Deciding On A Legal Business Structure
In order to determine the most appropriate business structure for our studio firm, we researched the various legal structures that are commonly used by architecture and design firms and discussed their advantages and disadvantages. Doing this allowed us to choose a business structure that takes into consideration the range of skills and experience that the members of our architecture firm are able to offer as individuals as well as within a group.
Types of Practice:
Sole Trader
This type of business is solely owned by one individual that makes all the decisions when advertising and providing its services to clients. It is a simple, low-cost legal structure where the owner receives all the business revenue as income and the capital that is invested into the business is limited to the personal funds or loans of the owner. The liability is unlimited meaning that the personal assets of the business owner are at risk and they can be made bankrupt.
Limited Companies
A company is established by registration under the Companies Act 2006 and the owners are given a Certificate of Incorporation along with a company registration number. In this type of business structure, the professional liability is limited which means that in a potential lawsuit, only the business assets would be at risk and personal assets would be protected. Directors, who are usually employees of the company are shareholders and the profits are distributed among them. Shareholders cannot make contracts binding on the company and are not personally liable for debts or obligations of other shareholders.
Limited Liability Company (Ltd)
Architecture practices usually incorporate as a private company and the directors, who are shareholders are typically individuals who would have otherwise been partners. This type of company must use the word ‘limited’ or ‘ltd’ after its name.
Public Limited Company (PLC)
Unlike a Limited Liability Company, the shares of a Public Limited Company may be freely sold and traded to the public (such as on the Stock Exchange), and this type of company must end its name with ‘public limited company’ or ‘plc’.
Limited Liability Partnership (LLP)
This type of business structure is set up by registration with the Registrar of Companies and acts a cross between a traditional partnership and a limited liability company. Similarly to a traditional partnership, the members are taxed on their share of profits meaning they are effectively treated as self-employed. However, unlike traditional partnerships, some elements of the business’ accounts will be on the public record. An LLP can avoid the issue of being jointly and severally liable as it has a separate legal personality and can sue or be sued in its own name.
Chosen Legal Structure:
Collectively we decided on a Partnership for our legal business structure as we want to ensure that there is equality throughout the company, and this was the most suitable option for the size and status of our practice.
Partnership
This option has a simple structure and is typically formed by sole traders who decide to join forces and make a business. It does not have legal status, the only legal requirement being that the partnership is registered with HMRC. Each partner in the business registers for self-assessment and completes a separate tax return. Furthermore, each partner is personally liable for any losses.
Advantages
- Flexibility and support
- Broader skills set
- Individual status as professionals but work together as partners in the business
- Easy to create
- Partners to decide how to share the profits
- Private accounts
- Not liable for the criminal actions of other partners
- Every partner is an agent of the practice
- Joint liability
- Financial transparency
- Collection of individuals and not a corporate body
- Legal action can be taken against a partner jointly (in the name of the partnership) or severally (in the name of the individual partner)
- Liable for all the debts of the practice and future obligations
- A retired partner is still liable for debts incurred before his retirement
After the legal business structure for our architectural studio was decided, we were able to come up with a statement for the structure of our (hypothetical) partnership to declare the responsibilities and liabilities of all members.
Statement of Hypothetical Business Structure
As a team we decided our legal business structure would be a partnership allowing for equality throughout the company.
Archi 4 is a registered (hypothetical) partnership of 23 individuals, who have come together to form an architectural studio that will work on an exhibition design in the Eldon Building. Archi 4 has agreed to record their progress in 3 ways, namely, a blog, website and Instagram. Each member has agreed to contribute in at least one of the following fields: Research, Presentation, and Social Media record keeping. Member’s roles and responsibilities have been decided based on their skills and experience.
As Archi 4 is an ordinary partnership, all members share in all liabilities and therefore share in paying debts.
Funding for the partnership has been provided by the University of Portsmouth, School of Architecture; a design budget of 500 pounds, along with an additional 100 pounds for setting up of a professional website.
It should be noted that Archi 4 has the choice of an additional sponsorship of 500 pounds.
Foster + Partners
When deciding on the legal business structure for our firm we looked at the British international architecture firm Foster + Partners for inspiration.
It was useful to see how a partnership can work on such a large scale and we were able to understand how this organisational structure can benefit a practice.
The different design teams work in small groups and develop the project from start to finish while consulting with other specialist teams, resulting in coherent, high quality design solutions.
We have been replicating this style of working in our own studio firm by splitting off into smaller groups to work on certain tasks, then we come back together to discuss the outcomes and allow for input from everyone.
As we develop and finalise the legal business structure of our practice we will refer back to Foster + Partners and the way that they work to ensure that we are moving in the right direction.
References
https://www.architectmagazine.com/technology/lighting/partnerships-collaborations-and-transitions_o
https://www.fosterandpartners.com/
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