the government has a substantial right to the profits earned by the 

entity 

• Whether the government is liable for acts of the entity 

• Whether the entity is essentially an operating unit or agency of the 

government.48

In recent guidance issued in the form of private letter rulings, the IRS has 

highlighted two of these factors as being essential to establishing "integral part" status: 

1) governance control; and 

2) financial commitment.49

Thus, if a tribal law corporation is utilized for economic development purposes, 

the case for favorable tax treatment is strongest if the entity is structured to meet the 

"integral part" test. While the determination as to whether an enterprise qualifies as an 

integral part of the tribal government depends on all the facts and circumstances, it is 
III-7 

critically important to establish (1) the tribe's degree of governance control over the 

enterprise, and (2) the tribe's financial commitment to the enterprise. 

It is difficult to predict whether the IRS revenue ruling that is expected to be 

issued in the next few months will continue to reflect this approach or chart a new course 

altogether. 

The status of tribally chartered corporations under state tax law varies from state 

to state. Their status also may vary according to the type of tax involved. 

In California, the only type of corporation that qualifies to be treated the same as 

the tribe for sales and use tax purposes is one that is "organized under tribal authority" 

and wholly owned by Indians or by the tribe itself; other types of corporations, even 

though they may be wholly owned by the tribe, apparently do not qualify for the special 

sales and use tax exemptions afforded to Indians, tribes and tribal organizations. 50

In Oklahoma, the Oklahoma Tax Commission has taken the position that the sales 

tax exemption of Indian tribes does not extend to any "corporations, partnerships, or other 

business or legal entities," but "only applies to transactions with a federally recognized 

Indian tribe itself."51

6. Financing Considerations

Since it is not clear whether a tribally chartered corporation will be treated as an 

“integral part" of the tribe for federal income tax purposes, it is also unclear whether such 

an entity can issue tax exempt bonds. Under the terms of the applicable statutory 

provisions, only tribal governments and their political subdivisions can issue tax-exempt 

debt52. Further, depending on the activities of a tribally-chartered corporation, its use of 

tax-exempt bonds might be prohibited if they are issued to fund facilities or operations 

not deemed to serve an essential governmental function. 

Where the facilities or operations to be financed do not meet the essential 

governmental function test under section 7871 for tax-exempt bond financing, a tribal 

law corporation may seek or arrange other types of financing, such as: 

• Government-guaranteed loans 

• Taxable bond issuances 

• Private placements 

• Commercial bank financing. 

Recently enacted tax-credit bonds, such as those provided for "clean renewable 

energy facilities" ("CREBs") under the Energy Policy Act of 2005, are limited to Indian 

tribal governments and their political subdivisions. 
III-8 

The Small Business Administration ("SBA"), by contrast, generally favors the use 

of corporations and other business entities, rather than the conduct of business by tribal 

governments and their political subdivisions. To qualify for contracting preferences 

under Section 8(a), the tribe must organize a separate and distinct legal entity, that is "forprofit" and is capable of being sued. It may be organized under either state or tribal law. 

Thus, under SBA 8(a) rules, a tribal law corporation would be a viable choice if SBA 

preferences are being sought. If an SBA loan is sought, government-owned corporations 

generally do not qualify, but there is an exception for tribal government-owned entities.53

Under the Department of the Interior's Loan Guaranty, Insurance, and Interest 

Subsidy Program (administered by the Office of Indian Energy and Economic 

Development ("IEED")), any business entity that is at least 51 percent owned by a 

federally recognized tribe may qualify for a government-guaranteed loan. 

The IEED program and other financing options are discussed in detail in Chapter 

II.A.5. 

7. Advantages and Disadvantages

Advantages of conducting economic development and business activities through 

a tribally chartered corporation include the following: 

• Ease of formation 

• Confirmation of tribal sovereignty and freedom from state corporate 

regulation 

• Flexibility (ability to design own governance structure and rules) 

• Possible tax immunity 

• Possible immunity from suit. 

Disadvantages of conducting such activities through a tribally-chartered 

corporation include the following: 

• Uncertainty of federal tax treatment 

• Certain business partners may not be comfortable lending to or investing 

in an entity that is not incorporated under the law of one of the 50 states 

• Uncertainty whether the entity would qualify as an issuer in a tax-exempt 

financing 

• Uncertainty whether the tribal corporation will be recognized as sharing 

the tribe's sovereign immunity. 

In sum, a tribally chartered corporation is a flexible entity form that works well in 

many situations--e.g., where it is intended to operate principally on-reservation as an arm 

of the tribal government. It would not be the entity of choice for extensive offreservation activities or as a joint venture entity involving non-tribal parties. The 
III-9 

continuing uncertainty surrounding its treatment for federal income tax purposes has 

diminished its attractiveness for many tribes. 

Case Study—Ho-Chunk, Inc. 

Ho-Chunk, Inc. is chartered under the laws of the Winnebago Tribe and is whollyowned by the Tribe. The Winnebago Tribe is organized under Section 16 of the Indian

Reorganization Act (IRA). Ho-Chunk, Inc. was formed in 1994 to diversify the Tribe’s

business interests while maintaining a separation between business activities and the tribal

government. Pursuant to its Section 16 IRA constitution, the Winnebago Tribe adopted a

Winnebago Business Code that permits the formation of wholly-owned tribal corporations.

Incorporating under tribal law gives the tribe more control over determining the powers and

authority of the corporation and which privileges and immunities of the tribe to confer on a

tribal corporate entity. The Winnebago Business Code gives the Tribe the option of

conferring all the privileges and immunities of the Tribe on tribally-owned corporations. 

The Tribe formed Ho-Chunk, Inc. as a general purpose holding company that

promotes economic self-sufficiency and creates jobs through its enterprises, joint ventures

and investments. Operating subsidiaries can be formed under the tribal business code. The

company has a five-member Board of Directors who is responsible for providing an annual

report, audited financial statements and an annual development plan to the Tribal Council.

Two of the board members are required to be tribal council members. The two tribal council

members ensure that tribal governmental interests are maintained and they keep an informal

channel of communication open with the Tribal Council. The Tribal Council appoints board

members, formulates the long-term development plan for the corporation, and approves the

annual operating plans. The Board of Directors selects the Chief Executive Officer who

oversees day-to-day management and strategic decisions for the company. This structure

preserves the autonomy of the corporation and permits the corporation and its Board to make

business decisions and minimizes political interference by the Tribal Council. This permits

the Tribal Council to focus on governance issues and enables business experts to focus on

maximizing the profitability of the corporation. Ho-Chunk, Inc. operates 15 subsidiaries in

six major business areas, both on and off the reservation. 

Source: Ho-Chunk, Inc. and Harvard Project on American Indian Economic

Development: Innovations Award. 
III-10 

B. Section 17 Corporation—Federal Law Corporation

1. Description and Examples 

In passing the Indian Reorganization Act of 1934 (IRA), Congress intended to 

provide tribes with the ability to compete in the private business world. Section 17 of 

the IRA gives tribes the power to incorporate and enables them to waive sovereign 

immunity to facilitate business transactions, thereby fostering tribal economic 

development and independence.54 Congress realized that the perception, if not the 

reality, of tribal sovereign immunity could impede a tribe’s economic growth and 

participation in the business world. Therefore, to address this issue, Congress authorized 

tribes to organize two separate entities: (1) a political governing body to exercise powers 

of self-government pursuant to Section 16 of the IRA, and (2) a federally-chartered tribal 

corporation to engage in business transactions pursuant to Section 17. 

Pursuant to the IRA, a Section 16 governmental unit and a Section 17 tribal 

corporation are distinct legal entities. By forming two legal entities (one with sovereign 

immunity, the other with the possibility of waiver of sovereign immunity), tribes could 

maximize the use of their property and assets. Under the two-part scheme, the property 

of the corporation may be placed at risk, but only to the extent necessary to satisfy the 

needs of lenders and developers; however, tribal assets held by the tribal political body 

organized pursuant to Section 16 of the IRA would remain fully protected by sovereign 

immunity.55

2. Organizational Characteristics

Formation--Establishment of a Section 17 corporation is governed by a Section 

17 of the IRA and by its implementing regulations.56 However, neither the statute nor its 

regulations contain detailed procedures for forming a Section 17 corporation. Therefore, 

there is significant flexibility in how the procedural requirements are met and there is 

wide variation in the contents of tribal Section 17 corporate charters. Additionally, staff 

at the BIA Central, regional and local offices may have differing interpretations of the 

formation requirements particularly with respect to whether a tribe is required to submit a 

petition for a charter. Recently, the BIA Central Office has delegated more approval 

power to the Regional offices. 

Traditionally, Indian tribes were required to take the following five steps in order 

to secure final approval of a federally-chartered Section 17 corporation. 

Step 1--Tribal Resolution or Petition. The regulations provide that a tribe may 

initiate the Section 17 corporation formation process by submitting a petition to the 

Secretary of the Department of the Interior to issue a corporate charter. Prior to the 1990 

amendments to Section 17, some agency personnel and attorneys interpreted the 

petitioning requirement to apply only to tribes with constitutions. Pursuant to recent BIA 

practice, the formation process may be initiated by tribes with or without constitutions-- 
III-11 

simply by passing a tribal resolution for the issuance of a charter--without submitting a 

formal petition. 

Step 2--Draft Charter. The next step is to draft the corporate charter, which is a 

document similar in form and scope to Articles of Incorporation, but generally with more 

detail. The charter describes the organizational framework for the entity that the tribe is 

seeking BIA approval. The corporation must be structured as a legal entity that is wholly 

owned by the tribe, but separate and distinct from the tribal government. 

Step 3--Approval by the Tribe. Once drafted, the charter must be submitted to the 

tribe for approval. According to the BIA, the procedure for obtaining tribal approval is 

set by the law of the tribe, and not by federal law. If the tribe's constitution (or other 

organic documents) allows the Tribal Council to form corporations, a Council resolution 

is generally sufficient; if not, a vote of the general membership must be scheduled. 

Step 4--Filing of Petition/Resolution. After the tribe signs the resolution or 

petition and approves the charter, both documents should be submitted to the local BIA 

office having administrative jurisdiction over the Tribe. Once received by the local BIA 

office, the documents will be reviewed to ensure that the submission is complete. If 

complete, the charter documents will be forwarded to the regional BIA office for further 

review and approval. (Under a recent delegation of authority, only if the regional BIA 

office proposes to disapprove the documents will they be forwarded to the Central or 

national BIA office for further review.) Upon a determination that the resolutions and 

proposed charter are consistent with tribal and federal law, and properly approved by the 

tribe, the Regional BIA office will issue an approved charter of incorporation. 

Step 5--Ratification of Corporate Charter. Once the charter is approved, it will be 

returned to the Tribe for ratification. The Section 17 statutory provisions require that the 

corporate charter be ratified by the governing body of the tribe before it becomes 

effective. Once the charter is ratified by the Tribe, the statutory requirements are met and 

the charter becomes operable. 

When Section 17 was first enacted, tribes were required to first organize a 

governing body under Section 16 in order to be eligible to organize a corporate entity 

under Section 17. The IRA was amended in 1990, and now tribes can form a Section 17 

corporation regardless of whether they have formed their governing body pursuant to 

Section 16 of the IRA or pursuant to tribal law. Originally, the IRA did not apply to 

Alaska Natives or to Oklahoma tribes; it has subsequently been amended to extend to 

Alaska Natives and a similar provision was enacted for Oklahoma tribes.57 The 

Oklahoma Indian Welfare Act (OIWA) authorizes the formation of tribal corporations in 

a manner similar to the IRA and extends to tribes organized under the OIWA any other 

rights or privileges secured to an organized Indian tribe under the IRA.58 The 1990 

amendments also extended the ability to form Section 17 corporations to tribes that voted 

to reject the IRA. 
III-12 

Neither the Section 17 statutory provisions nor the regulations provide guidance 

on how to amend a Section 17 corporate charter once it has been issued. For this reason, 

tribes frequently draft the corporate purposes section of the charter as broadly as possible 

to accommodate prospective changes in the Section 17 corporation's business activities 

and operation. In drafting the corporate charter, some tribes have vested tribal governing 

body (e.g., the Tribal Council) with authority to seek BIA approval of amendments as 

well as the authority to ratify such amendments. Once issued, a Section 17 corporate 

charter can not be revoked or surrendered, except by an Act of Congress.59

Management--Section 17 corporations are managed and controlled by a 

Corporate Board of Directors appointed by the tribal government. The Board of 

Directors manages and operates the Corporation in accordance with its federal corporate 

charter. A CEO or a manager is usually in charge of its day-to-day operations. 

General Characteristics--Section 17 corporations are tribal in character, they 

must be wholly-owned by the tribe and are essentially alter egos of the tribal government. 

