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What Type Of Business Entity Should You Form

Starting an architectural firm is a big decision. One of the next big decisions for the architectural entrepreneur is deciding what form of business entity will be appropriate for your current practice as well as your future practice. While a licensed architect can certainly just go out there and practice as a sole proprietor, formation of an appropriate business entity shields the architect from personal liability in most business contexts (architects cannot be shielded from claims arising out of their own negligence or misconduct, although that risk may be borne by an insurer).

Each state has its own rules about which entity types are permissible but listed below are descriptions of the most common entity types for design professionals, and the benefits and limitations of each type:

Entity TypeBenefitsLimitations
Professional Corporation
  • Permitted in all states
  • Typically requires all shareholders, directors, officers to be licensed.
  • Double taxation – the corporate income is taxed and distributed to the owners of the business, where taxes are levied again on each owner’s personal income - unless Subchapter S election (see below)
Professional Limited Liability Company
  • Offers the most flexible ownership, profit/loss allocation and management structures
  • Members (owners)/managers can be individuals or professional entities, making the PLLC a good choice for joint ventures or collaborations between firms
  • "Flow-through" entity – all income is allocated based on ownership interests and taxed at the personal level
  • Typically requires (i) all individual members/managers to be licensed and (ii) entity members to be authorized to practice
  • This entity form may not be recognized by all states
Limited Liability Partnership
  • "Flow-through" entity – all income is allocated based on partnership interests and taxed at the personal level
  • At least two partners are required
  • All partners must be licensed
  • Death of a partner may automatically dissolve the partnership
  • This entity form may not be recognized by all states
General Corporation
  • Typically allows non-licensed ownership, e.g., investors, non-licensed professionals
  • Best type of entity for future growth compared to other entity types because the less restrictive ownership
  • This entity type is available in a limited number of states because "mixed" ownership is disfavored by many
  • Double taxation – the corporate income is taxed and distributed to the owners of the business, where taxes are levied again on each owner’s personal income - unless Subchapter S election (see below)
Subchapter S Election for Corporations
  • No double taxation – each owner is taxed individually on his or her ownership percentage of the firm's net income
  • Limited to 100 shareholders, all shareholders must be individuals and non-resident aliens may not be shareholders
  • Limited to one class of stock

Often, your goals for the new firm, the services and owners contemplated, and the costs of formation will dictate the appropriate entity type. Choosing the right entity for you is the first step to building success.

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About The Author

Patti Harris spent 13 years as the Managing Partner of a New York City-based construction law firm; in addition to overseeing the business operations of the firm, she advised clients on office and business management issues.

Learn more about Patti on our About page.

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