Welcome back, ArchiHacks fam! We will talk about three major things you need to know about architecture firms and how they operate today! The three major topics will be broken into smaller units to highlight the different aspects of the business. While this information does help support your decision when considering a firm, it also provides insight into how an architecture firm is structured if you want to open a firm. Can you imagine yourself opening up your design firm? Yes, no, or maybe? It’s not for the faint of heart! Whether you plan to start or join a new firm, this information is often overlooked or rushed in most architecture curriculums, so let’s get to it!
Studio Size
The first and foremost important point to understand with a firm is its size! As such, you should ask yourself what studio size fits best with you or your future goals. Each firm size has different pros and cons, but keep in mind that doesn’t correlate with the size of projects a firm can receive. Small firms can receive multi-million dollar projects, and big firms can also work on dozens of small-scale projects!
Small firms are ideal for individuals who like to wear multiple hats! Since there are fewer people to lean on and fewer resources, employees need to be more self-reliant while working closely with their small team. Firms of this size are very conscious of the team balance and carefully craft their teams to mesh well. If you seek a role that will allow you to see projects from start to finish with a large amount of responsibility, a small team may be for you!
Medium-sized firms tend to combine both small and large incentives. The overall firm can break into smaller teams that focus on more specific areas of work (typically types of projects or phases of a project). If one group becomes extremely busy, they can receive support from other teams within the office. Please note, individuals pulled into projects outside of their team are still responsible for their duties within their team – if one gets too busy, it can be a tricky balancing act!
Larger firms have more resources, a diverse project portfolio, and more personalities. Larger firms also break down into smaller teams but tend to be more concrete in having specific seniors, designers, and drafters dedicated to each group. Roles and responsibilities tend to be more rigid and defined in large firms. If you are looking to play a more specific role in a team, such as a project manager, draftsperson, arch visualization, or conceptual designer, then a larger firm with such a structure may be for you!
In most scenarios, you might not have a clear idea of which size fits better with you until you experience all the firms. On the other hand, it will likely start as a studio/atelier and eventually work its way up if you consider starting your firm! It may be a stretch to reach AECOM, HDR, or CallisonRTKL, but not impossible!
Organizational Type
Once you settle on a firms’ size, the second thing you’d want to understand is the organization of the design practice. We often see two methods of organizational structure; studio-based, department-based, or a hybrid of the two. Each firm will have its hierarchical and design structure nuances, so it’s a critical and engaging question you should ask management or yourself.
Studio-Based
Firms that follow a studio-based organization most likely fall between small to mid-sized and develop projects through teams or pods of people. These studios can take projects through preliminary design to construction, in which case, its members, one point or another, will have multiple roles in getting a project built.
Beyond setting a standard team, these studios can be differentiated by project types, i.e., retail, residential, institutional, and the list continues. The benefit of having this type of organization is that each team is specialized and understands the nuances of the typology. However, this doesn’t mean that a studio member can’t expand to other studios, but management most likely would want the workforce and knowledge to stay within the prospective market.
Department-Based
Firms following this organization most likely emphasize efficiency and optimization of projects, typically in large firms with hundreds of small projects that produce revenue for the business. Unlike a studio-based organization, a project would go through departments or phases from initial design to construction with a different team at each stage. Like an assembly line, this workflow maximizes the production of drawings in a controlled manner to produce a steady flow of revenue.
This could get repetitive over time, so if you like to razzle and dazzle with dynamic projects, you might want to avoid a firm organized by departments. However, we’d like to note that bigger firms can also break down by project types, studios, then departments where the production and quality are high and fast.
Now that you know about which firm size and the firm’s organizational structure, this is typically where most designers will make their decision. Of course, there are other variables like design style that are equally important. Still, those two key points are crucial and define your experience in the architecture, engineering, and construction industry. If you are not considering opening your firm, you can stop here, but I hope you continue!
Business Operations
I’m assuming you continued reading, in which case, welcome to the last point! We want to note that this point, in particular, may not influence you much when considering a firm, but it provides some clarity in how one can set up an architecture practice. Let’s take a moment and imagine that you decide to start your design firm but aren’t sure what business entity you’d want to use. Here’s a breakdown of the different business entities that you can utilize when starting your practice!
The simplest way to start your design firm’s business operation is a sole proprietorship! This is quite common for small and possibly mid-size firms, but after a certain amount of employees, it will be more liable to your practice as it grows. However, if you consider opening a small firm and working on smaller-scale projects, this business organization will work for you!