They share the same privileges and immunities as the tribal government. The corporate 

charters may convey the following powers to the incorporated entity: 

• Power to buy and sell real and personal property; including the power to 

purchase restricted Indian lands 

• To enter into leases or mortgages of tribal land for a term of 25 years 

without Section 81 approval by the Secretary of the Interior60

• To enter into contracts or agreements without Section 81 approval by the 

Secretary of the Interior61

• Further powers "as may be necessary to the conduct of corporate 

business." 

A federal corporate charter often permits the corporation to establish and manage 

subsidiary corporations. Tribes have operated construction, manufacturing, gaming, and 

government contracting companies through Section 17 corporations. Section 17 

incorporation provides a separation of the business entity from the tribal government 

body. A Section 17 corporation holds assets or property separately from the tribal 

governing body. Land and assets used by corporation are specifically conveyed or set 

aside for the corporation. A Section 17 corporation will typically have separate bank 

accounts, separate directors, and separate assets. Although the enterprise is whollyowned by the tribe, the tribal council is typically not involved in day-to-day management 

decisions either directly or indirectly. 
III-13 

Section 17 Corporation

• The Board of Directors of the Corporation has control over the direction 

and business activities of the Corporation 

• The Tribal Council is not involved in the day-to-day activities of the 

Corporation, but rather sets strategic economic policies for the tribe. 

3. Sovereign Immunity and Liability Issues

Sovereign Immunity--The Indian Reorganization Act (IRA) was intended to 

allow tribes to enter and compete in the business world. Understanding that sovereign 

immunity could be an impediment to enabling tribal governments to successfully 

compete in the business world by hampering the ability of tribes to obtain credit or attract 

investors, Congress authorized tribes to form a separate legal entity to engage in business 

activities: Under the IRA, a tribe may form a constitutional governing body pursuant to 

Section 16 and a tribal corporation to engage in business transactions pursuant to Section 

17. Typically, a Section 17 corporate charter will vest the corporation with the same 

privileges and immunities of the tribe, including the tribe’s immunity from suit. The 

charter will describe the authorized purpose of the corporation and whether the 

corporation is permitted to borrow money, encumber corporate assets, and whether it can 

waive sovereign immunity for certain transactions. The corporate charter usually 

describes the corporation’s power to act, who can act on the corporation’s behalf, the 

Section 17 

Corporation 

Wholly-owned by 

Tribe 

Section 17 Subsidiary Tribal Corporation 

Subsidiary 

Tribal LLC 

Subsidiary 

Section 17 

Corporation Board of 

Directors 
III-14 

ability of the corporation to waive sovereign immunity, to what extent corporate assets 

can be encumbered and what corporate actions can be undertaken without the approval of 

the tribe. 

Section 17 corporate charters often contain a "sue and be sued clause." This 

clause usually permits the corporation to be sued in its corporate name. Some courts 

have held that this language constitutes a waiver of sovereign immunity of the 

corporation.62 However, other courts have indicated that the inclusion of a "sue and be 

sued clause" does not constitute a waiver unless it is both unrestricted in scope and 

explicit in its intent to waive immunity.63 The execution of a judgment against the 

corporation is limited to the business activities of the corporation and to "assets 

specifically pledged or assigned" to the corporation. 

The BIA has drafted a model corporate Section 17 charter which provides that the 

"sue and be sued clause" of the charter is subject to limitations contained in the charter 

which restrict the scope of the waiver that can be granted pursuant to the "sue and be sued 

clause." Waivers of sovereign immunity pursuant to the "sue and be sue clause" in the 

corporate charter should be limited to a waiver of only the corporation’s sovereign 

immunity and transactions of the corporation. These limitations include restricting the 

waiver to specific transactions or claims or classes of claims for which the waiver is 

granted, and that the waiver extends only to the property and income of the corporation 

and not to the tribe itself. 

Even where there is a limited waiver, the IRA protects the assets of the tribal 

government from execution to satisfy a money judgment. Control over tribal assets is 

retained by the tribal governing body except where the tribal government specifically 

transfers assets or property to the Section 17 corporation.64 A Section 17 Corporation has 

authority to convey or lease tribal lands that are assigned to the corporation for a period 

of 25 years. This permits the tribal government to pledge or assign specific assets to the 

corporation. This limitation allows a Section 17 corporation to enter into business 

transactions and to pledge a security interest in corporate assets. The property of the 

corporation is at risk in the amount necessary to satisfy creditors and developers. 

However, property owned by the tribal governmental body is still protected by sovereign 

immunity and is safe from the execution of a judgment against the corporation. 

There are several court decisions concerning waiver of tribal sovereign immunity 

of a Section 17 corporation. Many of these decisions arise from the confusion created 

when a tribe has not clearly separated the business activities of its Section 16 governing 

body from the business activities of its Section 17 corporation. In these instances, the 

court is usually trying to determine in which capacity a tribe is acting. The court will 

look at who controls the decisions of the business, if the corporation has a separate bank 

account and its own liabilities, and if assets or property have been assigned to the 

corporation. If a court determines that tribe is acting in its governmental capacity, then 

the activities will likely be found to be beyond the scope of the Section 17 "sue and sued" 

waiver.65
III-15 

4. Tax Treatment

The Internal Revenue Service has concluded that federally recognized tribes are 

not subject to federal income taxes.66 As noted earlier, the IRS has ruled that the income 

earned by a state, a political subdivision of a state, or an integral part of a state or political 

subdivision "is generally not taxable in the absence of specific statutory authorization for 

taxing such income."67 The IRS has taken this same approach to the taxation of income 

earned by Indian tribes, their unincorporated businesses and their federally chartered 

corporations because they share the same tax status as the tribe and as such are not 

taxable entities.68

In Revenue Ruling 81-295 and Revenue Ruling 94-16, the IRS ruled that any 

income earned by a federal corporation organized under Section 17 of the Indian 

Reorganization Act shares the same tax status as the tribe and is therefore not subject to 

federal income tax regardless of the location of the activities that generated the income.69

Similarly, in Revenue Ruling 94-65, the IRS has ruled that a tribal corporation organized 

under Section 3 of the Oklahoma Welfare Act is not subject to federal income tax on 

income earned in the conduct of commercial business on or off the tribe’s reservation.70

5. Financing Considerations

One of the major advantages of establishing a Section 17 corporation for business 

activities is that such an entity can arrange for financing without subjecting the tribal 

governmental assets to the risks and liability associated with borrowing money and can 

limit financial disclosure of records to those of the corporation and not the tribe. 

Additionally, in a 1998 Private Letter Ruling, the IRS has held that a Section 17 

corporation can be both the borrower and the issuer in a tax-exempt financing if other 

requirements for tax exempt financing are met.71 When the Section 17 corporation, and 

not the tribal government, is the issuer/borrower, overly invasive disclosure of tribal 

financial records may be avoided. 

Where the facilities or operations to be financed do not meet the essential 

governmental function test under section 7871 for tax-exempt bond financing, the Section 

17 corporation may seek or arrange other types of financing--such as: 

• Government-guaranteed loans 

• Tax-credit financing 

• Taxable bond issuances 

• Private placements 

• Commercial bank financing. 

These options are discussed in detail in Section II.A.5. 

6. Advantages and Disadvantages
III-16 

Advantages and Disadvantages--A Section 17 corporation can provide an 

attractive business structure for tribes because it establishes a legal entity to conduct and 

manage business activities separate from the tribe itself. It also segregates tribal 

governmental assets and liabilities from those of tribal businesses, minimizing the 

financial risks of the tribe. The assets and property of the business are conveyed to a 

separate legal entity and can be separately pledged as collateral. Thereby by limiting the 

liability of Section 17 corporation. It permits a tribe to tailor a waiver of sovereign 

immunity to fit the specific business activities that will be conducted by the corporation. 

It also safeguards the decision-making authority of the tribal government governments 

and assigns the responsibility for operating and managing business activities with the 

Board of Directors of the corporation and a business manager. 

The advantages of operating a business as a Section 17 corporation include: 

• Entity will have the same privileges and immunity as the tribal 

government including tribal sovereign immunity 

• Segregates the assets and liability of the corporation from tribal assets 

• Not subject to federal income tax 

• Has 25 year leasing authority for tribal reservation lands and Section 81 

approval by the Secretary of the Interior is not required 

• Contracts and agreements of the corporation are not subject to Section 81 

approval by the Secretary of the Interior. 

Disadvantages include: 

• The time to obtain a corporate charter issued by the Department of the 

Interior can be lengthy because of the various steps involved 

• Once issued, the charter can only be revoked by an act of Congress 

• A Section 17 corporation must be wholly-owned by the tribe--precluding 

equity ownership in the enterprise by outside investors. 
III-17 

# 4466727_v1 

Case Study—S&K Technologies, Inc. 

In 2006, the Confederated Salish and Kootenai Tribes formed S&K Technologies

as a Section 17 Corporation. The tribal council passed a resolution approving the draft

Charter and then submitted the draft Charter and petition to the Secretary of Interior to

issue a charter. The corporate charter was then ratified by the tribe. 

The Section 17 charter confers all the privileges and immunities of the tribe to

S&K Technologies and permits the tribe to confer all privileges and immunity to triballyowned subsidiaries chartered under the holding company. The S&K Technologies is a

general purpose company and its corporate charter permits the corporation to charter

subsidiaries under either the tribe's Tribal Corporation Code or under its newly adopted

tribal Limited Liability Company Code. S&K Technologies is headquartered on the

Flathead Indian Reservation in Montana. S&K Technologies plans to charter subsidiaries

under the tribal LLC Code to operate its aerospace and information technology

companies that are participating in the Small Business Administration 8(a) business

development program. These tribal 8(a) LLCs will operate in Alaska, Georgia, Ohio, and

the Pacific Northwest. The corporate charter is broadly drafted so that the corporation

could also create other non-8(a) business entities. 

S&K Technologies will be governed by a seven-member Board of Directors

appointed by the Tribal Council to four year staggered terms and who are responsible for

providing an annual report to the Tribal Council. The corporate charter does not restrict

board appointments to tribal members or require that tribal council members be appointed

to the board. The S&K Technologies Board of Directors will be responsible for hiring a

CEO for each of the subsidiaries created under the holding company who will be

responsible for day-to-day operations of the company. There will not be separate boards

of directors for each of the subsidiaries; rather each CEO will report to the Board of

Directors of S&K Technologies Corporation. This safeguards the decision-making

authority of the Tribal Council and assigns the responsibility for operating and managing

the business activities of the Section 17 Corporation to the business managers they hire.

It permits business experts to focus on maximizing the profitability of S&K

Technologies. 

Source: S&K Technologies, Inc. 

IV-1 

IV. 

STATE LAW ENTITIES

Business entities organized under state law include corporations, partnerships and 

limited liability companies. This chapter focuses on state law corporations and state law 

limited liability companies (LLCs) that have a single member, reserving discussion of 

partnerships and multiple-member LLCs to the Handbook chapter on Joint Ventures. 

This chapter also discusses a special election available to entities that qualify as 

corporations under federal tax law called the "S election." It should be noted at the outset 

that a governmental entity, such as an Indian tribe, is not a qualified "S corporation" 

shareholder. 

A. State Law Corporations

State-law corporations are relatively easy to organize and offer certain 

advantages. Virtually every state has a statute that permits persons to organize a 

corporation for business or nonprofit purposes. Distinguishing characteristics of the 

corporate form of doing business include limited liability for the owners of the 

corporation, centralized management, transferability of ownership interests (generally in 

the form of shares of stock), and continuity of life. Since 1994, the IRS has taken the 

position that a State law corporation, even if wholly owned by a federally recognized 

tribe, does not share the same federal tax status as the tribe. Because of this unfavorable 

treatment, many tribes avoid forming state-law corporations--even though they are easily 

organized and widely recognized by potential business partners and lenders. A state law 

corporation is also more likely to be viewed as separate from the tribe, and thus not as an 

entity that shares in the tribe's sovereign immunity from suit.

1. Brief Description

a) Powers of business corporation defined by charter and state 

law 

The powers of a business corporation are generally defined by its charter (or 

articles of incorporation) as limited by state law. Typical powers for state law corporations 

include the powers to do the following: 

• Sue and be sued, complain and defend in the corporation's own name 

• Purchase, receive, lease, own, hold, improve and otherwise deal in or with 

real or personal property 

• Sell, convey, mortgage, pledge, exchange or otherwise dispose of property 

• Lend money 

• Acquire interest in another enterprise or entity 
IV-2 

• Enter into contract and guarantees 

• Incur liabilities, including through the borrowing of money or issuing of 

bonds 

• Transact any lawful business. 

b) Separate legal entity 

The essence of a corporation is that it is a legal entity from its owners. Courts are 

generally reticent to "pierce the corporate veil" (i.e., to disregard the legal separateness of a 

corporation vis-à-vis its owners) unless certain factors are present. Some of the key steps 

that can be taken to avoid veil piercing include: 

• Adequate capitalization 

• Compliance with legal requirements for issuance of stock 

• Maintenance of corporate records 

• Maintenance of separate financial records and bank accounts 

• Avoidance of inter-corporate loans 

• No guarantees by tribe of subsidiary's debt 

• No assignment of contracts between tribe and subsidiary 

• No representation the entity's primary purpose is to limit liabilities 

• Maintenance of adequate insurance 

• No interlocking or identical boards. 

