I am researching business structures for practices and am curious if this community can offer insights into the success of alternative models. I think I understand the basic principles behind sole proprietorship, LLCs, corporations, non-profits, partnerships, etc. but I'm curious if there might be a rise in new business models as younger generations with different values start to become a larger share of leadership amongst architecture practices.
My personal experience is in an incorporated practice where there is a partnership of principles who own shares of the firm. I believe this is the most common business structure for architecture practices. While every firm is the keeper of its own fate and is responsible for the equity of all staff in the office I wonder if this business structure often leads to equity disparities amongst levels of staff.
I would be surprised to see a large increase in non-profit practices in the future, but what about cooperatives? I know The Architecture Lobby is trying to start a cooperative of small practices but what about a single practice structured as a cooperative? What would the ramifications be?
You'll get a lot of people on here wishing they worked for an ESOP so they could share in the profits. I'm not a fan personally, but to each their own. The idea of a non-profit, however, is terrifying. That's a different profession as far as I'm concerned.
In general architecture firms are set up like law practices. The vast majority of firms are less than 3 people, but the majority of of employees work for larger companies.
Thanks for the comment. Curious, can you speak to what you dislike about ESOPs?
Nov 3, 21 1:48 pm ·
·
RJ87
I forget who it was on here that I was talking to about this the other day. But the gist is that I grew up hearing my dad, who owned a small business, explain it to us as kids like this: "I don't get paid, I just keep what's left."
So I've always viewed it as a balance of risk / reward. If you want to show up everyday & receive the same level of compensation regardless of outcome (excluding getting laid off obviously), be an employee. If you want to take the risk not getting a steady paycheck & your income shifting with good & bad times, be an owner. Don't ask for both.
Now I do believe in giving out bonuses that go up in good years & down in bad years. But that's all discretionary & not directly tied to revenue.
I'm sure there are many benefits as an employee & I totally get why some people like the idea of them. I'm pretty laissez-faire when it comes to economics, life's hard by all means go get money whatever way you can as long as you're not a terrible person.
its immature to believe that competence hierarchies are unjust. Inequities among different levels of staff are part of life. If you join a karate class do you get a black belt and get to instruct on day one? Radical changes to business structures are uncommon because they don’t work. Profit sharing can be made to work, so long as it doesn’t muddy competence hierarchies. In construction hierarchies are necessary for obvious reasons. I’m tired of entertaining this notion that you graduate and have equal status and stake in a 30 year old business that someone else started, probably struggled personally and financially for in their first decade…just because buzzword “equity”. Equity applies when comparing apples to apples experience and seniority.
So I guess my question is what benefits do alternative structures have on quality of output? Your post seems to care only about internal job satisfaction - which is important, but not primarily important to run a service firm that people want to pay for.
Nov 3, 21 11:35 am ·
·
gwharton
The biggest differences come from how the organizational structure influences decision-making incentives by the firm leadership. For instance, publicly-traded companies have radically different managerial incentives than privately-held companies. Same for companies with pass-through taxation structures vs. C Corporations.
You seem pretty upset that I'm even posing the question that alternative business structures MIGHT afford a more equitable experience for all levels of staff. Equitable not equal as you seem to be understanding. Of course, the college graduate doesn't get paid the same as senior architect but are there better ways to more equitably share profits?
I've witnessed what I would call abuse of profits where partners are giving each other tens of thousands of dollars on top of their already large salaries when the other 90% of the staff have not received additional bonus compensation for years. It could be that this is just a problem for this specific practice but the purpose of this post was just to inquire as to whether other business structures might steer practices into automatically being more equitable with their profits.
Nov 3, 21 1:39 pm ·
·
x-jla
Not upset, just skeptical. Start a firm and try it out. I will guarantee that by the time you are making a comfortable living, after a few divorces and decades of eating ramen soup, that you will be willing to more evenly share profit with some 23yo that can’t tell a Dado joint from a Dodo bird.
Nov 3, 21 3:41 pm ·
·
x-jla
It’s just one of those easier said than done things.
But if you want to buy a bunch of magnets and try to build a perpetual motion machine i won’t discourage that either…just one of those things that you have to do and prove it’s effectiveness. Sure in theory you can design lots of different business models, but with the human factor it becomes hard to implement for lots of reasons.
Nov 3, 21 3:43 pm ·
·
x-jla
In a product oriented business this seems more doable. But In a professional service business it just seems unlikely
Nov 3, 21 3:46 pm ·
·
mega_pointe
I appreciate your comments - and your optimism. :)
Ownership/business structure really depends on a lot of different factors, and many firms evolve through different types of legal organization over time. The main considerations are:
How are you going to capitalize the business?
