Fivecat Studio was founded in 1999. Annmarie and I were 29 years old. She was licensed. I was not. With no clients and no money, we launched the firm as a sole proprietorship; Annmarie McCarthy, Architect.
Slowly, we grew the firm and in 2002, with my license in hand, we incorporated as McCarthy LePage Architects, PC.
We knew from day one that we needed a way to differentiate ourselves from the many other local firms. McCarthy LePage Architects sounds very professional, but we do things differently. We needed a name that was a bit more personal, so we launched our brand, Fivecat Studio.
When you finally decide to start your own firm, you will need to make several critical decisions. Many of those decisions are outlined in previous sessions of this Entrepreneur Architect Academy series.
One of the most important decisions you’ll need to make is which business structure best fits your new firm. The business structure you choose will have significant legal and tax implications. As architects, there are five basic structures from which to choose.
Sole Proprietor
A very popular choice for new firms is the simplest structure; sole proprietor. This is an unincorporated business with no legal distinction between the owner and the business entity. You are entitled to all profits and are liable for all debt, losses and liabilities.
With a sole proprietorship, there is no formal structure to establish. If you are a sole owner doing business, then you are automatically a sole proprietor. As with all businesses, there may be licenses and permits required to do businesses, so check your local and state authorities. If you choose to name your business something other than your own name, you may be required to file that name with your local authority as a DBA (“doing business as”) name.
Taxes are filed using your standard Form 1040 and a Schedule C, which identifies the earnings from the business and transfers them to your personal income.
Although sole proprietorships are easy to form and relatively easy to understand, a major disadvantage is that you are personally liable for all business debt, loss and liability. You have no personal protection from actions against the business including any liabilities caused by an employee.
Partnership
A partnership is a single business owned by two or more people. Unless defined in a partnership agreement, all aspects of the business are divided equally among each partner. Partnerships are formed by registering the business as a partnership with your state.
Typically, the legal name of the business is required to be the names of the individual partners. If an alternative name is preferred, some states permit the use of a DBA name.
Taxes are filed by completing and submitting an “annual information return”, which identifies the income, deductions, gains and losses of the business. Similar to the sole proprietor, all earnings and loses “flow through” to the partners’ personal tax returns.
A disadvantage to a partnership is that all liabilities are shared by the partners. Each partner is not only liable for his or her own actions, but the actions of all the employees and partners within the business. Partners personal assets are also at risk and can be used to satisfy the partnership’s debt, whether or not the individual partner was personally involved.
Corporation (C Corporation)
A corporation is an independent legal entity owned by shareholders. Shareholders are protected from liabilities for all the actions and debts the business incurs. Corporations offer the ability to sell ownership shares in the business through stock offerings.
Some states, including NY where my firm is based, allow professionals to form a Professional Services Corporation. A Professional Services Corporation, or P.C., has the same advantages and protections as a corporation, but is exclusive to professionals such as architects, physicians and attorneys.
Corporations receive a tax ID number and are required to pay taxes separate from it’s shareholders. Unlike sole proprietors and partnerships, corporations pay income tax on its profits. The complex legal and tax requirements of a corporation could make it more appropriate for larger companies.
S-Corporation
An S-Corp is a special corporation which allows shareholders to avoid the double taxation of a corporation. The limited liability of a corporation remains but the profits and losses “pass through” the business to the shareholder’s personal tax returns like a partnership.
In order to take advantage of these benefits, Annmarie and I elected to incorporate our firm as an S-Corp.
S-Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and record maintenance.
Limited Liability Company (LLC)
A limited liability company combines the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
LLCs are not taxed as separate entities like corporations. Profits and losses are “passed through” the business to each member of the LLC. Members are required to report profits and losses on their personal tax returns, just like with a partnership.
One disadvantage of an LLC is that members are considered self-employed and are required to pay the self-employment tax contributions toward Medicare and Social Security. The entire net income of a LLC is subject to tax.
So the choice is up to you. Choose wisely.
For more information on these business structures, visit the Federal Small Business Administration (SBA) Website.
Are you running your own firm? Which business structure did YOU choose? Why did you make that choice? Please share, so others considering the launch of a new firm may learn from our comments.
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photo credit: Alan Cleaver via photopin cc
My business partner and I choose an LLC so we could have an equal partnership, its relatively easy to set up, we both still have other jobs, and we could potentially add silent members in the future. (Our company is real estate development but we do all the architecture in-house)
That said we may be changing to an S-corp for the difference in tax rules.
@Matthew – You might want to check with your CPA on this. When the entity files its taxes, there is no LLC designation. You have to elect how you will be taxed by the IRS. The default for an LLC with multiple members is to be taxed as a partnership, but you can elect to be taxed S-corp instead and thereby gain the tax benefits without having to actually change your entity type. I *think* there are limitations on its use and that once you elect to be taxed as an S-corp, you can’t go back. So consider carefully with your tax liability expert moving forward.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liability-Company-%28LLC%29
That is how I understand it as well. Thanks Chris for the comment. This is exactly how I hope this site will work. Architects helping architects.
I have to question the idea of creating a “brand” for a design firm. I see a lot of architects doing this now, and the benefits of this “identity” are not clear to me. I don’t disagree with it, but I’m also not convinced that this is an effective way to distinguish yourself.
Thoughts?
Greg,
I’m not sure I follow. Isn’t the point of a brand to distinguish your firm from others? Can you cite some examples of what you would consider to be “branded” firms?
I feel every firm already has a brand. It is just a matter of whether or not that brand is one created and controlled by you.
