So you’re ready to run your own shop. But how should you incorporate your business? There are numerous options, from partnerships to different types of corporations to nonprofit status, each of which comes with different implications regarding taxes and liability.
“They all have implications that are broader than how many partners you have or how large your firm is,” says Rena Klein, FAIA, a principal of Seattle-based RM Klein Consulting who authored The Architect’s Guide to Small Firm Management and was executive editor of The Architect’s Handbook of Professional Practice (15th edition). She recommends hiring an attorney to help navigate the decision.
In addition, regardless of which business type you choose, having insurance is vital. “A lot of architects don’t want to pay for it or can’t afford the policy, because it’s expensive,” says Mark LePage, AIA, a partner at Fivecat Studio Architecture in Chappaqua , N.Y., and founder of the blog Entrepreneur Architect. “But the liability [that] architects have just by practicing is pretty big. To go without is pretty risky.”
General PartnershipsLLPs and LLCs
A 2012 AIA survey found that 81 percent of architectural firms have fewer than five members. The simplest option for two or more architects practicing together, and the default mode if no formal legal steps have been taken, is a general partnership. Each partner is liable for the other partner’s action, and their combined liability may extend to all partners’ personal assets. General partnerships don’t pay federal taxes; each partner reports his or her share of income and expenses on their individual returns.
Limited liability partnerships (LLPs) and limited liability corporations (LLCs) offer liability protections that general partnerships don’t. The personal assets of the partners (in the case of the LLP) or firm members (in the case of the LLC) are protected against liability for business claims, except in the case of fraud or other extreme wrongdoing. LLCs have become an increasingly widespread choice for firms during the past two decades.
Closely held subchapter S Corporations, or S Corps, make up about 28 percent of all firms, according to the AIA. For small firms, it’s a logical choice, says LePage: “That’s because of the tax benefit.” Leaders pass revenue through their personal income statements, but, unlike a general partnership, S Corps can have shareholders, usually employees or others actively engaged in the practice. For firms large enough that their stock can be publicly traded on an exchange, the next step is to become a subchapter C Corporation, or C Corp.
Nonprofit and B Corp
Another option is to register your firm as a nonprofit or a benefit corporation (B Corp). “Being a strict nonprofit is really restrictive in terms of how you deal with your income, but it does allow you to fundraise in a different way,” Klein says. “With a B Corp you have a little more flexibility. You can distribute profit to a certain extent, but you also have an obligation for benefit. It creates an opportunity to identify a problem and solve it to benefit the greater good as well as the people trying to make it happen. It’s a really good thing.”