How many owners will there likely be?
Will you have employees?
What are your state legal requirements for firm licensure?
What sort of taxation structure do you want?
Taxation structure and employee expectations are usually the deciding factors. Most owners prefer the pass-through tax structure of S Corporations, Partnerships, and LLCs. That means that the business itself does not pay taxes. All its income is "passed through" to the owners on a pro rata basis and they pay income tax for it on their personal tax returns. C Corporations pay taxes on their income directly, which can create double-taxation issues for profit distributions when you have to pay taxes on that income again as an owner.
Partnerships are extremely rare now that LLCs are established as business entities in every state. Partnerships have little to no limitation of liability for owners, where LLCs limit personal liability much like corporations do (unless a member of an LLC is negligent, they generally can't be sued directly for the company's liabilities). S Corporations are obviously similar, but unlike C Corporations have some specific limitations on how their ownership structure is allowed to be formed. LLCs can be organized however you want, and own whatever. S Corps can't. But if you are planning to have a bunch of employees on payroll, you may want to organize as an S Corp instead of an LLC for various legal and tax reasons.
C Corps have very specific legal constraints on how they are organized and run, as well as the double taxation thing I mentioned above. The big advantage of C Corp is being able to sell stock to capitalize the business. Also, as a general (but not universal) rule, if you want to be a 501(c)3 nonprofit, you need to be a C Corporation. Honestly, I don't see any reason for an arch firm to go through all the trouble to be a formal non-profit.
If you want to have an ESOP, you need to be an S Corp or C Corp. Doing that with an LLC would be a royal pain.
In some states, to practice architecture, the firm structure needs to be a specific type of Professional Service org: a PS corporation or PLLC.
But regardless of all this, if you are trying to make this decision, talk to a lawyer and an accountant about it before committing to anything.
Oh, I forgot one thing. There's a new thing floating around you may have heard of called the "B Corporation". https://bcorporation.net/ This is not a formal legal or taxation type of entity. It's just a branding exercise for other types of businesses.
From what I understand via my accountant you can have an LLC or pllc and still file taxes as an s Corp. he said that there is no need to register business as such with state agencies.
Thanks so much for the descriptive response, gwharton.
Nov 3, 21 1:46 pm ·
·
gwharton
x-jla: the registration requirements for a company practicing a regulated profession vary considerably from state to state (from none at all to quite prescriptive), so talking to a lawyer about that for any specific case is recommended.
Alternative Business Structures
I am researching business structures for practices and am curious if this community can offer insights into the success of alternative models. I think I understand the basic principles behind sole proprietorship, LLCs, corporations, non-profits, partnerships, etc. but I'm curious if there might be a rise in new business models as younger generations with different values start to become a larger share of leadership amongst architecture practices.
My personal experience is in an incorporated practice where there is a partnership of principles who own shares of the firm. I believe this is the most common business structure for architecture practices. While every firm is the keeper of its own fate and is responsible for the equity of all staff in the office I wonder if this business structure often leads to equity disparities amongst levels of staff.
I would be surprised to see a large increase in non-profit practices in the future, but what about cooperatives? I know The Architecture Lobby is trying to start a cooperative of small practices but what about a single practice structured as a cooperative? What would the ramifications be?
Thanks for your insight.
You'll get a lot of people on here wishing they worked for an ESOP so they could share in the profits. I'm not a fan personally, but to each their own. The idea of a non-profit, however, is terrifying. That's a different profession as far as I'm concerned.
In general architecture firms are set up like law practices. The vast majority of firms are less than 3 people, but the majority of of employees work for larger companies.
Thanks for the comment. Curious, can you speak to what you dislike about ESOPs?
I forget who it was on here that I was talking to about this the other day. But the gist is that I grew up hearing my dad, who owned a small business, explain it to us as kids like this: "I don't get paid, I just keep what's left."
So I've always viewed it as a balance of risk / reward. If you want to show up everyday & receive the same level of compensation regardless of outcome (excluding getting laid off obviously), be an employee. If you want to take the risk not getting a steady paycheck & your income shifting with good & bad times, be an owner. Don't ask for both.
Now I do believe in giving out bonuses that go up in good years & down in bad years. But that's all discretionary & not directly tied to revenue.
I respect your perspective. I'd be curious to hear from someone who's currently benefiting from an ESOP structure at their practice.
