Guide to Starting Your Own Architecture Firm

In order to start your own architecture firm, you will need to incorporate your business. This guide walks you through the various legal structures used by entrepreneurial architects and their tradeoffs including liability, taxation, and organization.
By
Lucas Gray

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Every jurisdiction is slightly different and the needs of every business can vary greatly. The information in this blog post should not be considered legal advice but rather a starting place as you research how you want to organize your business. Consult with a lawyer and tax accountant before making the final decision on what would work best for your specific situation and in the location you plan to conduct business.

Before you start designing, it is important to set up the legal structure for your business to address the financial and liability aspects of running an architecture firm. Here we outline the basic legal forms most enterprises in the United States use and some pros and cons to each option. 

Introduction

As you plan to start an architecture firm on your own or with colleagues, it is important to consider the legal ramifications and potential risks involved with owning your own business. Considerations should include both your short-term financial needs to get the business up and running efficiently as well as longer term planning for potential growth, bringing on new owners or partners, and even whether you may need additional financing down the road.

Beyond financing the startup costs of starting a company, you also must consider the liability you and/or the business will be taking on by providing design services. Understanding the various legal structures and the pros and cons of each should help you think through what you need and why you may select one structure over another. 

Most importantly, you need to consider both your personality, who you may be partnering with, and what level of risk you are willing to take. As I started a small firm it was important for me and my business partners to protect our personal assets from the business assets.

In this case we were planning for worst case scenarios and potential legal situations even though we knew we would be working hard to avoid getting into legal trouble. Still we felt that separating our business from personal lives and having a structure that would allow us to grow or shrink the number of owners was important as we started our business relationship. 

Below are the main business structures used in the United States. We tried to outline what each structure means and some of the reasons to select one over another. However, each person, business, and local laws will affect what may work best for your situation. It is always best to do extra research and consult with an attorney and tax advisor to help select the best option for your needs.  


Sole Practitioner

This is by far the simplest way to start your own architecture or design company and one of the most common business structures in the country for any enterprise. As a sole practitioner you simply start advertising your services and providing those services to paying clients.

It is a business that is solely owned by one individual and for tax and business purposes it is treated as the same as your personal taxes. All income and deductibles will be submitted on your personal tax return when you file your annual taxes and the company will not be taxed as a separate entity. All of the earnings will be taxed at your personal income tax rate. 

The downside of this structure is that the person and the business are one and the same for both taxes as well as liability. Meaning, if there is a claim against the business, your personal assets as well as the business assets are at risk. There is no protection between the two. You will also be taxed on revenue that you leave in the business. 


Advantages

  • Simple and low-cost to create
  • Simple to dissolve or close the business
  • Single owner makes all decisions
  • All business revenue is income for the owner
  • All revenue is only taxed and the individual level (only taxed once)

Disadvantages

  • Limited capital to invest in the business - limited to the owner’s personal funds or loans. 
  • Unlimited liability - the owner’s personal assets are at risk.
  • Can’t share ownership in the business with employees or investors
  • Some benefit expenses may not be deductible such as the owner’s insurance policies (consult with your tax advisor).
  • The company can only be around as long as the owner is alive - no succession option without changing the business’ legal structure.


If your goal in starting an architecture firm is to remain as a single designer that works on smaller scale projects and you don’t have any ambitions to grow, this might be a legal structure that would meet your needs. However, if you think you may grow the company in the future, plan to take on large scale projects, or want to limit your personal liability, then there are better options. 


Partnership

Another relatively simple business structure if more than one person is opening up a business together is the General Partnership. This would be a fit if you were planning on starting a firm with a colleague for instance. In this case all earnings are split based on the partnership agreement and are taxed at the personal level - similarly to a sole proprietorship. The partners are not considered employees though so they won’t be issued salaries and W2s but instead would take draws which will be reflected on a K1 form for tax purposes.

Liability also falls on both partners as individuals. Each partner is jointly liable, so a claim can go after one or any number of partners and their personal assets. For this reason it is important to to really trust the person you are going into business with. 

Considering there are now multiple people involved in the creation of the business it is important to document the Partnership Agreement in writing regarding significant issues that could come up over the course of doing business. A few questions that should be answered in the agreement include:

  • What is the capital contribution of each partner? This could be cash, assets, and/or time. 
  • How will the profits (or losses) of a business be split? Does each partner own an equal stake in the business or does one control more than the others? 
  • What are the salaries of each partner or the amount of draws?
  • Who is responsible for each aspect of the business’ management?
  • If the partnership shall be dissolved, how will that process happen?
  • How will you deal with the death, disability, withdrawal, or retirement of one of the partners?

As you can see, this is a bit more complicated than simply setting up shop as a sole practitioner. But there are advantages to starting a business as a partnership.


