Introduction
A crucial early choice is how to structure your business. Your decision will have significant effects on both your personal and financial situation, so you must exercise thorough diligence. Your business structure primarily determines how personal and corporate assets are handled as well as your tax plan. Many people incorrectly believe that it offers liability protection.
Whether or not you operate under the cover of a business, if you are a certified professional (such as an interior designer, structural engineer, architect, etc.), you are accountable for your actions. There are further protections available if you do not hold a professional license, which we will discuss in the pages that follow. Start by having a fundamental grasp of your company’s trajectory. Even in five to ten years, it can be difficult to forecast where your firm will be, but visualizing what success actually looks like may point to one organizational structure over another.
These kinds of restrictions typically aim to promote open ownership and management of a professional architecture business. As you read about business structures here and elsewhere, you’ll see that liability is a major concern. However, as I already indicated, regardless of how you choose to structure your business, as a design professional you are individually liable for your professional conduct. The business structure does have some bearing on the assumption of obligation. You can allocate some of your financial responsibility to your insurance, but you can never totally absolve yourself of all responsibility.
You must always carry this professional obligation. One more thing about the organizational structure has to do with practicing between states. You might find yourself working in more than one state as your company expands to become more aware of and linked to the rest of the world. Your business structure may not automatically be considered legal in other states or nations just because it is in one. Even if you don’t have an office there, you still have to abide by the legal requirements of any state or nation you practice in. If you’re not sure which structure is best, pick the most basic one to begin starting. As your firm grows, you can transition into the other structures.
Sole Proprietorship
Due to its simplicity, the single proprietorship is frequently chosen by professionals as their first business form. It is intended for a single person without any staff. A sole proprietorship has just one drawback, and it’s a significant one. The assets and liabilities of your business and personal life are legally considered to be one and the same. This implies that anything you own, including your house and vehicle, may be utilized as collateral in the event of a lawsuit or other legal action. There is no cap on your personal and professional liabilities.
It would help if you manage your personal and professional assets separately even though there isn’t a legal distinction between them. Although not required by law, this is nevertheless a wise business decision. Opening a separate business checking account to handle all business activities can make tax filing simpler and make it possible to quickly see and track the health of your company. This division will make the transition to a new corporate structure much simpler when you expand and make that decision in the future.
A sole proprietorship can be established quickly and easily. If you want to, you can complete it today. It’s a first choice, and while it’s significant, it’s not a final one. As your firm develops, you can choose to employ a different structure at any time.
Partnership
The skills of individuals are the foundation of businesses. You’re likely to be better at certain things and worse at others since it’s uncommon for one person to possess all the qualities required to manage a successful business. A partnership makes use of these well-known advantages and disadvantages and divides the burden and stress of starting up. If you’re not doing something alone, you are automatically a partnership, which is a type of legally recognized company.
Creating a partnership agreement is advised but not necessary. This paper outlines the specifics of how you will be running your business. Without one, your state will assume that every owner is an equal-share partner, and the business will be subject to the laws of your state as based on the Uniform Partnership Act. The Uniform Partnership Act will in some way affect your company regardless, thus getting legal advice is also advised here.
In-depth explanations of matters like ownership holdings (%), the original investment, how profits and losses are handled, decision-making, adding or removing owners, liquidation, and dispute resolution are all included in a partnership agreement, among other things. The tax implications of this business structure are comparable to those of a sole proprietorship because each shareholder receives a portion of the company’s net income. The tax must be paid by each owner on their individual tax return.
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Corporations
There are different substructures (C-Corp, S-Corp, Professional Corp, etc.) under the corporate umbrella, each with its own set of benefits and drawbacks. Once more, this is only meant to serve as an overview and is not intended to be taken as legal advice. Individual shareholders’ personal assets are kept apart from the assets and liabilities of the organization thanks to the corporate structure. Since it is a separate legal entity from other structures, it is typically far more complicated to create, file taxes for, and maintain.
If you go this way, you’ll need professional assistance. An individual shareholder’s personal assets cannot be utilized to satisfy any business obligation because the corporation is a different legal entity. However, there are some exceptions, including when you personally harm someone, personally guarantee a bank loan, fail to report employee taxes to the government, engage in willful fraud or illegal activity, or treat the corporation as an extension of your personal affairs rather than a separate legal entity.
Shareholders are a corporation’s legal owners. A board of directors is chosen by the shareholders to run the corporation’s affairs, and its activities are governed by a set of bylaws. A private corporation’s shares are bought and sold privately, as opposed to publicly traded corporations, whose shares are bought, sold, and exchanged on the open market. Private firms typically, but not always, have stockholders who are also employed by the company and manage its day-to-day operations. They are paid for this work similarly to other employees, in accordance with their level of expertise and contributions. As a shareholder, they will also get dividends of the company’s profits (or losses).
As you might expect, a corporation requires significantly more filings than any other type of structure in order to be established and maintained. The name of your company may change if you choose this arrangement. In California, architecture businesses must include the name of one of the founders or owners as well as the phrase “Architect” or “Architects”. You must issue stock and conduct shareholders’ meetings in addition to writing yearly reports. Even though it is more complicated, the tax and legal benefits frequently outweigh the additional work. It’s a logical — almost necessary — evolution for a developing design practice when a business expands beyond a small number of customers and staff.
LLC/LLP
Limited liability partnerships (LLPs) and limited liability companies (LLCs) provide the limited liability protections of a corporation with the pass-through taxation simplicity of a sole proprietorship or an S-Corp. As an owner, you are only liable for the amount you put into the business; if it fails, you will only be out that sum.
The IRS regards a subgroup of single-member LLCs slightly differently. The IRS will automatically categorize and tax your company as though you were a lone owner. As a result, you will need to pay self-employment tax on all of your net income. However, if you want, you can be taxed as a company. Again, unless the partners choose to be classified as a corporation, multi-member LLCs are handled as partnerships. On their income tax returns, the partners are each subject to individual taxation.
The benefit of choosing to be taxed as a company, more precisely as an S-Corp, is that the owner(s) will get a salary, with the LLC covering payroll taxes, and any surplus earnings (given via dividends) won’t be subject to self-employment taxes. The C-Corp form enables the LLC to keep all profits within the company and not transfer any of them on, helping to postpone tax obligations when dealing with possibly higher tax brackets.
The liability protections of an LLC or LLP are comparable to those of a corporation in that the owner(s) cannot be held personally accountable for any claims, verdicts, or debt arising out of the LLC or LLP.
Conclusion
In conclusion, choosing the right business structure is a crucial decision for any entrepreneur or a business owner. The type of structure you choose can greatly impact your personal liability, taxes, and overall success. It’s important to carefully consider your specific business needs, goals, and long-term plans when making this decision. Consider seeking guidance from a professional such as a business attorney or accountant to ensure that you choose the right structure for your business. With the right structure in place, you can focus on growing and expanding your business with peace of mind.
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