These same key steps should also be taken to protect the separate status of other 

limited liability entities, whether such entities are formed under state law or tribal law. See 

Appendix B, Key Steps to Protect the Corporate Veil and Limit Liability.

c) Power to sue and be sued 

In virtually all states, corporations have the power to sue and be sued. How this power 

is interpreted varies from state to state. State law (including judicial interpretations of this 

power) should be reviewed to determine whether or not it is consistent with corporation's claim 

to tribal sovereign immunity where the corporation is wholly owned by the tribe. 

2. Organizational Requirements

The organizational characteristics and requirements for a state law corporation 

will vary according to the applicable law of the state under which it is formed. Most 

states have very detailed corporate codes--in most cases, with separate provisions for 

stock and nonstock (i.e., not-for-profit) corporations. There are some common 

characteristics and procedures for forming and managing corporations. 
IV-3 

To form a corporation, the incorporators must generally select a name and draft 

articles of incorporation. Most states' corporate codes require the following items to be 

included in the articles of incorporation of any type of corporation: 

• The name of the corporation 

• The term or period of existence of the corporation (which may be 

perpetual) 

• The purpose(s) for which the corporation is organized (with an eye to 

consistency with lawful corporate purposes under the state's corporation 

code or statute); 

• Procedures relevant to the governance of the corporation, including the 

election of directors and rights of shareholders; 

• The address of the corporation's initial registered office and the name of 

its initial registered agent at such address; 

• The number of persons constituting the initial board of directors and the 

names and addresses of the persons who are to serve as directors; 

• The name and address of each incorporator; 

• Provisions regarding the issuance and classes of stock by the corporation; 

• Provisions relating to the payment of dividends; and 

• Liquidation and dissolution procedures. 

After filing articles of corporation with the state, a newly formed corporation will 

generally have an organizational meeting to elect its officers and directors, adopt its 

bylaws, set up its bank account, adopt a fiscal year, and establish a corporate records 

book to hold its key documents, including the minutes of every board meeting. 

3. Relationship to Tribal Government

A state law corporation may be wholly owned and controlled by a tribal 

government, or it may be owned in part by the tribe and in part by other entities or 

individuals. A state law corporation will be regulated by the state for corporate law 

purposes (e.g., compliance with the state's corporate code, fiduciary duty rules, 

shareholder rights issues). 

By incorporating under state law, a tribe does not subject the corporation to state 

regulation for all purposes--particularly with respect to its on-reservation operations. 

However, a state law corporation going beyond reservation boundaries will be more 

likely to find itself subject to state regulation than an unincorporated division of the tribe. 

4. Sovereign Immunity and Other Liability Issues
IV-4 

State law corporations are unlikely to be able to assert the organizing tribe's 

sovereign immunity. While state chartered corporations do not appear to be absolutely 

precluded from sharing in the tribe's sovereign immunity under appropriate 

circumstances, it is likely that the corporation asserting immunity would need to be 

primarily, if not exclusively, involved in on-reservation governmental projects. In such 

situations, under the law of certain jurisdictions, a tribally-owned state chartered 

corporation might be viewed as an arm of or alter ego of a tribe. But, it appears that as 

more courts face the issue, organization under state law may be fatal to a finding of 

entity-level sovereign immunity, particularly for corporations that are structured to limit 

shareholder liability.72

The factors relevant to a sovereign immunity analysis of a state law corporation 

are similar, if not identical to those pertaining to such an analysis of tribal corporation. 

These factors include: 

• Whether the tribe as owner or sole shareholder of the corporation is 

financially liable for the corporation's legal obligations; 

• Whether the corporation's purpose is governmental or commercial; 

• The extent and nature of the tribe's control over the corporation; and 

• Whether federal policies would be furthered by finding that the 

corporation shares the tribe's immunity. 

See Appendix A, Sovereign Immunity Factors in Recent Judicial Decisions. 

One court has found that a tribal corporation organized under the District of 

Columbia Nonprofit Corporation Act could exercise the tribe's sovereign immunity based 

on the court's analysis of the above factors and their application to the unique facts of the 

case. 

• The corporation's purpose was governmental in nature--i.e., to provide 

housing and health and welfare services to tribal members. 

• The corporation's governing body was comprised mainly of tribal 

officials, and thus the tribe controlled the entity. 

• The tribe's funds were vulnerable to suits against the corporation. 

Given the close connection between the entity and the tribe, the court found 

sovereign immunity was appropriate, even though the entity was incorporated by the tribe 

under state law. 73

Some courts distinguish between entities organized by the tribe in the first 

instance and those purchased by the tribe subsequent to their incorporation. A Wisconsin 

court held that a tribe's purchase of a corporation's stock does not normally confer tribal 

immunity on the corporation.74 In that case, even one hundred percent tribal ownership 

did not serve to extend the tribe's immunity to the acquired state-chartered corporation. 
IV-5 

In sum, incorporation under state law lessens the chances that a court will treat the 

tribally-owned business entity as a sovereign "arm of the tribe." While the multi-factor 

test approach of current law does not preclude treating a state-chartered corporation like a 

tribal instrumentality with respect to sovereign immunity, the trend cuts against extending 

immunity to state-incorporated entities. In most cases, organization under tribal law 

provides a more flexible framework if the tribe wishes to extend its sovereign immunity 

to a wholly-owned corporation. 

5. Tax Considerations

Since 1994, the IRS has taken the position that a state-chartered corporation, even 

one that is wholly owned by an Indian tribal government and engaged in exclusively onreservation activities, does not share the same tax status of the tribe. Revenue Ruling 94-

16 represents a significant reversal of a position that the IRS had taken in a series of 

private letter rulings in the late 1980s. Those rulings held that state law corporations 

wholly owned by an Indian tribe were not subject to tax if their business activities were 

conducted on the tribe's reservation. However, Revenue Ruling 94-16 determined that "a 

corporation organized by an Indian tribe under state law is not the same as an Indian 

tribal corporation organized under Section 17 of the IRS and does not share the same tax 

status as the Indian tribe for federal income tax purposes." Citing the Supreme Court's 

decision in Moline Properties v. Commissioner,

75 Revenue Ruling 94-16 states that 

"[g]enerally, the choice of corporate form will not be ignored."76 Thus, unless there is 

some other basis for the corporation's exemption from federal income tax (such as an IRS 

determination that it qualifies as a Section 501(c)(3) organization), a state-law 

corporation is subject to tax and required to file annual corporate income tax returns (IRS 

Form 1120). 

One unresolved issue is whether a tribally owned state-law corporation is subject 

to tax on all of its income or only on income derived from its business activities. 

Corporations are generally taxable not only on their business income, but also on income 

from investments and other sources. Revenue Ruling 94-16 states that a state-chartered 

corporation owned by an Indian tribe "is a taxable entity and is subject to federal income 

tax on all income earned from its business activities." It does not address the tax 

treatment of such a corporation's investment or other income. 

When Revenue Ruling 94-16 was promulgated in early 1994, the IRS provided a 

period of several months before its new position on the taxability of state law 

corporations went into effect. This was intended to allow tribes to convert existing state 

law corporations into some other type of business entity that was not subject to corporate 

income tax. 

As a general rule, a state law corporation that the tribe has formed or acquired 

cannot be "converted" to another form of entity without significant tax consequences. 

Section 337(d) and related IRS regulations provide for the imposition of tax on the "builtin gain" of a taxable corporation that converts to a tax-exempt corporation. See generally 

Treas. Reg. § 1.337(d)-4. 
IV-6 

When tribes are in the process of acquiring an existing business in corporate form, 

they often find that shareholders would prefer to sell them the stock of their corporation, 

rather than dissolve the business and sell the assets to the tribe. Tribes need to be aware 

in such situations that they may be assuming various types of liabilities, including federal 

tax liabilities. Because of the "liquidation tax" on the built-in gain of a corporation, tribes 

should avoid buying the stock of a corporation to ease the sellers' tax burden unless they 

are prepared to undertake a process of due diligence to accurately quantify any past or 

prospective tax liabilities thereby assumed. 

6. Financing Considerations

A state-chartered corporation wholly owned by an Indian tribe will not qualify as 

an issuer of tax-exempt bonds. In a 1998 private letter ruling, the IRS addressed the issue 

of whether a nonprofit state-law corporation formed by a tribe to provide various health 

care services could issue tax-exempt bonds to finance additions to its health center, 

including an emergency medical services building and a nursing home, all of which were 

located on the Tribe's reservation. Citing Revenue Ruling 94-16, the IRS suggested that 

where a tribe incorporates an entity is under the laws of a state, such an entity is not an 

integral part of the tribe. Thus, such an entity would not meet the requirement of Section 

7871(c), which permits only an Indian tribal government or a subdivision thereof to issue 

tax-exempt bonds.77

An additional question in the tax-exempt financing area is whether a tribe's statechartered corporation could be the recipient of tax-exempt financing as a borrower. If 

such a corporation is wholly-owned and the facilities to be financed constitute essential 

governmental functions, it would appear that a tribe could issue bonds on a tax-exempt 

basis and re-lend the proceeds to a state-chartered corporation, particularly one that is 

wholly owned by the tribe. However, the issue has not been definitively addressed in any 

IRS guidance issued to date. 

Other forms of financing discussed elsewhere in this Handbook may be available 

for state-law corporations and LLCs that are wholly-owned by an Indian tribe. Such 

other options include: 

• Government-guaranteed loans 

• SBA loans 

• Taxable bonds 

• Private debt placements 

• Commercial bank financing. 

B. Subchapter S Corporations

Subchapter S of the Internal Revenue Code treats an "S corporation" as a passthrough entity similar to a partnership. An S corporation must pass through income and 
IV-7 

loss items separately to its shareholders and thus, as a general rule, the corporation is not 

subject to a corporate level tax on those items. Subchapter S is only applicable to a 

"small business corporation," defined as a domestic corporation that does not have more 

than 75 shareholders. 

S corporations are not viable options for tribal ownership. Section 1361 of the 

Code restricts S corporation ownership to individuals, estates, certain types of trusts, 

entities described in Section 401(a) (pension plans) and Section 501(c)(3) (charitable 

organizations). Governmental entities are not listed as qualified S corporation 

shareholders. Moreover, a recent IRS revenue ruling specifically addresses the question 

of tribal government ownership of S Corporations, and concludes that tribal governments 

are not qualified S Corporation shareholders under current tax law. 78

C. State-Law Limited Liability Companies

An increasingly popular choice of business entity is the limited liability company 

("LLC"). An LLC has the advantage of limited liability like a corporation. However, it 

is generally taxed like a partnership or other "flow-through" entity. If wholly-owned 

(i.e., an LLC with a single member), the LLC may be disregarded as a separate entity for 

tax purposes. However, a state-chartered LLC--even one that is wholly-owned by a tribe-

-would likely be treated as a separate legal entity for purposes of legal liability purposes. 

Thus, it might be difficult (but not impossible) for such an entity to assert tribal sovereign 

immunity 

1. General Description of Limited Liability Companies

The LLC is a type of organization that provides its owners with limited liability 

just like a corporation, but LLCs are not subject to double taxation like corporations are.79

LLCs have become the preferred investment vehicle for investors who want to participate

in the management of the entity's business and still limit their personal liability. Under 

the LLC structure, all of the members obtain the tax advantages of a pass-through entity, 

but unlike the limited partnership structure, members can limit their personal liability 

regardless of whether or not they participate in the management of the LLC's business 

Thus, a closely held business that is structured as LLC is generally able to benefit from 

certain corporate advantages without jeopardizing its favorable tax. 80

2. Organizational Requirements

An LLC can be quickly and easily organized under the laws of most states. All 

that is required is that the organizers select a name and file a document similar to a 

corporation's Articles of Incorporation. In the case of an LLC, this document is generally 

referred to as the LLC's Articles of Organization. The key issues required to be 

addressed in the Articles of Organization are: 

• Name of the organization 
IV-8 

• Street address of the registered office of the LLC and the name of the 

registered agent at that office 

• Brief description of the type of management structure of the LLC 

• Name and address of each person organizing the LLC 

• A statement that the LLC is organized under the LLC act or Code. 

All other details about how the LLC is organized, managed, and owned can be 

reserved to the Operating Agreement, which does not need be filed with the State or made 

public. 

Most LLCs supplement their Articles of Organization with a fairly detailed 

Operating Agreement, that spells out how they will be managed. From a management 

perspective, LLCs fall into one of two types: (1) member-managed; and (2) managermanaged. A "member-managed" LLC is subject to more control by its legal owners than 

a "manager-managed" LLC. 

