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.
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.
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.
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.