Advantages

  • All revenue is only taxed and the individual level (only taxed once)
  • It is still relatively easy to set up the business as a partnership
  • With more than one owner there is the potential for more capital to invest in the business
  • Each partner can bring unique skills, knowledge, and experiences to the business. 

Disadvantages

  • With more than one owner decision making can be tougher, take longer, or lead to disputes. 
  • Unlimited liability - both owner’s personal assets are at risk even if one owner wasn’t involved in the dispute.
  • Profits are split between the owners.
  • Some benefit expenses may not be deductible such as the owner’s insurance policies (consult with your tax advisor).
  • Typically the business entity would dissolve upon the death or withdrawal of a partner.


To address the issue of shared liability there is a business structure called a Limited Partnership. It is a bit more complicated in that there are still General Partners that are fully liable and handle the company’s management, and then Limited Partners that don’t have a voice in management and are only liable up to the amount of their capital contribution.

Typically this structure is used when one partner wants to invest in the company but doesn’t have the technical or management expertise to help run the business. In general, this is a relatively rare business structure for an architecture/design firm and there are probably better structures to meet your needs. 


Limited Liability Company (LLC)

I would venture to guess that most small firms - at least those that have more than one owner - start out operating as Limited Liability Companies, or at least they should. The advantage for LLCs is that they have some of the simplicities of a General Partnership but have the advantage of limited liability for each individual. 

LLCs are pass-through entities, thus all profits (or losses) derived from the business are passed onto the members of the LLC. Typically these disbursements are proportional to the capital each person invested into starting the company. For example, if the startup costs for your business is $100,000 and Jane put up $60,000 and John put in $40,000 then Jane would have 60% of any profits or losses passed through the business to her personal income and then taxed accordingly. 

Typically it is pretty simple to set up an LLC and in many jurisdictions you can do it online for a small fee. All you need to do is write an operating agreement, designate the members, and then file that paperwork with your local jurisdiction (in some areas it may be required to register both at the state, county, and/or local level). You can find operating agreement templates online pretty easily or consult with your attorney. 

Another reason why LLCs are a good way to structure a firm is that you can edit them over time in case someone leaves or joins the ownership of the firm. There isn’t a limit on who, what, or how many entities can be members - meaning both individuals and other companies could be a member and there is no restrictions on members being US citizens or not. Some states do have specific restrictions that may differ so check what the local rules are where you plan to do business. 


Advantages

  • Simple and low-cost to create
  • Simple to dissolve or close the business
  • Easy to add or remove members in the future
  • All profits or losses are passed on to the members based on the operating agreement 
  • All revenue is only taxed and the individual level (only taxed once)
  • Each member has limited liability - meaning only the business assets are at risk in a potential lawsuit. Personal assets are protected. 
  • Both individuals and business entities can be members of an LLC

Disadvantages

  • Taxes are on income earned, not necessarily the money distributed to the members - if some profits are kept within the company the individual members may still be taxed for that as income.
  • There could be tax advantages to other business structures like S-Corporations. Consult with your tax advisor. 
  • Harder to attract outside equity capital


We found that the benefits of the LLC outweighed the disadvantages and thus started our firm as a Limited Liability Company. After a couple of years, when a third partner was joining the company, we found it was relatively easy to add them as a new member of the original LLC. We were also able to set up this business structure on our own for limited cost and entirely online. We eventually transitioned from an LLC to an S-Corporation for tax and some legal reasons related to ownership and our state licensure laws as the firm grew. However, for many small firms an LLC is probably all you may need for the lifespan of your business. 

Keep in mind, each state may have different regulations so check what the rules are in your location if you are considering setting up your business as an LLC. 


C Corporation

This structure is most common for big American companies and could be a good fit for larger architecture firms. The benefit of a C Corporation is that it can have infinite numbers of owners and ownership is divided out by shares of stock. Corporations are managed by a board of directors and their mission is to make decisions that benefit the shareholders (owners). 

Individual shareholders are protected from liability, so if a person sues the corporation only the company assets would be at risk. All of the individual owners would be protected from any legal losses. So if the losses from a lawsuit are bigger than the company’s net worth, your personal assets would not be at risk - you would only be able to lose the value of your investment in the firm. 

The other main benefit to setting up your business as a corporation is that it allows you to raise capital. If you are planning on growing your company and need funds to help with that growth you can raise that through the sale of stocks. You can also use stocks as a way to attract and retain talent, and provide ownership stake in the company to your top employees. This system also allows the firm ownership and management to change and adapt relatively seamlessly as people retire, etc. This allows for easy continuity once the original owners are no longer involved in the company 

There is a big downside for setting up a business as a corporation though, most notably double taxation. In the eyes of the law, corporations are considered people, and are thus taxed as such. Business profits will be taxed at the corporate level and then distributions of those profits (dividends) paid out to the owners of the business will then be taxed as capital gains. 

