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The Practice Management Knowledge Community (PMKC) identifies and develops information on the business of architecture for use by the profession to maintain and improve the quality of the professional and business environment.  The PMKC initiates programs, provides content and serves as a resource to other knowledge communities, and acts as experts on AIA Institute programs and policies that pertain to a wide variety of business practices and trends.

    

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Small Firm Payment Structures

  • 1.  Small Firm Payment Structures

    Posted 08-08-2023 06:06 PM

    Hello community!

    Appreciate all the knowledge I've gained from this forum and have a question of my own I'm hoping to gain some insight on in terms of best practices.

    For context, I fairly recently became a part owner of the small firm I work for. We are set up as an LLC and as everyone who works for the firm is an owner we have never had the 'need' for a payroll service - we simply have an operating agreement through which we have set appropriate compensation which is drawn from our revenue on a monthly basis.

    Prior to my involvement I know this system was put in place for its simplicity, but I've now taken over most of the financial responsibilities for the firm and am questioning whether we should have things set up differently?

    Thanks for any insight!

    Best,

    Charlie Gaidica, AIA, NCARB



    ------------------------------
    Charles Gaidica AIA
    Skilform
    Royal Oak MI
    ------------------------------


  • 2.  RE: Small Firm Payment Structures

    Posted 08-09-2023 05:26 PM

    Charlie,

    it depends on how your LLC is organized.  I am assuming that if this has been going on for a while that the LLC is actually taxed as partnership and has not made an election to be treated as a corporation or S corporation.  Assuming a partnership, all members/owners would be paid for services via guaranteed payments and not as payroll.  You would each in turn be responsible for your own self-employment tax.  

    Highly recommend you discuss with your CPA. Also full disclosure I am a CPA, associate member of AIA, acting controller of my firm.

    Christine



    ------------------------------
    Christine Taraska
    Cube 3 Studio LLC
    Gloucester MA
    ------------------------------



  • 3.  RE: Small Firm Payment Structures

    Posted 08-09-2023 05:30 PM

    Charles – in our transition advisory work, this is a question that many firms structured as an LLC face as they add owners. You should talk to your accountant about whether there is any advantage for the LLC to elect to do business as an S-Corporation. If so, you will be paying salaries and issuing W-2s to each of the owners, same as staff. You will then divide any remaining profits based on ownership percentages.

    If you continue as an LLC without an S-Corp election, then the owners will likely continue to be paid as you have done – draws against annual profits and you might not need a payroll service.  Hope this helps.

     

    Regards,

    ___________________________

    Michael Strogoff, FAIA

    Strogoff Consulting, Inc.

    o: 415.383.7011

    m: 415.717.2755

    Michael@StrogoffConsulting.com

    www.StrogoffConsulting.com

    ownership transitions . mergers & acquisitions . practice management . leadership development . management recruiting

    This message, sent by Strogoff Consulting, may contain information that is confidential and/or intended exclusively for the person(s) to whom it is addressed.  If you received this message in error, please notify us immediately and delete this message from your system.

     






  • 4.  RE: Small Firm Payment Structures

    Posted 08-09-2023 05:46 PM

    I have a very small firm in California and I've been told that I cannot form an LLC as an Architect to reduce liability exposure, that as a licensed professional my only real protection is professional liability insurance.  I'd like to clarify this question, as it appears that some of the very large architecture firms are either LLPs or Corporations. It isn't clear if the options vary by state, either.

    Would love to get some advice for very small (ie 1-2 people) firms.

    Alison



    ------------------------------
    Alison Kendall Architect AIA
    Kendall Architecture Planning + Design
    Santa Monica CA
    ------------------------------



  • 5.  RE: Small Firm Payment Structures

    Posted 08-09-2023 07:57 PM

    Many small firms for an S Corporation, in which an profits flow through to shareholders at a lower taxation level. S corps may also benefit from R & D tax credits, depending on the type of work you do.

    You may want to join SDA (Society for Design Administration), which is a national organization made up of firm managers and administrators. You would have access to our forums, educational programs, and priceless networking. "Everything I know about running an A/E firm I've learned in SDA."

    www.sdanational.org

    www.sdaoc.org

    If you want to be added to the Orange County Chapter's database, let me know.



    ------------------------------
    Betsy Nickless, FSDA
    Controller
    Architecture Design Collaborative
    SDA Orange County Chapter
    Laguna Hills, Calif.
    ------------------------------



  • 6.  RE: Small Firm Payment Structures

    Posted 08-11-2023 02:35 AM

    Hello, Allison -

    Regarding LLCs, LLPs, and professional liability:

    I can almost guarantee that the decision is state by state, and that there will be some minor differences in the rules and what is allowed.