3. Liability and Sovereign Immunity 

A chief characteristic of any state-law LLC is its ability to limit liability to the 

assets of the company, thereby protecting the LLC's owners or members from any 

personal or individual liability for the company's debts. State LLC statues typically 

provide that the debts, obligations, and liabilities of an LLC will be solely those of the 

LLC, and no member or manager of the LLC will be personally obligated for such 

liability.81 At the same time, such statue laws generally permit LLC managers or 

members to agree to assume personal liability for any debts of the entity.82

It is highly unlikely that state or federal courts would recognize a state-law LLC 

formed to engage in business as sharing in the sovereign immunity of a tribal 

government--even if the LLC's sole member is an Indian tribal government. One major 

hurdle is the fact that state law shields the owner of an LLC from its liabilities, but clearly 

contemplates that the LLC itself can be sued. 

While no reported cases have explicitly held that formation of a state-law LLC 

eliminates tribal immunity for the LLC, at least two cases have suggested that such is the 

case. First, a Connecticut state court in an unreported opinion83 stated that taking 

ownership of an off-reservation hotel in LLC form removed any immunity with respect to 

the LLC's conduct of hotel operations.84 The Mashantucket Pequot Tribal Nation took 

ownership of the hotel through a newly-formed LLC of which it was the sole shareholder. 

Members of the hotel management team sued the LLC on various tort claims. The tribe 

did not assert sovereign immunity as a defense, and the jury returned a multi-million 

dollar verdict against the LLC. 

Second, a California case contains language implying that a tribe, as sole 

shareholder of the LLC, might be liable under common law "alter ego" liability.85 The 

case involved breach of contract claims against an LLC of which the tribe was originally 
IV-9 

a 51% owner (and then later, a 100% owner). The plaintiff alleged that the LLC was an 

alter ego of the tribe and the court allowed discovery on the alter ego and sovereign 

immunity issues to proceed. In doing so, the court refused to accept the tribe's sovereign 

immunity as a basis for precluding litigation of the controversy. 

Comment: Tribal law LLC codes are frequently more flexible in this regard. For 

example, the Ho-Chunk Nation's LLC Code states that "if the Nation is the sole 

member of a LLC formed under this Act, that LLC shall possess the Nation's 

sovereign immunity from suit except to the extent otherwise provided in its Articles of 

Operation." 

4. Tax Considerations

The federal tax treatment of LLCs is provided for under sections 301.7701-1 

through 301.7701-3 of Treasury Regulations governing the federal tax classification of 

business entities (sometimes referred to as the "check-the-box" regulations). The checkthe-box regulations allow certain entities to choose classification as either a partnership 

or a corporation, or to be treated as a disregarded entity for federal tax purposes. The 

check-the-box regulations also provide default classifications for certain business entities. 

Elections (on IRS Form 8832) are necessary only when an entity chooses initially to be 

classified as other than the default classification or when an entity chooses to change its 

classification. 

Under the IRS check-the-box regulations, an LLC with a single owner is 

generally treated as a disregarded entity. As such, it is treated in the same manner as a 

branch or division of the owner. An LLC with two or more owners is generally treated 

like a partnership for tax purposes. 

IRS regulations set forth a number of entities that are per se classified as 

corporations for federal income tax purposes. This list includes entities referred to as 

"incorporated" or as a "corporation," "body corporate," or "body politic" under a federal, 

state or tribal law or statute. This list of per se corporations does not include domestic 

limited liability companies (LLCs)--other than LLCs wholly owned by a state or foreign 

government. See Treas. Reg. §301.7701-2(b)(6). 

The check-the-box regulations treat LLCs that are wholly owned by a state or 

foreign government as per se corporations. At the same time, they fail to specific how a 

tribal government-owned LLC will be treated. 

Comment: In the absence of a rule deeming tribal LLCs to be corporations, most 

advisers believe that tribal government-owned LLCs should be treated as a division 

of the tribal government for tax purposes. The IRS has specifically ruled that an LLC 

with a tax-exempt organization as its single member should be disregarded as a 

separate legal entity and treated as a division of the single member.
IV-10 

D. Advantages and Disadvantages of State-Law Business Entities

The primary advantages of using a state-law business entity includes the following: 

• State-law corporations and LLCs are easily and quickly organized 

• State-law entities are familiar to lenders and potential business partners 

• State-law entities can be effectively used to acquire or merge with an 

existing state-law entity. 

In addition, state-law LLC are disregarded for federal income tax purposes when 

owned by a single member, such as a tribe. 

Disadvantages include the following: 

• State-law corporations are subject to federal income tax 

• State-law entities are not qualified issuer in a tax-exempt financing 

• State-law entities are not likely to be regarded as government 

instrumentalities that are immune from unconsented suit. 

For off-reservation ventures, state-law LLCs still have a number of advantages and, 

from a tax perspective, very few disadvantages. 
V-1 

V. 

JOINT VENTURE ENTITIES

There are several different types of entities that can be utilized for purposes of 

establishing a joint venture between an Indian tribe and a business partner other than the 

tribe: 

• A Limited Liability Company ("LLC") 

• A General Partnership ("GP") or a Limited Partnership ("LP") 

• A Corporation. 

In each case, the equity interests in the joint venture entity will most likely be owned 

in part by the tribe and in part by another party. 

Each of these entities has certain advantages and disadvantages. However, in this 

chapter of the Handbook, we will focus the discussion on the two entity types that are the 

most advantageous for tribes to utilize--LLCs and LPs. 

Although there may be occasions in which the parties to a joint venture prefer or 

are required to operate in corporate form, the tax consequences to an Indian tribe of 

operating a joint venture through a corporation are generally not as favorable as operating 

the joint venture through a non-taxable or flow-through entity. A corporation that is not 

wholly owned by a tribe is subject to corporate income tax on all of its income. 

Moreover, the corporation's taxable owners may also be subject to a second level of tax 

when they receive distributions from the corporation in the form of dividends. The two 

levels of tax on the income of a corporation can be reduced if the corporation's income is 

decreased by deductible fees paid to the equity owners for services rendered. 

Nevertheless, because LLCs and partnerships are generally more favorable to use for 

joint ventures than corporations, this chapter does not discuss in detail the use of 

corporations for joint ventures, but instead focuses on the use of LLCs and partnerships. 

Although there is one type of corporation, an S corporation, which is taxed as a flowthrough entity, because tribes are not eligible shareholders of an S corporation, this 

chapter also does not discuss S corporations. 

When a tribe forms an LLC or a partnership to engage in a joint venture with 

another party, tax considerations are not the only considerations. It is important at the 

outset to make sure that each party's role in the venture is appropriately spelled out in the 

organizational documents. Care should be taken that the terms of the transaction fairly 

compensate each party for what it brings to the table. Another key consideration is the 

inclusion of terms to accommodate a desire on the part of either party to terminate its 

participation in the venture. 
V-2 

A. Limited Liability Companies

1. Brief Description and Examples

The LLC is a type of organization that provides its owners with limited personal 

liability just like a corporation, but it is not subject to double taxation as regular 

corporations are.86 The LLC has become the preferred investment vehicle for investors

who want to participate in the management of the entity's business and still limit their 

personal liability. Under the LLC structure, all of the members obtain the tax advantages 

of a pass-through entity, but unlike the partnership structure, members can limit their 

personal liability regardless of whether or not they participate in the management of the 

LLC's business. Thus, a closely held business that is structured as an LLC is generally

able to benefit from certain corporate advantages without jeopardizing its treatment as a 

partnership for federal income tax purposes.87

As noted above, an LLC is a business entity in which limited personal liability 

may be achieved for the owners--similar to a corporation--while achieving flow-through 

taxation that is characteristic of a partnership. In addition, unlike a partnership, an LLC 

may be formed with a single member or owner, as well as by multiple members. The 

flexibility of the LLC as a business entity is what has lead to its increasing popularity--

particularly in the situation where the business starts out with a single owner, but intends 

to admit additional owners or partners at a later stage. 

Tribes are beginning to use LLCs to partner with non-tribal business entities for a 

variety of purposes: 

• To acquire specialized knowledge in fields such as energy or government 

contracts 

• To create the proper incentives for those playing a critical role in a triballyowned business 

• To be able to efficiently allocate certain tax benefits (e.g., low income 

housing tax credits). 

In addition to using LLCs to partner with non-Indian individuals or businesses, 

tribes are also using LLCs to partner with other tribes. Four Fires, LLC, a economic 

development entity organized by the Oneida Tribe of Indians of Wisconsin, San Manuel 

Band of Mission Indians, the Forest County Potawatomi Community of Wisconsin and 

Viejas Band of Kumeyaay Indians, is a good example of an inter-tribal LLC. It owns a 

hotel near the United States Capitol building in Washington, D.C. 

2. Organizational Requirements

An LLC can be quickly and easily organized under the laws of most states. All 

that is required is that the organizers select a name and file a document similar to a 

corporation's Articles of Incorporation. In the case of an LLC, this document is generally 
V-3 

referred to as the LLC's Articles of Organization (although Delaware, perhaps the most 

popular state for forming LLCs, refers to them as a Certificate of Formation). The key 

issues required to be addressed in the Articles of Organization are: 

• Name of the LLC 

• Street address of the registered office of the LLC in the state where the LLC 

is being formed and the name of the registered agent at that office 

• Description of the purpose for which the LLC is being formed 

• Description of the type of management structure of the LLC (e.g., whether 

the LLC will be managed by its members or by a manager or managing 

member) 

• Name and address of each person organizing the LLC 

• A statement that the LLC is organized under the LLC Act or Code of the state 

where the LLC is being formed. 

All other details about how the LLC is organized, managed, and owned can be 

reserved to the Operating Agreement, which need not be filed with the State or made public. 

Most LLCs supplement their Articles of Organization with a fairly detailed 

Operating Agreement, that spells out how they will be managed. From a management 

perspective, LLCs fall into one of two types: (1) member-managed; and (2) managermanaged. A member-managed LLC is subject to more control by its legal owners than a 

manager-managed LLC. 

The key features of an LLC Operating Agreement are provisions addressing the 

following:

• Identity and Classes of Members 

• Members' Duties and Obligations 

• Management of the LLC 

• Contributed Capital and Capital Accounts 

• Allocations and Distributions 

• Liability and Indemnification 

• Withdrawal of Members 

• Arbitration and Dispute Resolution. 

B. General Partnerships and Limited Partnerships

1. Brief Description
V-4 

There are two types of partnerships--general partnerships ("GPs") and limited 

partnerships ("LPs"). The differences are discussed below. 

a) General Partnerships 

In a GP, each partner of the GP assumes general personal liability for the activities of 

the partnership. A GP is easily organized, but is not frequently utilized unless the joint 

venture partners are incorporated or have some form of liability protection. 

b) Limited Partnerships 

An LP is a partnership with one or more limited partners and at least one general 

partner. The most popular feature of the LP is the limited liability of the limited 

partners. The limited partners are protected against personal liability for debts of the 

partnership that exceed their equity or capital contribution to the partnership. However, 

in order to retain this limited liability, the limited partners may not participate in the

management or control of the partnership's business. Unlike the limited partners of an 

LP, the general partners of an LP assume general personal liability for the activities of the 

partnership. 

2. Organizational Requirements

The core document for a partnership is a Partnership Agreement. The key features of 

a Partnership Agreement are substantially the same as with respect to the Operating 

Agreement of an LLC and are as follows: 

• Identity and Classes of Partners 

• Partners' Duties and Obligations 

• Management of the Partnership 

• Contributed Capital and Capital Accounts 

• Allocations and Distributions 

• Liability and Indemnification 

• Withdrawal of Partners 

• Arbitration and Dispute Resolution. 

An LP, unlike a GP with no limited partners, must file an executed certificate of 

limited partnership with state in which the entity is organized. 

C. Considerations Common to LLCs and LPs

1. Relationship to Tribal Government

In forming an LLC or LP that is designed to serve as a joint venture with a third 

party, the tribe should consider whether it would like to own the LLC directly or through 
V-5 

an intermediary business entity. Because of the tribe's sovereign immunity and other 

uncertainties, some potential business partners prefer that the tribe hold its interest 

through an entity that is legally separate from the tribe. Possible options for the tribe 

include holding the LLC interest through (1) a single-member LLC, (2) a Section 17 or 

Section 3 corporation, (3) a tribally chartered corporation, or (4) an economic 

development authority that qualifies as a political subdivision. Because of the 

unfavorable tax treatment, holding a joint venture interest through a state-law corporation 

is not recommended. 

2. Sovereign Immunity and Other Liability Issues

Many of the sovereign immunity and liability issues surrounding tribally owned 

LLCs and partnerships remain unresolved. Because of the dearth of decided cases, it is 

unclear whether the sovereign immunity claims of tribal LLCs or LPs will be analyzed 

similarly to those asserted by tribal corporations or whether a different method of 

analysis will be used. It is also unclear whether ownership of less than 100% of the entity 

will be fatal to assertions of immunity from suit. No court has ever held that a business 

entity that was less than wholly-owned by a tribe can exercise the tribe's immunity. 