You, Greg, have certainly worked hard to create a very powerful brand for both your firm and your house plan business. Your effort is obvious. The logos; the colors; the design of you website are all part of your specific brand. Your work with CORA, the promotion of your wall systems and even your contributions online with social media all contribute to the La Vardera brand.
But I think your question is more directed toward naming a firm something other than the name of the architect. I am sure every firm who chooses to do this has their own reasons for doing so.
Annmarie and I chose Fivecat Studio for four specific reasons;
First, we want to differentiate our firm from other local, “smith and smith architects” firms. We wanted to create a name that people remember and a name that is not so serious. Almost daily, people comment on our name and tell us how memorable it is.
Second, we wanted to somehow reflect our personal mission as animal rescue advocates. Animal rescue is a huge part of Annmarie’s life and, as her husband, mine as well. We organize and coordinate a donation drive through the firm each year and plan to one day fund a foundation of our own through the business. The name helps support our cause.
Third, we wanted the credit for our work to go to the collaboration of all the members of our team. A name separate from the principals encourages this to happen.
and Four, we want our firm to endure and outlive Annmarie and I as the only principals. Establishing a firm as a brand name, separate from the principals makes transition to the next generation much easier.
Mark, I think you are interpreting my comment correctly. I am not saying you don’t need, or don’t set out to distinguish yourself in the ways you describe. And I realize that the business world refers this to “Branding”. But I was talking directly to the question of fictitious naming and the value of that practice.
I don’t deny that it can do the very things you say, and its also good for the value of a firm when it comes time to transition ownership. But I’m not convinced that this is a more powerful statement than working under your name, and the responsibility that represents.
I completely agree with you Greg. I don’t think one way is necessarily a better than the other and I do see the value of working under your own name. We technically have it both ways… we are legally McCarthy LePage Architects, PC, but branded as Fivecat Studio. Both identities are present on our letterhead, biz cards and the sign on the front of the building.
My comments were not meant to be directed to you Mark, but I wonder why its become so popular.
It is an interesting trend. I suspect we are seeing an influence from the tech sector and the naming of dot coms.
I’m late to the conversation, but I’ve often contemplated the “name of architect, incorporated” vs. “real cool brand name, inc.”. For me, the biggest draw of the “brand name” is the buy-out potential. Something like “FiveCat Studio” is much more sellable to a young strapping architect than “John Jones Architect”.
I mentioned ownership transitions above, and I suppose there is some appeal there. But such transitions were managed long before this trend ever emerged. Transitions with conventional firm names mean name changes when successors are brought on board – a single name may go to two or three, and eventually dropping the original owner. Such transitional name changes are not a bad thing and can send a positive signal of rejuvenation out to the market, and provide the new owners the latitude to set new directions. I remain ambivalent about the trend.
Greg,
In your original statement you said, “I’m also not convinced that this is an effective way to distinguish YOURSELF”. This is %100 true. What architecture companies are realizing is that they are no longer interested in branding “yourself/themselves” as the sum total of the founding partners but being branded/distinguished by an “idea” which is disassociated from found partners personal identity.
What this naming convention is saying is that the idea is more important than the personal identity/interests of its founding partners. This new naming convention in the filed of architecture is pivotal, as it doesn’t not alienate the collaborates but invites them to be part of an idea which does not give sole authorship to a small group of founders.
Architecture is a creative field so that is rarely a single author to a project, this name convention reinforces that notion. The tread is paying homage to the issues associated with authorship of work. Now the authorship of the work is being gifted to an idea, no longer to the 3 or 4 big boys at the top of the company food chain.
I perceive this trend as a consequence of a cultural shift to be, a more collective society driven by ideas instead of personality’s.
I don’t think most that are doing it are bringing that level of intellectual consideration to the decision. I think its plainly driven by the desire to come up with something that sounds cool.
I agree John. The trick, though, is building a firm worth buying 😉
Mark,
I really enjoy your posts. I am in business with my architect husband and we started our firm in 1989 when we were both 29 … But both us us were already registered. I am chair if the national AIA Small Firm Round Table. W are working on creating a resource for emerging professionals who want to start their own firm. We have both financial and staff support from AIA National. I think you could be a valuable resource to our effort…would you be interested? If so email me jane@f-farchitects.com or call 843.522.8422
Mark, is it legal to practice architecture as an S corp in nys?
Yes. McCarthy LePage architects PC is an S Corp. (Aka Fivecat Studio)
Mark, I am doing the research now and am confused by the entity type, LLC, mentioned in your article. Is it legal to practice architecture as a LLC in NYS? Thanks.
Yee,
Thanks for your comments. Although many states allow professionals to form LLCs, I am not sure if the current laws regarding LLCs and architects in NYS. I recommend that you contact the NYS Office of the Professions and an attorney or CPA familiar with the current rules.
Thanks for your response.
Thanks for putting together this article!
I’m an intern architect and currently half-way through the ARE 5.0 exams. I love the firm that I am a part of now, but like every intrepid student of architecture I have ideas about what it would be like to maintain my own practice.
The love of my life comes from the professional world of business and also HR, and she is perhaps more business savvy than myself. She loves my passion for architecture, and often suggests that we could make a great professional team as well. If I wanted to start a practice with her, after I become licensed, what type of business structure would we be looking at – since she won’t be pursuing an arch license?
Thanks!
Richard, Thanks for the comment and question. The answer is very specific to your state. Each state has different rules and regulations on requirements for partners in an architecture firm. I recommend contacting Patti Harris, esq of LicenseSure.biz. She’s a friend of EntreArchitect and will have the answer to your question. Good luck and keep us posted on your progress.