Pros
- Simple and low cost to create
- Easy to dissolve
- Single Owner
- Business revenue is income for the owner
- Business is taxed once
Cons
- Limited capital to invest in the business since it’s tied to the owner’s assets
- Lots of liability – The owner is the only one at risk
- Certain items aren’t deductible from business expenditures (Consult a tax advisor)
- Business is only operable as long as the owner’s alive. No succession option in a sole proprietorship.
The second simple way to start a firm is to find someone or multiple people to be your partner(s), although I can’t imagine a firm with more than 3-4 partners just starting. This is great if you love the design but dread the more practical side of architecture – ahem – like learning about business entities. Partners bring different expertise and skills that one lacks, so the overall skillset of the firm is well-balanced!
Pros
- Revenue is taxed once
- Easy to set up business as a partnership
- With more than one owner, the higher the potential of capital investments into the business
- Each partner brings a unique skill, knowledge, or experience to the business.
Cons
- With more people making decisions, coming to a final decision will take longer.
- Lots of liability even with partners; it’s just spread evenly now.
- certain items aren’t deductible from business expenditures
- The business entity would dissolve upon the death or withdrawal of a partner(s)
Limited Liability Partner
Another partnership organization is the limited liability where it is similar to a partnership but protects the partners’ assets. This dramatically reduces the partners’ liability from creditors going after their assets if the business fails or another dramatic event.
Like the limited liability partnership, Limited Liability Company (LLC) is probably the most ideal for small to mid-sized firms because it protects the owners’ assets. If anything negative happens, only the company would be held liable. The advantage of an LLC is they are similar to a general partnership and have the advantages of limited liability per individual. Profit or losses is derived from the business and passed onto the members of the LLC, and it’s proportional to the capital each partner invested when starting the company. For example, partner A puts in 65% of capital, partner B puts in 25%, and partner C puts in 10% when starting. From here, let’s say the business makes a profit of $100,000, which is after overhead costs of the business, in other words, leftover money after paying everything or everyone. In this situation, partner A makes $65,000, B makes $25,000, and C makes $10,000.
Pros
- Simple and low cost to create
- Simple to dissolve or close
- Can add, change, or remove members of the business in the future
- Profits or losses passed onto the owners
- Revenue is taxed once
- Limited liability = personal assets of each owner are protected from creditors.
- Both individuals and business entities can be members of LLC
- Can change into an S-Corp or C-Corp
Cons
- Taxes are on income earned, not the money passed onto the owners. If owners decide to keep some profits in the business checking account, it’s still considered income and taxed.
- Other tax advantages with S-Corp or C-Corp (Consult with a tax advisor)
- Harder to attract outside equity capital (Investors)
The business entity classified as C-Corp is typical for big firms with an infinite number of owners and ownership divided by shares. A board of directors manages corporations, and their mission is to benefit the stakeholders.
Pros
- The company’s assets are at risk, not the shareholders’, and all owners’ assets are still protected.
- Raise capital through investors to assist the company’s growth through the selling of stock shares
- Utilize stocks to retain and incentivize talent
- Firm ownership and management can be changeable and allow continuity even if the founders are no longer involved = unlimited life span.
- Benefits to employees are tax-deductible.
Cons
- The process to set up is complex and costly.
- Taxed twice; Business profits are taxed at the corporate level, and distributions (dividends) paid out to business owners will be taxed as capital gains.
- More oversight from federal, state, and local levels.
S-Corp is a hybrid between partnerships and corporations! This is a closely held corporation where all the owners are involved in the business, and often these partners are chosen internally given private shares of the company. However, S-Corps have limitations on who can be a shareholder, how many shareholders, and so forth. If you are curious about what stipulations a business will need to follow to classify as an S-Corp, read additional information from the IRS.
Pros
- Revenue is passed through eh business and taxed once
- Limited liability
Cons
- Limitations on who can be the owner
- Regulations to meet to classify as an S-Corp
- Complicated to set up like C-corps
Maybe you aren’t considering opening your firm, and instead, you want an in-depth breakdown of how a business of architecture is working. Who knows, perhaps you find yourself less concerned about designing and more involved with keeping the practice afloat through an understanding of architecture and business acumen.
Well, that’s all we have for you today, and if you’ve made it this far, you deserve a cookie. I hope you found this article interesting and took something from it! Sharing is caring! We hope to provide you with valuable insights and share them with someone who might find this helpful. Make sure to follow our Youtube and Instagram for more content!
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