Given this situation, it is safest to assume that the formation of an entity that includes 

individuals or entities other than the tribe will likely eliminate the connection required to 

establish that the entity shares the tribe's sovereign immunity. 

The only case to discuss the sovereign immunity implications of a partially owned 

LLC did not decide whether the LLC shared the tribe's immunity.88 The opinion appears 

to assume that the LLC, which was 51% owned by the tribe initially and later 100% 

owned by the tribe, did not enjoy sovereign immunity.89 However, the contract between 

the parties anticipated the possibility that a court could hold that the LLC was a "tribally 

controlled entity" and therefore that it could exercise immunity.90 The court did not 

resolve the issue and it is uncertain whether an argument in favor of sovereign immunity 

would have succeeded. 

It is possible that an LLC partially wholly owned by a tribe would be analyzed 

under the multi-factor test applied to tribal corporations. The applicable factors include: 

(1) whether the tribe will be financially liable for the corporation's legal obligations; (2) 

whether the corporation's purpose is governmental or commercial; (3) the extent and 

nature of the tribe's control over the corporation; and (4) whether federal policies would 

be furthered by finding that the corporation shares the tribe's immunity.91

The third factor (extent and nature of tribe's control) would appear to preclude a 

finding of immunity for any entity that is not controlled by a tribe. If a tribe held more 

than 50 percent of the ownership interests, it would at least have an argument in favor of 

a finding of sovereign immunity, but less than majority ownership would seem to 

eliminate the necessary level of tribal control over the entity.92

3. Tax Considerations Applicable to LLCs and LPs
V-6 

In general, an entity that is a partnership (or an LLC that is taxed like a 

partnership) is not subject to federal income tax. Rather, each partner (or member in the 

case of an LLC) includes in its income such partner's allocable share of income, 

deductions, gains, losses, and credits generated by the partnership. LLCs and LPs 

combine the tax advantages of a "flow-through" or "pass-through" entity with limited 

personal liability. An LP is considered a pass-through entity because the partnership 

itself does not pay tax,93 but, partnership income is allocated and taxed to the partners, 

whether or not they receive a distribution of all or any part of such income. Furthermore, 

the partners may use the losses or credits generated by the partnership to offset their 

income from other sources (subject to certain limitations that are beyond the scope of this 

manual). 

With respect to tribal participation in a partnership, the IRS has stated that a tribe 

that is a partner in a partnership is not subject to federal income tax.94 The IRS has 

cautioned, however, that "a tribally owned state chartered corporation that is a partner [in 

a partnership] will be subject to federal income tax on its distributive share of partnership 

income."95

Sections 301.7701-1 through 301.7701-3 of the Treasury Regulations (the "checkthe-box" regulations) govern the federal tax classification of business entities. The 

check-the-box regulations allow certain joint ventures to choose classification as either a 

partnership or a corporation. The check-the-box regulations provide default 

classifications for business entities.96 Elections (on IRS Form 8832) are necessary only 

when an entity chooses initially to be classified as other than the default classification or 

when an entity chooses to change its classification.97

The check-the-box regulations provide, in relevant part, that a "business entity" is 

any entity recognized for federal tax purposes that is not properly classified as a trust. A 

business entity with two or more members is classified for federal tax purposes as either a 

corporation or a partnership. 

The regulations set forth a number of entities that are per se classified as 

corporations for federal income tax purposes. This list includes entities referred to as 

"incorporated" or as a "corporation," "body corporate," or "body politic" under a federal 

or state statute, or the laws of a federally recognized Indian tribe. This list does not 

include domestic limited liability companies (other than those wholly owned by a state or 

foreign government.)98 Thus, under the check-the-box regulations, an LLC or LP that has 

two or more members (one of which is a tribe) will be treated like a partnership for tax 

purposes unless it specifically elects to be treated like a corporation. 

The following federal income tax rules apply to both partnerships (such as LPs) 

and LLCs: 

• Generally, the contribution of "property" to a partnership in exchange for a 

partnership interest is a nontaxable event for the partnership and the 

contributing partner. 
V-7 

• A partner may also contribute "services" to the partnership in exchange for a 

partnership interest. 

• Generally, a partner who receives a partnership capital interest in 

exchange for performance of past, present or future services for the 

partnership will realize ordinary income.99

• Where a partner receives a profits interest in the partnership in 

exchange for services, the exchange generally will not be treated as 

generating taxable income.100

• Partnership losses, income, gains, or credits flow through to the partners. 

• The character of such income, loss or credit to a partner will be the same as if 

the distribution bypassed the partnership and was made directly to the partner. 

• Because partners are taxed on the income of the partnership whether or not 

they receive a distribution of all or any part of such income, when a partner 

actually receives a current distribution from a partnership, as a general rule, 

neither the partner nor the partnership will recognize gain or loss on the 

transaction unless the distribution exceeds the partner's basis in its partnership 

interest, in which event, gain is recognized. 

Partnerships and LLCs also have the flexibility to shift economic and tax 

attributes among the owners, subject to the following restrictions: 

• The partners' distributive shares of income, gain loss, deduction or credit are 

generally determined under the partnership agreement.101

• The allocations of partnership income, gains, losses or credits provided in the 

agreement must either have "substantial economic effect" or be in accordance 

with the partners' interest in the partnership. 

Although an Indian tribe is not subject to federal income tax, not all of the federal 

tax rules applicable to other organizations exempt from federal income tax under the 

Internal Revenue Code (the "Code") are applicable to a tribe or to an entity that shares the 

same tax status as an Indian tribe. 

• First, unlike charitable organizations described in Section 501(c)(3) of the 

Code, an Indian tribe generally is not subject to federal income tax on 

"unrelated business taxable income" ("UBTI") under Sections 511-514 of the 

Code.102 Therefore, an Indian tribe does not need to be concerned about 

issues related to UBTI in the joint venture context. 

• Second, unlike charitable organizations described in Section 501(c)(3) of the 

Code, an Indian tribe is not subject to the requirements that it operate 

exclusively for charitable purposes and not for private benefit. Thus, an 

Indian tribe will not jeopardize its tax-exempt status if it does not "control" a 

joint venture. 
V-8 

However, Congress has recently stiffened rules aimed at preventing tax-exempt 

entities (including tribes) from shifting inappropriate tax benefits to taxable parties. Thus, 

consultation with experienced tax counsel is strongly recommended. 

Note that the discussion in this chapter focuses on federal income tax matters only. 

LLCs, partnerships and other flow-through entities may be subject to tax in certain 

states that do not recognize the non-taxable nature of flow-through entities. 

4. Financing Considerations

It is unlikely that a public-private joint venture would qualify to utilize the 

proceeds from a tax-exempt bond offering because of the absolute prohibition on the 

issuance of so-called "private activity" bonds by an Indian tribal government and the 

Tax Code's strictly interpreted "essential governmental function" test. However, there are 

many other types of financing available, including the following: 

• Government-guaranteed loans (Department of the Interior’s IEED and SBA) 

• Taxable bond issuances 

• Private placements 

• Commercial bank financing. 

Under the IEED Loan Guaranty, Insurance, and Interest Subsidy Program, only a 

joint venture in which a federally recognized tribe holds a majority interest is eligible for 

such financing. 

The Small Business Administration also has loan programs available to assist 

small business ventures. Such ventures may be co-owned by a tribe and another party 

provided that they otherwise meet SBA loan requirement. For example, SBA loans are 

available only to applicants for whom credit is not otherwise available on reasonable 

terms. 

These financing options are discussed in detail in Chapter II.A.5. 

5. Advantages and Disadvantages

Advantages of conducting economic development and business activities through 

a jointly-owned LLC or LP include the following: 

• Ease of formation 

• Flexibility (relative ability to design own governance structure) 

• Flow-through taxation resulting in tribe's share of joint venture income 

flowing through free of federal tax to the tribe. 
V-9 

Disadvantages of conducting such activities through a jointly owned LLC or LP 

include the following: 

• Likely loss of sovereign immunity for the joint venture entity 

• Inability to qualify for certain types of financing 

• Difficulties in unwinding the venture if one party wants to terminate. 

VI-1 

VI. 

EVALUATING YOUR OPTIONS

A. Comparison of Each Form

As you have learned there are many possible business structures for tribal 

governments to evaluate when considering how to organize for economic development. 

As discussed in the previous chapters, your choice of business structure will have longterm consequences and will impact how tribal assets are protected, how tribal sovereignty 

is preserved, and how potential liability and tax liability can be minimized. When you 

evaluate possible structures, you need to take into account various factors about the 

business activity you are considering--the relative importance of each factor depends on 

the nature and the extent to which the tribe seeks to keep business decisions separate 

from tribal governmental decisions, and the degree of financial and legal liability to 

which it is willing to expose itself and tribal assets. You should devote the necessary 

time and energy to evaluate the best structure for the particular business you are a 

considering. Below is a brief summary comparing the key factors that should be 

considered in choosing the best structure for your business. 

1. Organizational Requirements

You can choose to organize under federal, state, or tribal law. Your choice of law 

will have implications for how the entity will be treated for purposes of tribal sovereign 

immunity and for federal income tax purposes. 

Some organizational structures are more formal than others and do not require a 

lot of lead time to establish. For example, a key attribute of a tribal unincorporated entity 

or a tribal instrumentality is that it is relatively easy to form and can be established by 

tribal resolution or ordinance. If you are looking for simplicity, this is the entity—what it 

lacks in bells and whistles is made up for in its ease of formation, maintenance and 

dissolution. Ease of formation means minimal paperwork and negligible start-up costs. 

The tribal government is the owner and is in charge of making decisions. The biggest 

potential drawback is that tribal government assets and liabilities are not separated from 

the entity’s business obligations and liabilities. 

Some entities take advance planning and time to form. A Section 17 corporation, 

like a Section 3 corporation, is a separate legal entity from the tribe. Section 17 and 

Section 3 corporations require carefully drafted organizational documents and navigation 

of the federal and tribal approval process. It takes quite a bit of lead time to obtain the 

required Secretary of the Interior approval and tribal ratification of a corporate charter. 

As separate legal entities, these corporations operate and are managed independently of a 

tribal government. The decisions are usually made by a board of directors separate from 

the tribal council. 
VI-2 

Similarly, a tribal political subdivision takes some time and expense to form and 

then to obtain the necessary Bureau of Indian Affairs and Internal Revenue Service 

approvals. A political subdivision must be delegated one or more tribal governmental 

powers in order to be treated the same as the government itself for tax purposes. 

Some entity forms give tribal governments a lot of flexibility in determining the 

management structure for an entity. For example, a tribe can determine the management 

structure of a tribal instrumentality, a political subdivision, or a tribal law corporation 

under its own law. In the case of other forms, such as a Section 17 corporation or a state 

law corporation, some requirements for organization and formation are determined under 

federal and state law, respectively. 

A tribal law corporation, a state law corporation, or a tribal or state LLC--each 

require carefully drafted organizational documents and advance planning to form. 

However, the external approval process is generally much faster for these business 

entities than for political subdivisions or Section 17 corporations. 

In addition, some organizational forms provide more protection for tribal 

government assets by segregating tribal business assets and liabilities from the tribal 

government. With these forms, the tribe itself is not liable for the debt and liabilities 

incurred by the corporation except to the extent it pledges assets or capital to the business 

entity. These include: a tribal corporation, a state law corporation, and a Section 17 

corporation, as well as all types of LLCs. 

2. Relationship to Tribal Government

The organizational form you chose will also dictate the relationship or degree of 

independence a business entity has from the tribal government. For certain business 

ventures, a tribe may want to create an entity that operates fairly autonomously from the 

tribal government and has the ability to attract the necessary technical and managerial 

expertise to run the day-to-day operations of the business. These can include: a tribal 

corporation, a state law corporation, and a Section 17 corporation. 

If you want management to be more centralized with the tribal government, these 

forms should be considered: tribal instrumentality and unincorporated tribal entity. 

Other types of business entities may involve the exercise of tribal governmental 

regulatory functions and may be more appropriately formed as instrumentalities or 

political subdivisions of a tribe. Examples include tribal utilities and telecommunications 

entities that provide services to an Indian reservation or provide other quasigovernmental services. 

3. Sovereign Immunity and Other Liability Issues

Some business structures permit tribal governments to confer on the entity the 

tribe's sovereign immunity from suit and other governmental powers in its organizational 
VI-3 

documents. These structures include: a tribal instrumentality or unincorporated business, 

a tribal political subdivision, a Section 17 corporation and Section 3 corporation. 

The location of your business activities may also dictate what structure should be 

chosen. For example, for off-reservation business activities where sovereign immunity is 

a major concern for a tribal government, a federal Section 17 corporation may be the 

form that can best shield tribal assets. Additionally, an unincorporated tribal entity may 

also share the sovereign immunity of the tribe both for on and off-reservation activities. 