I'm sure there are many benefits as an employee & I totally get why some people like the idea of them. I'm pretty laissez-faire when it comes to economics, life's hard by all means go get money whatever way you can as long as you're not a terrible person.
its immature to believe that competence hierarchies are unjust. Inequities among different levels of staff are part of life. If you join a karate class do you get a black belt and get to instruct on day one? Radical changes to business structures are uncommon because they don’t work. Profit sharing can be made to work, so long as it doesn’t muddy competence hierarchies. In construction hierarchies are necessary for obvious reasons. I’m tired of entertaining this notion that you graduate and have equal status and stake in a 30 year old business that someone else started, probably struggled personally and financially for in their first decade…just because buzzword “equity”. Equity applies when comparing apples to apples experience and seniority.
So I guess my question is what benefits do alternative structures have on quality of output? Your post seems to care only about internal job satisfaction - which is important, but not primarily important to run a service firm that people want to pay for.
The biggest differences come from how the organizational structure influences decision-making incentives by the firm leadership. For instance, publicly-traded companies have radically different managerial incentives than privately-held companies. Same for companies with pass-through taxation structures vs. C Corporations.
You seem pretty upset that I'm even posing the question that alternative business structures MIGHT afford a more equitable experience for all levels of staff. Equitable not equal as you seem to be understanding. Of course, the college graduate doesn't get paid the same as senior architect but are there better ways to more equitably share profits?
I've witnessed what I would call abuse of profits where partners are giving each other tens of thousands of dollars on top of their already large salaries when the other 90% of the staff have not received additional bonus compensation for years. It could be that this is just a problem for this specific practice but the purpose of this post was just to inquire as to whether other business structures might steer practices into automatically being more equitable with their profits.
Not upset, just skeptical. Start a firm and try it out. I will guarantee that by the time you are making a comfortable living, after a few divorces and decades of eating ramen soup, that you will be willing to more evenly share profit with some 23yo that can’t tell a Dado joint from a Dodo bird.
It’s just one of those easier said than done things.
But if you want to buy a bunch of magnets and try to build a perpetual motion machine i won’t discourage that either…just one of those things that you have to do and prove it’s effectiveness. Sure in theory you can design lots of different business models, but with the human factor it becomes hard to implement for lots of reasons.
In a product oriented business this seems more doable. But In a professional service business it just seems unlikely
I appreciate your comments - and your optimism. :)
Ownership/business structure really depends on a lot of different factors, and many firms evolve through different types of legal organization over time. The main considerations are:
Taxation structure and employee expectations are usually the deciding factors. Most owners prefer the pass-through tax structure of S Corporations, Partnerships, and LLCs. That means that the business itself does not pay taxes. All its income is "passed through" to the owners on a pro rata basis and they pay income tax for it on their personal tax returns. C Corporations pay taxes on their income directly, which can create double-taxation issues for profit distributions when you have to pay taxes on that income again as an owner.
Partnerships are extremely rare now that LLCs are established as business entities in every state. Partnerships have little to no limitation of liability for owners, where LLCs limit personal liability much like corporations do (unless a member of an LLC is negligent, they generally can't be sued directly for the company's liabilities). S Corporations are obviously similar, but unlike C Corporations have some specific limitations on how their ownership structure is allowed to be formed. LLCs can be organized however you want, and own whatever. S Corps can't. But if you are planning to have a bunch of employees on payroll, you may want to organize as an S Corp instead of an LLC for various legal and tax reasons.
C Corps have very specific legal constraints on how they are organized and run, as well as the double taxation thing I mentioned above. The big advantage of C Corp is being able to sell stock to capitalize the business. Also, as a general (but not universal) rule, if you want to be a 501(c)3 nonprofit, you need to be a C Corporation. Honestly, I don't see any reason for an arch firm to go through all the trouble to be a formal non-profit.
If you want to have an ESOP, you need to be an S Corp or C Corp. Doing that with an LLC would be a royal pain.
In some states, to practice architecture, the firm structure needs to be a specific type of Professional Service org: a PS corporation or PLLC.
But regardless of all this, if you are trying to make this decision, talk to a lawyer and an accountant about it before committing to anything.
Oh, I forgot one thing. There's a new thing floating around you may have heard of called the "B Corporation". https://bcorporation.net/ This is not a formal legal or taxation type of entity. It's just a branding exercise for other types of businesses.
From what I understand via my accountant you can have an LLC or pllc and still file taxes as an s Corp. he said that there is no need to register business as such with state agencies.
Thanks so much for the descriptive response, gwharton.
x-jla: the registration requirements for a company practicing a regulated profession vary considerably from state to state (from none at all to quite prescriptive), so talking to a lawyer about that for any specific case is recommended.
Block this user
Are you sure you want to block this user and hide all related comments throughout the site?
Archinect
This is your first comment on Archinect. Your comment will be visible once approved.