Advantages

  • Shareholders have limited liability
  • Stocks can be sold to raise money
  • Benefits to employees are deductible
  • There is an unlimited lifespan for a corporation - it can survive beyond the careers of the founders. 
  • Stocks can be given or sold to employees to attract and retain the top talent
  • Shares are transferable - if a shareholder wants to leave the company they can sell their shares for a straightforward buyout. 

Disadvantages

  • Double taxation - profits are taxed on the corporate level and when distributed to shareholders 
  • The process of setting up a corporation is complex and costly. 
  • Corporations are overseen on federal, state, and local levels. So there is more oversight and regulations. 


Most architecture firms remain relatively small businesses and probably won’t need this level of legal structure. There are a handful of firms, think Gensler or Perkins+Will, who are large enough that this might make sense. If your goal is to grow and become one of these massive firms then this might suit you. For the rest of us, it is probably more complicated and costly to set up than is beneficial for the business. 

S Corporation

You can think of this option as somewhat of a hybrid between partnerships and corporations. It gives the tax advantages of the partnership, where business revenue is passed through the company to the individual shareholders and taxed only on the personal level. At the same time, it offers liability protection by limiting the risk for each owner to the capital contributions they made to join the company. 

In general, this is a closely held corporation where all the owners are involved in the business. Thus there are some limitations on who can be a shareholder of an S Corporation, how many shareholders there can be, and also some limitations on what revenue streams are qualified. 


According to the IRS website:

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).


Advantages

  • Revenue is passed through the business and only taxed on the personal level
  • Liability is limited to each owner’s contribution to the firm - no personal assets are at risk. 
  • Can use company shares as incentives for productive employees or to grow the ownership group. 

Disadvantages

  • There are limitations on who can be an owner
  • There are limitations on revenue sources that are allowed for businesses of this structure
  • More complicated to set up than some of the other business structures


This structure can make a lot of sense for a design service business. Architecture firms probably won’t come up against any of the revenue or shareholder restrictions. There could be some tax advantages as well, depending on the size of the firm and revenue. It is a bit more complicated to set up than an LLC and we relied on our accountant and lawyers to assist with it, which incurred more costs than going with an LLC. 

B Corporation

This is the newest business structure and is a bit different than the others in that to become a B Corporation you need to get certified by a third-party organization. Basically the goal is to convince companies to think holistically about their business to balance profits and purpose. This means that a B Corporation meets high standards of social, environmental and economic accountability. If your company has a social mission or a purpose beyond maximizing profits, this might be worth pursuing. 

It isn’t a government designation but rather a certification you would get on top of the tax and liability structure you need to operate under. This does add some additional time and effort to work through the certification process. There are also annual certifications fees to maintain the B-Corp certification so that is also something to consider. The benefits are that your business will be identified as an organization that is looking to make a positive impact beyond corporate profits. You could attract clients, collaborators, and vendors whose values align with purpose driven companies. 


What legal structure is best for a small architecture firm?  

Like we mentioned at the outset of this article, there is no perfect answer for which legal structure is ideal considering each firm has different needs and goals. When I started my firm with a couple of partners we started out as an LLC due to its simplicity to start and liability protections for our personal assets.

We eventually transitioned to an S Corporation based on recommendations from our lawyer and accountant after we brought on a new partner and our revenue increased. Based on the size and revenue that we grew into, plus some other legal situations related to practicing architecture, an S Corp was the most advantageous for us.

We also wanted to make sure that our personal assets were protected and separate from any business liability which steered us away from a General Partnership or simply being Sole Practitioners. Most firms could probably emulate this path -  starting as a Limited Liability Company and only converting into an S Corporation if you grow or there are other financial or legal reasons to do so. But remember, we aren’t lawyers or tax experts so consult with licensed advisors in your area to help make the decision on what would work best for your unique situation. 


Conclusion

I started a firm because I wanted to design beautiful architecture, solve challenges for our clients with creative design solutions, and get to exercise my creativity. However, my partners and I probably didn’t spend enough time researching and understanding all of the other aspects of running a business before setting up shop.

In hindsight, I wish I worked with more expert advisors earlier on rather than learn on the fly as the company grew. Working through all of these legal decisions ahead of time and planning for your future goals can save a lot of time and money. It can also help protect you and your financial wellbeing in case something does go wrong.

I always recommend planning for the worst and hoping for the best. Find the right legal structure for your current and future goals. It is well worth your time and investment to get things right early on, so you can then focus on what we all love, practicing architecture and creating inspiring places. 


Additional Resources

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