    When I learned about a dozen years ago that my fellow stockholders were kicking another stockholder and me (and about 1/4 of the staff) off of the ship (it was the stupid economy), I chose being a plain sole proprietor, no employees, as my business organization form, and secured general and professional liability coverage.

    At the time, I don't think that professionals in Washington could organize as an LLC.  I believe that has changed - now you can, but only if you carry a certain amount of professional liability coverage.  I haven't bothered to revisit the decision. 

    A quick search shows that California doesn't allow architectural LLCs.

    If you are nervous about liability exposure, look into increasing your coverage.  I was pleasantly surprised at the low cost of going from $1 million to $2 million when a school district requested that.

    If you are at all contemplating providing services in other states, you will find that there are different ways of doing business, becoming registered as a "foreign" entity, that they have different approaches to whether or not they collect an annual "license" feefor the privilege of working in their state, etc.  ~23 years ago I led my former firm's work for an international apparel company, became registered in about 13 other states, and spent maybe 10% of my time making sure we didn't run afoul of various state licensing boards and treasurers. 



    ------------------------------
    Joel Niemi AIA
    Joel Niemi Architect
    Snohomish, WA
    ------------------------------



  • 7.  RE: Small Firm Payment Structures

    Posted 08-09-2023 06:01 PM

    Wondering if proper payroll taxes are being withheld for all employees (FICA, Medicare, etc.) and submitted to the proper taxing entities.

    Is anyone's income reported on a 1099 or W-2?

    Even with a small firm, and even knowing how and what to do, I have always used a payroll service to ensure that the correct and required withholdings are taken and submitted to the state and fed.



    ------------------------------
    Betsy Nickless, FSDA
    Controller
    Architecture Design Collaborative
    SDA Orange County Chapter
    Laguna Hills, Calif.
    ------------------------------



  • 8.  RE: Small Firm Payment Structures

    Posted 08-09-2023 08:10 PM
    Hi Charlie,
    Our accountant does the payroll for my small firm.  As a small firm of 4, it is simple because they also do our taxes.  Payroll is primarily about paying in taxes (payroll taxes) and so whether your are a partner with ownership or an employee without ownership, payroll is linked to State and Federal taxes.  Draws should be treated the same way.  If you understand all of this, that should be fine, but consistent payroll (bi-monthly or monthly checks of a set amount / "salary") helps simplify things for our accountant and paying payroll taxes.  

    As mentioned we have our accountant handle our payroll.  They charge per person.  As my firm grows, I would likely need to hire a third party HR entity that processes payroll.  If we are blessed to grow exponentially, weʻd look to hire an in-house payroll / HR person and upgrade to an in-house accountant.  So overall, it depends if you desire to remain as is, keep things simple or scale up the business.  

    Hope thatʻs helpful.
    Regards,
    Reid T. Mizue, AIA, LEED AP
    2023-2024 President | AIA Hawaii State Council
    OMIZU architecture inc
    826 Kaheka Street #305
    Honolulu, HI 96814
    808.721.4267






  • 9.  RE: Small Firm Payment Structures

    Posted 08-10-2023 09:23 AM

    Simple is great. Hopefully you have a well-prepared buy/sell agreement in place to handle staff turnover in an equitable manner. Now is the time while things are simple to plan for the growth of your firm. When a potential desirable hire comes along looking for a stable paycheck and health and retirement benefits, you will be ready. Keep in touch with a good tax accountant to make sure you're moving in the right direction.



    ------------------------------
    Philip Kabza AIA
    SpecGuy Specifications Consultants
    Mount Dora FL
    ------------------------------



  • 10.  RE: Small Firm Payment Structures

    Posted 08-10-2023 06:21 PM

    Charlie, Congratulations!  The transition from employee to owner is an exciting process.  You've receive a lot helpful comments and I agree with.  I've been a shareholder with multiple (owner-architect) business partners and currently run a small firm.  When there is more than one owner, my suggestion is to differentiate regular compensation via salary and revenue sharing based on ownership.  There are many benefits to think as an employee and an owner, including empathy, longevity, and quality.  As others have stated, local accountants are a great source for payroll services with a small number of employees.

    Good luck!



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    Curtis Wilson AIA
    Wilson Architecture
    Eugene OR
    ------------------------------