If a tribe incorporates under state law for off-reservation activities, it can be subject to 

suit based on the law under which it incorporates. 

If a tribe wants to insulate tribal assets from debt obligations and liabilities of its 

business, it should consider forming a separate entity that can shield tribal assets through 

limited liability protection. This would include all forms of corporations--including a 

tribal law corporation, Section 17 corporation, Section 3 corporation, and a state law 

corporation. 

As noted in the tribal corporation chapter, in certain situations, corporations 

organized under tribal law may share the organizing tribe’s sovereign immunity from 

suit. Courts have developed various methods to determine whether a tribe is immune 

from suit. 

Both state chartered corporations and LLCs would most likely be treated as 

separate legal entities from the tribe and thus would not likely be viewed as sharing the 

tribe’s immunity from suit. 

4. Tax Considerations 

The IRS has consistently ruled that federally-recognized tribes are not subject to 

federal income taxes because they are not considered taxable entities. Therefore, any 

income earned by a tribe is not subject to federal income tax regardless of whether the 

business activity is on or off Indian-owned lands. 

The IRS has ruled that unincorporated tribal entities, Section 17 corporations, and 

Section 3 corporations organized under the OIWA, are not taxable entities for purposes of 

federal income tax regardless of whether the business activity is on or off-reservation. 

Additionally, IRS practice has been to treat tribal political subdivisions like the tribe itself 

for federal tax purposes. 

Section 7871 of the Tax Code treats Indian tribal governments and their political 

subdivisions like state governments for specific tax purposes. The key benefits include: 

exemption from certain excise taxes levied on fuels, manufactured goods, 

communications and certain highway vehicles and authority to issue tax-exempt bonds 

for facilities that serve an "essential governmental purpose." 
VI-4 

In contrast, a wholly-tribally owned state chartered corporation is likely to be 

considered a separate taxable entity by the IRS, even when operating exclusively onreservation. 

As noted earlier, the federal tax treatment of tribally-chartered corporations is 

uncertain at this time. The IRS and Treasury Department indicated in 2001 that they 

would issue guidance on this issue, but have not yet done so. In the interim, many tribal 

advisors have ceased forming new tribally-chartered corporations, and some tribes have 

converted their tribally-chartered corporations to other types of business entities pending 

the IRS guidance. 

Also, the IRS has not yet made a final determination on how tribal LLCs 

incorporated under state or tribal law will be treated under its check-the-box regulations. 

Under the regulations as they currently stand, a single member LLC is generally treated 

as a disregarded entity. Under this general rule, the IRS would treat a tribal single 

member LLC as sharing the same tax status as the tribe. At the same time, IRS 

regulations treat state or foreign government single member LLCs as per se corporations, 

and therefore potentially taxable. However, it has not made a similar determination for 

tribal governments. In the absence of a change in the regulations or some other formal 

IRS guidance, tribal advisors believe that a single member LLC owned by a tribe should 

be treated as a division of tribal government for tax purposes. An LCC with two or more 

members is treated like a partnership and a tribe’s share of income would generally flow 

through to the tribe free of tax. 

B. Key Factors to Consider

1. Timing

If a short-time frame is required, the quickest and simplest entity to form is an 

unincorporated arm or instrumentality of the tribal government by tribal resolution or 

ordinance. 

A tribal political subdivision maybe established under tribal law to carry out a 

substantial governmental or quasi-governmental function of the tribe, such as a business 

development, housing, or energy development. The formation of a political subdivision 

does require some lead time and expense to establish because of the required approvals 

by both the Bureau of Indian Affairs and the Internal Revenue Service. 

Most corporations can be easily and quickly formed under the incorporation law 

under which they are established. A tribal law corporation would also require some lead 

time to draft a charter and incorporate under tribal law depending on the level of detail 

required under tribal incorporation law. The same is true for a state-chartered corporation 

or LLC. 

Establishing a Section 17 or Section 3 corporation does require more advance 

planning and a substantial amount of time to get through the federal and tribal approval 
VI-5 

process. A tribe must first draw up a petition and draft charter and submit it to the BIA 

for approval. BIA review and approval can take up to one-year. After the BIA approves 

the charter, it needs to be ratified by the tribal council. BIA is currently in the process of 

streamlining the procedures. 

2. Requirements of Business Partners and Lenders

Business partners may insist on entity types with which they are more familiar or 

which offer more certainty. Many business partners may not be familiar with tribal laws 

or of their ability to enforce tribal agreements under tribal law or in tribal courts. For 

these reasons, they may require incorporation under state or federal law. 

A tribe operating as an arm or instrumentality of the tribal government may have 

difficulty obtaining conventional financing. Lenders may be reluctant to provide credit if 

they are not certain they can enforce their agreement due to the sovereign immunity of 

the tribe. 

Only a wholly-owned tribal entity that is not legally separate from the tribe can be 

an issuer or borrower in a tax-exempt financing. Such entities include: an unincorporated 

tribal instrumentality, a tribal political subdivision, as well as a Section 17 and Section 3 

corporation. When a subdivision or federal law corporation, and not the tribe itself, is the 

issuer/borrower, overly invasive disclosure of tribal financial records can be avoided. 

Since it is not clear whether a tribally chartered corporation will be treated like an 

integral part of the tribe for federal income tax purposes, it is also unclear whether such 

an entity can issue tax-exempt bonds.103

To be eligible for the Department of the Interior's Office of Indian Energy and 

Economic Development (IEED) Investment Capital Program, including its loan guarantee 

and loan insurance programs, at least 51% of the entity must be owned by a federallyrecognized tribe. 

Also, certain entity types do not lend themselves to equity financing or to 

ownership by multiple owners. If you plan on forming a business with multiple owners, 

this may exclude certain entity types from consideration--tribal unincorporated entities, 

political subdivisions, and federally-chartered corporations must be wholly-owned by the 

tribe. 

An LLC organized under state law is an attractive entity for multiple owners and 

can preserve the non-taxable status of the tribe for federal income tax purposes. If a tribe 

is a member of an LLC with multiple members, the LLC will be treated as a partnership 

for tax purposes. Since income is allocated to each partner, the IRS has ruled that a tribe 

in a partnership is not subject to federal income tax. However, the IRS has cautioned that 

a tribally-owned state-chartered corporation that is a partner in a partnership would be 

subject to federal income tax for its distributive share of partnership income. Similarly, a 

state-chartered tribal LLC will not qualify as an issuer of tax-exempt bonds. 
VI-6 

An LLC organized under tribal law could also permit multiple owners and could 

arguably share in the non-taxable status of the tribe for federal income tax purposes. 

3. Anticipated Profitability

If the business entity is not anticipated to generate a significant amount of profits, 

the federal tax liability of the entity may be less of a factor to consider in choosing the 

entity type. For example, in the Qualco Case Study, the Tulalip tribes formed an energy 

power generation company which was driven by the off-reservation environmental 

interests of the tribes. The entity was established to promote and preserve the offreservation fish habitat of the tribes and to promote long-term working relationships with 

local farmers--all profits generated by the entity are dedicated to habitat restoration. For 

these reasons, and to give certainty to their non-Indian business partners, the Tribe 

incorporated as a non-profit corporation under state law. 

On the other hand, if you anticipate that the entity will generate substantial profits 

from either on or off-reservation activities, an unincorporated tribal entity or a Section 17 

or Section 3 corporation may be your best entity option since the IRS has made a clear 

determination that these are not taxable entities for purposes of federal income tax. 

For business activities exclusively on the reservation, a political subdivision of the 

tribal government may also be attractive if the business activity is quasi-governmental in 

nature. 

As mentioned above, there is some uncertainty as to whether tribally-chartered 

corporations or single member LLCs will share the same tax status of the tribe. 
CHART: STRUCTURE AT A GLANCE

TYPE OF ENTITY LAW GOVERNING

FORMATION

SOVEREIGN

IMMUNITY

LEGAL LIABILITY FEDERAL TAX

TREATMENT

FINANCING

Tribal Instrumentalityand unincorporatedentity

Tribal law, constitution,code, resolution orordinance

Can share the sameattributes of immunity astribal government;immunity can be waivedby tribe; waiver must be inaccordance with tribal law

Tribal assets may notbe segregated fromentity; Tribalgovernment may beliable for debts andobligations of tribalenterprise

Not subject to federalincome tax (regardlessof location of businessactivities) if the entityis not separate from thetribe.

Equity financing notpossible; may qualifyfor tax-exemptfinancing if IRSrequirements met; maybe eligible forgovernment guaranteedloans

Tribal PoliticalSubdivision

Created under Triballaw through a specialpurpose ordinance orresolution to exerciseone or more sovereignpowers delegated by thetribe

Shares same attributes ofimmunity as tribalgovernment; immunitycan be waived by tribe

Whether tribalgovernment is liablefor debts andobligations of itspolitical subdivisionswould be determinedunder tribal law.

IRS practice has been totreat politicalsubdivisions the sameas the tribe—so long asthey qualify as such byhaving been delegatedsubstantialgovernmental powers

Can be both borrowerand issuer of taxexempt financing forfacilities or operationsthat meet the essentialgovernmental functionstest; may be eligible forgovernment guaranteedloans; can issue cleanrenewable energy bonds(CREBS)
CHART: STRUCTURE AT A GLANCE

TYPE OF ENTITY LAW GOVERNING

FORMATION

SOVEREIGN

IMMUNITY

LEGAL LIABILITY FEDERAL TAX

TREATMENT

FINANCING

Tribally CharteredCorporation

Tribal law, constitution,code, resolution orordinance

A corporation that operatesindependent from the tribalgovernment may not sharethe immunity of the tribe(multi factor test).

A wholly owned tribalcorporation shouldmake clear in itsorganizing documentsthat the tribalshareholder is notliable for debts of thecorporation except tothe extent of itscontributed capital orthe shares it owns.

Tax treatment isuncertain. In, 2001, theIRS and the TreasuryDepartment agreed toresolve the uncertaintyby issuing guidance buthave not yet done so.For this reason, manytribal advisors haveceased creating newtribal law corporations.

It is not clear whethertribal law corporationscan issue tax exemptbonds. Governmentguaranteed loans,taxable bond issuances,private placements,commercial bankfinancing available.

Section 17Corporation

Federal charter issuedunder the IndianReorganization Act

Corporate charter canconfer the same privilegesand immunity as tribe;waivers of sovereignimmunity pursuant to the"sue and be sue clause" inthe corporate chartershould be limited to awaiver of only thecorporation’s sovereignimmunity and such waivershould be restricted inscope to transactions of thecorporation and limited toclaims against the assets ofthe corporation and not thetribe itself

Assets and liabilities

of the corporation aresegregated from tribalgovernment assets;Tribal government canpledge assets orproperty to thecorporation; tribalgovernment is notliable for debts orobligations of thecorporation

Not subject to federalincome tax regardlessof location of businessactivities

Section 17 Corporationcan pledge assets andproperty of thecorporation; is eligiblefor governmentguaranteed loans; canissue tax exempt bondsfor "essentialgovernmental services"and can issue cleanrenewable energybonds; joint ventures orequity partnershipspossible through a LLCsubsidiary charteredunder a Section 17corporation.
CHART: STRUCTURE AT A GLANCE

TYPE OF ENTITY LAW GOVERNING

FORMATION

SOVEREIGN

IMMUNITY

LEGAL LIABILITY FEDERAL TAX

TREATMENT

FINANCING

State LawCorporation

Created under state lawfor-profit or nonprofitpurposes

Need to look at state law todetermine power to sue andsued

Assets and liabilitiesof the corporation aresegregated from tribalgovernment assets;Tribal government canpledge assets orproperty to thecorporation; tribalgovernment is notliable for debts orobligations of thecorporation

IRS has taken positionthat a state charteredtribal corporation doesnot share the same taxstatus as the tribe and ittherefore taxable.

Does not qualify as anissuer of tax-exemptbonds or cleanrenewable energybonds.

State CharteredLimited LiabilityCompany

Created under state law A single member LLC

owned by a tribe wouldlikely be considered aseparate legal entity forpurpose of legal processand thus not likely to beviewed as sharing thetribe’s immunity from suit.

Has advantage oflimited liability like acorporation; Tribe isnot liable for debts orliabilities of LLC.

Taxed like a partnershipor other "flow through"entity. IRS has notruled on treatment oftribal single memberLLC, in the absence ofa rule, tribal advisorsbelieve that a tribalgovernment ownedLLC should be treatedas a division of tribalgovernment of taxpurposes.

Does not qualify as anissuer of tax-exemptbonds or cleanrenewable energybonds.
 APPENDIX A 

A-1 

SOVEREIGN IMMUNITY FACTORS IN 

RECENT JUDICIAL DECISIONS 

In determining whether a tribal enterprise or business entity shares the tribe's 

immunity from suit, courts typically consider a number of factors, including but not 

limited to the following: 

• Whether a judgment against the tribal entity will reach the tribe's assets 

• Whether the tribal entity has the power to bind the tribe's assets or to obligate 

tribal funds 

• Whether the tribe and the tribal entity are closely linked through governance 

structure and other characteristics (e.g., tribal control over appointment and 

removal of entity board members, extent of board's power over the entity's 

operations) 

• Whether federal Indian law policies intended to promote tribal selfdetermination would be furthered by extending immunity to the entity 

• Whether the entity is organized for governmental or for "commercial" 

purposes 

• Whether the entity holds title to property in its own name 

• Whether the entity is legally separate and distinct from the tribe (e.g., as is 

normally the case with a separately incorporated entity). 

In several jurisdictions, the main factors that determine whether a tribal enterprise 

or entity shares the parent tribe's sovereign immunity are (1) whether a judgment against 

the entity will reach the tribe's assets, and (2) whether the entity has the power to bind the 

tribe's assets or obligate the tribe's funds.104 In some jurisdictions, if the answers are "no," 

the inquiry ends. Tribal entities that generate their own revenue and cannot bind or 

obligate tribal funds cannot lay claim to tribal sovereign immunity.105 In others, these are 

just two factors to consider.106

Another key factor is whether the tribe and the tribal entity, such as an entity, are 

closely linked in governing structure and other characteristics. Courts typically analyze 

the corporation's board of directors, including its composition, how its members are 

chosen, and the tribe's control over the procedure for their removal.107 If the corporation's 

board of directors is separate from the tribal government so that the board exercises full 

managerial control over the corporation, the corporation is more likely to be considered a 

separate and distinct entity that does not share the tribe's immunity. Also relevant is the 

level of control the tribe retains over appointing and removing board members. The less 

control the tribe has, the less likely a finding in favor of immunity. 
 APPENDIX A 

A-2 

Another factor typically analyzed is whether federal policies intended to promote 

Indian tribal autonomy are furthered by extending immunity to the entity. Examples of 

applicable federal policies include protecting tribal assets; protecting tribal cultural 

autonomy; promoting commercial dealings between tribes and non-Indians; and 

promoting tribal self-determination.108 A finding that extending immunity to the entity 

would support some or all of these policies weighs in favor of a finding that it shares the 

tribe's immunity. 

The nature of the entity's purpose is also given weight by several courts, but in 

varying amounts. Courts typically enquire whether the entity was organized for 

governmental or commercial purposes.109 However, the distinction between the 

governmental and commercial purposes is not always clear. For example, a tribal entity 

organized to operate tribal gaming enterprises was held to be organized for a 

"governmental purpose," based on the Indian Gaming Regulatory Act's goal to encourage 

tribal self-determination and its restrictions on the uses to which gaming revenues can be 

put.110 By contrast, a for-profit corporation formed to carry out construction projects was 

considered to have a commercial purpose.111 While court determinations are difficult to 

predict, tribal entities that deal with traditional government functions, such as health, 

education, and the welfare of tribal members, are more likely to be considered 

"governmental," than for-profit entities whose primary activity is conducting an offreservation business.

Several other factors are relevant in determining a tribal entity's ability to exercise 

sovereign immunity. The first is whether the entity holds title to property in its own 

name.112 Evidence that the tribe holds title to the entity's property weighs in favor of a 

finding of sovereign immunity. The second is whether the entity is incorporated. In at

least one court, the fact that a tribal entity is incorporated provided the court with strong

evidence that the entity is separate and distinct from the tribe and therefore cannot share

its immunity.

113 Clearly, if extended, this reasoning would preclude all tribal corporations 

from exercising sovereign immunity. At this point, however, it is just one of the factors 

considered. 

In conclusion, the guiding principle is that the closer and more inter-connected the 

tribe is with the tribal entity, the more likely it is that the entity shares the tribe's 

immunity, particularly if the entity's purpose relates to core governmental functions.

APPENDIX B

B-1 

KEY STEPS TO PROTECT THE CORPORATE VEIL 

AND TO LIMIT LIABILITY 

• Adequate capitalization. Adequately capitalize the corporation. Do not 

allow the corporation to be financially dependent on the 

parent/shareholders for working capital. 

• Compliance with legal requirements for issuance of stock. Make sure 

stock is issued and that you have complied with applicable legal 

requirements relating to issuance of a security. 

• Maintenance of corporate records. Maintain corporate records, 

including minutes of shareholders' and directors' meetings held at least 

annually. 

• Maintenance of separate financial records and bank accounts.

Maintain separate financial records for each subsidiary. Keep balance 

sheets and profit and loss statements for each year. Maintain separate bank 

accounts for each subsidiary and parent. 

• Avoidance of inter-corporate loans. Make few loans between the parent 

and the subsidiary. Document all loans made and make payments in 

accordance with the repayment terms. 

• No guarantees by tribe of subsidiary's debt. The parent entity (e.g., the 

tribe) should not generally assure corporate creditors that it will take care 

of subsidiary obligations if the subsidiary is unable to do so. 

• No assignment of contracts between tribe and subsidiary. Make sure 

that contracts that are intended to bind only the subsidiary are only in the 

name of the subsidiary. Don't put them in the name of the parent and then 

assign to the subsidiary. 

• No representation that the entity's primary purpose is to limit 

liabilities. Never suggest to a third party that the entity was created for 

the purpose of limiting the legal remedies or assets available to third 

parties. 

• Maintenance of adequate insurance. Maintain appropriate insurance 

coverage for the subsidiary's insurable liabilities. 

• No interlocking or identical boards. Avoid having the same group of 

individuals serve as officers and/or directors of both the parent and the 

subsidiary.
 

ENDNOTES 

1

 Stephen Cornell and Joseph Kalt, “Reloading the Dice--What can Tribes Do? Strategies and Institutions 

in American Indian Economic Development.” Harvard Project on American Indian Economic 

Development. 

2

 Jonathan Taylor, “Good Corporate Governance for Tribal Enterprises,” Reservation Economic Summit 

2005, Developing your Political, Legal, and Corporate Infrastructure (February 8, 2005), p. 6. 

3

 Michael W. Cameron, “A Prototypical Economic Development Corporation for Native American Tribes,” 

Malcolm Wiener Center for Social Policy, Harvard Project on American Indian Economic Development. 

4

 25 U.S.C. § 477. 

5

 United States v. Wheeler, 433 U.S. 313 (1978); Powers of Indian Tribes, 55 Interior Decisions 14 (1934). 

6

 Kerr-McGee Corp v. Navajo Tribe, 471 U.S. 195, 200 (1985). 

7

 25 U.SC. § 473a and the Oklahoma Indian Welfare Act, 25 U.S.C. § 501. 

8

 Barker v. Menominee Nation Casino, 897 F. Supp. 389, 391 (E.D. Wis. 1995)(Menominee Casino 

operated by the Menominee Tribal Gaming Commission a wholly-owned chartered business venture of the 

tribe created by ordinance pursuant to the Constitution and By-laws of the tribe); Pueblo of Santa Ana v. 

Hodel, 663 F. Supp. 1300, 1302 (D.C.C. 1987)(Santa Ana Enterprise created by tribal ordinance passed by 

the traditional government of the Pueblo). 

9

 Unique v. Gila River Pima-Maricopa, 674 P.2d 1376, 1382 (Ariz. App. 1983) (Gila River Farming 

venture was a subordinate economic entity of the tribe and not part of its corporate entity). 

10 Donovan v. Navajo Forest Products Industries, 692 F. 2d 709, 710(10th Cir. 1982). 11 Jonathan Taylor, p. 6, “Good Corporate Governance for Tribal Enterprises,” Reservation Economic 

Summit 2005, Developing your Political, Legal, and Corporate Infrastructure (February 8, 2005). 

12 Kiowa Tribe of Okla. v. Manufacturing Technologies, Inc., 523 U.S. 751, 754 (1998). 

13 Multimedia Games, Inc. v. WLGC Acquisition Corp. 214 F.Supp.2d 1131, 1135 (N.D. Okla. 2001). 

14 Santa Clara Pueblo v. Martinez, 436 U.S. 49 (1978). 

15 Kiowa Tribe of Oklahoma, 523 U.S. at 757-758 (1998); Seminole Tribe of Florida v. Florida, 517 U.S. 

44 (1996); Multimedia Games, Inc. v. WLGC Acquisition Corp. 214 F.Supp.2d 1131, 1135 (N.D. Okla. 

2001). 

16 Id. At 760. 

17 Kiowa Tribe of Oklahoma, 523 U.S. at 757-758 (1998); Seminole Tribe of Florida v. Florida, 517 U.S. 

44 (1996); Allen v. Gold County Casino, No. 05-15332, 9th Circuit Court of Appeals, (Sept. 29, 2006); 

Multimedia Games, Inc. v. WLGC Acquisition Corp. 214 F.Supp.2d 1131, 1135 (N.D. Okla. 2001). 

18 Id. 

19 Navajo Tribe v. Bank of New Mexico, 700 F.2d 1285 (10th Cir. 1983). 20 Gaines v. Ski Apache 8 F. 3rd 726, 729 (10th Cir. 1993); In re Greene, 980 F. 2d. 590, 593 (9th Cir. 1992); 

Barker v. Menominee Nation Casino, 897 F. Supp. 389, 393 (E.D. Wis. 1995). 

21 Oklahoma Tax Commission v. Citizen Band of Potawatomi Tribe of Oklahoma, 498 U.S. 505, 509 

(1991) (recognizing tribal sovereign immunity from suit over taxation of cigarette sales). 

22 Hydrothermal Energy Corp. v. Fort Bidwell Community Council, 216 Cal. Rep. 59 (Cal. App. 1985). 

23 C & L Enterprises, Inc. v. Citizen Band Potawatomi Tribe of Indian of Oklahoma, 552 U.S. 411, 418-420 

( 2001). 

24 Four revenue rulings address the tax status of tribal governments: Rev. Rul. 67-284, 1967-2 C.B. 55; 

Rev. Rul. 81-295, 1981-2 C.B. 15; Rev. Rul. 94-16, 1994-1 C.B. 19; and Rev. Rul. 94-65, 1994-2 C.B. 14; 

GAO/GGD-97-91, Tax Policy: A Profile of the Indian Gaming Industry (May 1997). 

25 Rev. Rul. 67-284, 1967-2 C.B. 55. 
 

26 Rev. Rul. 57-128, 1957-1 C.B. 311. The Service's "instrumentality" test does not generally apply for 

income tax exemption, but it is utilized for other tax purposes. See, e.g., PLR 200621010 (Feb. 1, 2006) 

(entity treated as instrumentality of a Tribe for purposes of Code Section 7871(a) (ability to receive 

charitable contributions). 

27 Title II of Pub. L. No. 100-203, 96 Stat. 2605 (1982). 

28 The USDA B&I regulations can be found at http://www.rurdev.usda.gov/. 29 The SBA 7(a) regulations can be found at 13 CFR. 120 and 

http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html. 

30 Id. 

31 See, e.g., PLR 9847018 (August 21, 1998), (a tribe's Section 17 corporation treated as qualified issuer); 

PLR 9826005 (March 20, 1998) (tribe's wholly owned state law corporation is not an integral part of the 

tribe, and thus not a qualified issuer); PLR 8702017 (October 9, 1986), (tribal tax commission is an integral 

part of tribe and will be treated like the tribal government for all Section 7871 purposes including tax 

exempt bonds). 

32 PLR 200225010 (March 8, 2002) (intertribal authority is an instrumentality); PLR 8638025 (June 20, 

1986) (joint city- tribal commission is an instrumentality). 

33 Definition of Essential Governmental Function under Section 7871, 71 Fed.Reg.45474 (Aug. 9, 2006). 

34 Lyn Corum, Financing Distributed Generation in the New Energy Marketplace, Distributed Energy, The 

Journal for Onsite Power Solutions (November/December 2004). 

35 PLR 200635002 (Sep. 1, 2006). 

36 PLR 9826005 (March 20, 1998) (tribal health entity not a political subdivision because it was not 

delegated any sovereign powers); PLR 8702017 (Oct. 9, 1988) (tribal tax commission not a political 

subdivision because it was an integral part of the tribe). 

37 See H.R. Conf. Rep. No. 97-984, at 15 (1982), 1983-1 C.B. 522 

38 Rev. Proc. 84-37, 1984-1 C.B. 513 provides procedures for a political subdivision of an Indian tribal 

government not included on the list published in Rev. Proc. 84-36 to request a ruling qualifying it for 

treatment as a political subdivision as provided under Section 7871(d) of the Tax Code. 

39 See, e.g., Rev. Proc. 2006-4, 2006-1 I.R.B. 132. 

40 Rev. Rul. 87-2, 1987-2 C.B. 18. 

41 Rev. Rul. 67-284, 1967-2 C.B. 55 and Rev. Rul. 94-16, 1994-1 C.B. 19. 

42 In Private Letter Ruling 200148038 (Aug. 30, 2001), the IRS held that a local governing body that 

delegated certain police powers over local tribal matters was a political subdivision of an Indian tribal 

government. The local governing body was formed by a committee of the governing body of an Indian 

tribe and delegated police powers. The local body provided 24-hour law enforcement and detention 

services on the reservation. It also was permitted to adopt certain ordinances, including ordinances to 

amend the land use plan; to acquire property by eminent domain; zoning ordinances; ordinances for the 

enforcement of general health, safety, and welfare of the community; and local taxes. IRS reasoning 

focused on the fact that the local governing body had been delegated substantial governmental powers. In 

ruling that the local body qualified as a political subdivision of the Indian tribe, the IRS stated that the 

Department of Interior had opined that the Indian tribe effectively delegated sovereign powers to the local 

body. Accordingly, after consultation with the Secretary of Interior, the IRS concluded that the Authority 

was a political subdivision for purposes of Section 7871 of the Code. See also PLR 200635002 (Sep. 1, 

2006), supra note 31 and accompanying text. 

43 See Chapter II.A(5), supra.
 

44 Treas. Reg. § 301.7701-1(a)(3) (“tribes incorporated” under Section 17 of the IRA of Section 3 of the 

OIWA are “not recognized as separate entities for federal tax purposes”). In referring to “tribes 

incorporated” under Section 17, the IRS regulations are following the statutory language of 25 U.S.C. § 

477, which refers to the “incorporated tribe”. Cf. § 301.7701-2 (b)(1) (defining a corporation to include 

any business entity organized under a federal, state or tribal statute if the statute refers to the entity as 

incorporated). 

45 See Treas. Decision 8697, 61 Fed. Reg. 66585 (Dec. 17, 1996). However, in regulations issued in 1997 

under Internal Revenue Code section 337(d), the IRS limited the definition of tax-exempt Indian tribal 

corporations to those incorporated under federal law--specifically, section 17 of the IRA and section 3 of 

the OIWA. See Treas. Reg. §1.337(d)-4(c)(2)(v). 

46 See Internal Revenue Manual, § 4.88.1.4.1(6)(a). 

47 See Cohen's Handbook of Federal Indian Law, § 8.02[2] [a] citing Ellen P. April, "The Integral, the 

Essential and the Instrumental: Federal Income Tax Treatment of Governmental Affiliates," 23 Exempt 

Organization Tax Review 263, 267-269 (Feb. 1999) (discussing the integral part test). 

48 See, e.g., Florida Residential Property and Casualty Joint Underwriting Association v. United States, 207 

F. Supp. 2d 1344, 1349 (N.D. Fla. 2002); Rev. Rul. 87-2, 1987-2 C.B. 18; Rev. Rul. 71-131, 1971-2 C.B. 

28; Rev. Rul. 71-132, 1971-1 C.B. 29. See also PLR 199909013 (Nov. 25, 1998) (if an enterprise is 

deemed to be an integral part of the state, it will not be treated as a separate entity for tax purposes). 

49 PLR 200031045 (May 9, 2000) (a nonprofit corporation created pursuant to a city ordinance); and PLR 

200112013 (Dec. 14, 2000) (a tribally-chartered authority created by a Tribe to construct and manage its 

gaming business). 

50 Cal. Admin. Code title. 18, sec. 1616. 

51 See Oklahoma Tax Commission v. Chickasaw Nation, 115 S.Ct. 2214 (1995) (noting the Oklahoma Tax 

Commission’s current policy with regard to the sales and use tax exemption applicable to Indian tribes). 

52 See Code section 7871(c). However, in some private letter rulings, the IRS has stated or implied that 

such debt may also be issued by "an integral part of an Indian tribal government." See PLR 9826005 (June 

26, 1998) (concluding that a state-chartered nonprofit corporation did not qualify as an "integral part" or a 

political subdivision of an Indian tribe, and thus could not issue tax-exempt bond). See TAM 9013002 

(March 30, 1990) (activities of certain subsidiaries of a tribe, such as logging, agricultural and general retail 

operations, are not essential governmental functions, even though such subsidiaries provide funding to 

tribal government programs which in turn provide essential governmental functions). 

53 See 13 C.F.R. §124.109 (requirements for tribal entities under Section 8 (a)); 13 C.F.R. §120.111 

(exception for tribal government entities under SBA loan rules). 

54 25 U.S.C. §477; American Vantage v. Table Mountain Rancheria, 292 F.3d 1091, 1098 (9th Cir. 2002). 55 Atkinson v. Haldane, 569 P.2nd 151, 174-175 (Alaska 1977). 56 25 C.F.R. Part 82. 

57 Tribes in Oklahoma may reorganize under the provisions of the Oklahoma Welfare Act, 25 U.S.C. 501-

509 (1936). 

58 Id.; Specific laws affect the governmental authority of the Osage and Five Civilized Tribes of Oklahoma. 59 25 U.S.C. §477 (as amended 1990). 

60 25 C.F.R. 25 U.S.C. §84.004(b). 

61 25 C.F.R. 25 U.S.C. §84.004(f). 

62 Maryland Cas. Company v. Citizens National Bank, 361 F. 2nd 517 (5th Cir.) cert. denied, 385 U.S. 918 

(1966); Parker Drilling v. Metlakatla Indian Community, 451 F. Supp. 1127 (D. Alaska 1978). 

63 See BIA Model Charter Art. VII K. and Art. XVI (modifies “sue and be sued clause” so it subject to 

provision on immunity). 

64 25 USC § 476 provides that the tribe must consent to transfer of tribal assets. 
 

65 Atkinson v. Haldane, 569 P.2nd 151 (Alaska 1977). 66 Four revenue rulings address the tax status of tribal governments: Rev. Rul. 67-284, 1967-2 C.B. 55; 

Rev. Rul. 81-295, 1981-2 C.B. 15; Rev. Rul. 94-16, 1994-1 C.B. 19; and Rev. Rul. 94-65, 1994-2 C.B. 14. 67 Rev. Rul. 87-2, 1987-2 C.B. 18. 

68 Rev. Rul. 67-284, 1967-2 C.B. 55, Rev. Rul. 81-295, 1981 C.B. 15, and Rev. Rul. 94-16, 1994-1 C.B. 19. 

69 Rev. Rul. 81-295, Rev. Rul. 67-284, 1967-2 C.B. 55 and Rev. Rul. 94-16, 1994-1 C.B. 19; Treas. Reg. § 

301.7701-1(a)(3)(“tribes incorporated” under Section 17 of the IRA and Section 3 of the OIWA are “not 

recognized as separate entities for federal tax purposes”). 

70 Rev. Rul. 94-65, 1994-2 C.B. 14. 

71 PLR 9847018 (November 20, 1998) (citing Rev. Rul. 94-16 “that Section 17 Corporation has the same 

tax status as the tribe.”). 

72 See, e.g., Johnson v. Harrah's Kansas Casino Corp., 2006 WL 463138 (D. Kan. 2006); In re Ransom, 86 

N.Y.2d 553, 559 (1995); Dixon v. Picopa Construction Co., 772 P.2d 1104, 1110 (Ariz. 1989). 

73 In re Ransom, 86 N.Y.2d 553, 559 (1995). 

74 McNally CPA's & Consultants, S.C. v. DJ Hosts, Inc., 692 N.W.2d 247, 250 (Wis. Ct. App. 2004).

75 319 U.S. 436 (1943) 

76 1994-1 .C.B. 19 

77 PLR 9826005 (March 20, 1998). In the ruling, the IRS also concluded that the corporation was not a 

political subdivision of the tribe since there was no evidence it had been delegated any sovereign or 

governmental powers. 

78 Rev. Rul. 2004-50, 2004-22 I.R.B. 977. 

79 There are certain exceptions to this general rule. For instance, an LLC that engages in public trading of 

its interests will be treated as an association taxable as a corporation. 

80 There is one important caveat. Unlike partnership laws, which have some uniformity across states, LLC 

laws have not attained such uniformity, and as such, there are significant differences in the LLC laws of 

different states. Thus, an LLC that wishes to conduct business in a state other than its state of organization 

should closely review the LLC status of that state to determine whether the statute extends the expected 

treatment to foreign (i.e., out-of-stare) LLCs. 

81 See Del. Code, tit. 16, 318-303(a) 

82 See Del. Code , tit. 16, 318-303(b) 

83 Three features limit the usefulness of relying on this decision. First, it was a superior court opinion, 

which is not binding on any other courts, even within the state. Second, the opinion was not published, 

which in many jurisdictions, precludes parties from even citing to or mentioning the case. Third, the 

statement was "dicta" because the tribe did not assert sovereign immunity as a defense. 

84 Webster v. Pequot Mystic Hotel, LLC, 2004 WL 239738 (Conn. Super.) (unpublished opinion). 

85 Warburton/Buttner v. Superior Court, 103 Cal. App. 4th 1170, 1189 (2002). 

86 There are certain exceptions to this general rule. For instance, an LLC that engages in public trading of 

its interests will convert to an association taxable as a corporation. Similarly, certain states that do not 

recognize the non-taxable nature of LLCs, partnerships and other flow-through entities.

87 There is one important caveat. Unlike partnership laws, which have some uniformity across states, LLC 

laws have not attained such uniformity, and as such, there are significant differences in the LLC laws of 

different states. Thus, an LLC that wishes to conduct business in a state other than its state of organization 

should closely review the LLC statue of that state to determine whether the statue extends the expected 

treatment to foreign (i.e., out-of-state) LLCs. 

88 Warburton v. Superior Court, 103 Cal. App. 4th 1170 (2002). 89 Id. at 1188. 

90 Id. at 1175. 

91 See Johnson v. Harrah's Kansas Casino Corp., 2006 WL 463138 (D. Kan. 2006) (application of factors to 

state-chartered corporation that managed the tribe's casino). 

92 Cf. McNally CPA's & Consultants, S.C. v. DJ Hosts, Inc., 692 N.W.2d 247, 250 (Wis. Ct. App. 2004) 

(subsequent tribal purchases of existing businesses do not bestow sovereign immunity on such entities). 
 

93 Some states, including California, require limited partnerships to pay an annual "fee" of several hundred 

dollars for the privilege of doing business in California; other states, such as Illinois, may impose an 

income tax at the entity level. 

94 See Internal Revenue Manual § 4.88.1.4.1 [Federal Tax Status of Indian Tribal Governments] (01-01-

2003. 

95 Id. 

96 See T.D. 8697, 1997-1 C.B. 215. A Treasury Decision ("T.D.") is the IRS' official commentary on 

federal tax regulations. 

97 Treas. Reg. § 301.7701-3(a). 

98 See Treas. Reg. § 301.7701-2(b)(6). 

99 Certain rules apply to determine when such income will be recognized or included in the partner's gross 

income. 

100 In Rev. Proc. 1993-27, 1993-2 C.B. 343, the IRS noted that a profits interest received in exchange for 

the provision of services to a partnership would not be treated as taxable income to the partner unless: (i) 

the interest relates to a substantially certain or predictable stream or income; (ii) the partner disposes of the 

interest within two years; or (iii) the interest is a limited partnership interest in a "publicly traded" 

partnership. See also Rev. Proc. 2001-43, 2001-2 C.B. 191. 

101 Where the partnership agreement does not provide for such allocations, the distributive shares are 

determined according to the partners' interest in the partnership. 

102 The UBTI rules come into play only when a tribe operates a tribal college or university. See Code 

Sections 7871(a)(5) and 511(a)(2)(B). 

103 The recently enacted Energy Policy Act of 2005 provides for tax-credit financing of “clean renewable 

energy facilities” by tribal governments and their political subdivisions. 

104 See, e.g., Wright v. Colville Tribal Enterprise Corp., 111 P.3d 1244, 1250 (Wash. Ct. App. 2005). 105 Id.; Runyon v. Ass’n of Village Council Presidents, 84 P.3d 437, 440-41 (Alaska 2004). 106 Dixon v. Picopa Construction Co., 772 P.2d 1104, 1110 (Ariz. 1989). 107 See, e.g., Id. at 1107-08, 1109. 108 See, e.g., Id. at 1111-12; Trudgeon v. Fantasy Springs Casino, 71 Cal. App. 4th 632, 642 (1999). 109 See, e.g., Gavle v. Little Six, Inc., 555 N.W.2d 284, 294 (Minn. 1996). 110 Id. at 294-95; Trudgeon, 71 Cal. App. 4th at 639-40. 111 Dixon, 772 P.2d at 1110-11. 112 Id. at 1108; White Mountain Apache Indian Tribe v. Shelley, 480 P.2d 654, 656 (Ariz. 1971). 113 Dixon, 772 P.2d at 1110-11. 

The Department of the Interior 

Office of Indian Energy and Economic Development 

Mail Stop 20 South Interior Building 

1951 Constitution Avenue, NW 

Washington, DC 20245 

(202) 219-0740