Choosing the right business structure is a crucial decision for solo architects in California. The choice of business entity determines how the architecture practice is taxed, the extent of personal liability protection and personal asset protection available to the architect, and the administrative requirements the architect will need to manage in operating the architecture practice.

A future article titled “What are the Business Structure Options for Two or More Architects in California?” will discuss the additional options available when two or more architects start practicing architecture together, however, for architects practicing architecture solo in California, the options are limited to sole proprietorships and California Professional Architecture Corporations.

This article provides an overview of the various business structure options available to architects practicing architecture solo in California, helping these architects to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Architects

Summary of Practicing Architecture as a Sole Proprietor

The primary benefit of a sole proprietorship for architects is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward. However, a sole proprietorship is not a separate legal entity, which means that architect sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) against their architecture practice. The lack of a separate legal entity also means there is no distinction between personal and professional business assets for architect sole proprietors, so the debts, liabilities, and legal judgments for which the architect sole proprietor is liable are satisfied from the personal assets of the architect.

Summary of Practicing Architecture with a California Professional Architecture Corporation

While inherently more complex than architect sole proprietorships, the complexity of a California Professional Architecture Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Architecture Corporations significantly reduce liability risks and are more tax efficient for most architects. For architects in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Architecture Corporations also means there is a distinction between personal and professional business assets for the architect, meaning the debts, liabilities, and legal judgments against the architecture practice are not generally satisfied from the personal assets of the architect.

Summary of Practicing Architecture with a California Corporation or California S-Corp

California architects may practice architecture in California with either a California Professional Architecture Corporation or a California Corporation or California S-Corp. While a California Corporation may be taxed differently than a California Professional Architecture Corporation when subject to double taxation, a California Professional Architecture Corporation that elects to be taxed as an S Corporation is taxed identically to a California S-Corp, and these entity choices are identical for purposes of limited liability protection and personal asset protection.

Choosing Between a Sole Proprietorship and a California Professional Architecture Corporation

For most architects, the California Professional Architecture Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing architecture as a sole proprietorship. If the name requirements of a California Professional Architecture Corporation do not suit the branding an architect desires, or if an architect wishes to have unlicensed shareholders, the California Corporation or California S-Corp permit more flexibility than a California Professional Architecture Corporation.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Architecture Practice

Take the next step toward securing the ideal business structure for your architecture practice, whether that is a California Professional Architecture Corporation, California Corporation, or California S-Corp. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Architecture as a Sole Proprietor

Practicing architecture as a sole proprietor is the simplest and most straightforward business structure for solo architects in California. It requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the architecture practice. However, along with these advantages come distinct disadvantages that architects must consider carefully before considering sole proprietorship as the business structure for their architecture practice.

Administrative Requirements of Practicing Architecture as a Sole Proprietor

One of the primary benefits of a sole proprietorship for practicing architecture is the simplicity of establishing a sole proprietorship and the continued simplicity of operating as a sole proprietor.

Sole proprietorships require minimal effort to establish, with few legal formalities involved. Typically, the initial steps of setting up a sole proprietorship include obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Unlike other business structures, there is no need to file complex paperwork or create a formal business entity, which saves both time and money, but as discussed below, there are tradeoffs in exchange for this simplicity.

Taxation of Architect Sole Proprietors

Tax considerations are a critical aspect to be examined when planning to practice architecture as a sole proprietor. Sole proprietors are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to architecture practices is essential for architects when choosing a business structure in which to operate their architecture practice.

Business Income Taxation When Practicing Architecture as a Sole Proprietor

For architect sole proprietors, business income taxation is both simple and straightforward compared to that of other business entities. Sole proprietors report their business income and expenses on Schedule C (Profit or Loss from Business) to their personal income tax return, using Internal Revenue Service Form 1040. This allows architects to consolidate both personal and business income on a single tax form.

Self-Employment Tax When Practicing Architecture as a Sole Proprietor

While simple and straightforward, taxation of architect sole proprietors is not tax efficient. One significant consideration for architect sole proprietors is self-employment tax. Since a sole proprietor does not receive a salary from their business, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes (however, a sole proprietor can deduct half of the self-employment tax paid as an adjustment on their tax return, which provides some financial relief).

Additional Medicare Tax When Practicing Architecture as a Sole Proprietor

High-earning architect sole proprietors may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For architect sole proprietors filing as single, the threshold is $200,000, while it is $250,000 for architect sole proprietors filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Sole proprietors must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high-earning architects to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Architect Sole Proprietors

Understanding the tax implications of a sole proprietorship is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Architecture as a Sole Proprietor

Practicing architecture as a sole proprietor, while simple, also comes with challenges regarding personal liability protection and asset protection because a sole proprietorship is not a separate legal entity, and thus does not offer a legal distinction between the architect and the architecture practice.

Personal Liability for Professionals When Practicing Architecture as a Sole Proprietor

One of the primary risks faced by architect sole proprietors is personal liability. The lack of distinction between the architect and the architecture practice means that the architect sole proprietor is personally liable for all debts, liabilities, obligations, and legal judgments incurred by the architecture practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Person Asset Protection for Architects When Practicing Architecture as Sole Proprietors

The lack of distinction between the architect and the architecture practice that makes personal liability a primary risk to architect sole proprietors also means that all assets of the architect, be they strictly personal assets or assets used in the architecture practice, are subject to claims by creditors and legal claimants against the personal assets of the architect (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Architect Sole Proprietors

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for architects choosing a business structure for their architecture practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Architecture as a Sole Proprietor

When deciding whether to practice architecture as a sole proprietor, it is essential to weigh the benefits and drawbacks of this business structure. While architect sole proprietorships offer simplicity to architects, architect sole proprietorships come with significant risks and limitations. The advantages and disadvantages of practicing architecture as a sole proprietor are compared below together with a recommendation for when a sole proprietorship is the best legal structure for practicing architecture.

Advantages of Sole Proprietorship for Architects

The primary benefit of a sole proprietorship for practicing architecture is its simplicity. There are few legal formalities to establish a sole proprietorship and tax reporting is equally straightforward.

Disadvantages of Sole Proprietorship for Architects

While sole proprietorships are simple to establish, they carry significant risks and are not tax efficient for most architects.

A sole proprietorship is not a separate legal entity, which means that architect sole proprietors are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For architects in high-liability architecture practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for architect sole proprietors, meaning the debts, liabilities, and legal judgments for which the architect sole proprietor is liable are satisfied from the personal assets of the architect.

When is a Sole Proprietorship the Right Business Structure for Practicing Architecture?

A sole proprietorship can be an ideal option for architects starting small-scale architecture practices with the expectation of low net profit and low liability risks. However, before choosing to practice architecture as a sole proprietor, it is essential to weigh the benefits of simplicity against the risks of personal liability and the future growth of the architecture practice. For architects in high-risk architecture practice areas or those who anticipate growth in their architecture practice may want to avoid practicing architecture as a sole proprietorship in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between professional sole proprietorships and of California Professional Architecture Corporations and when a sole proprietorship is the best choice of business structure for architecture practices, see “When Not to Use a California Professional Architecture Corporation” for more information.

Practicing Architecture with a California Professional Architecture Corporation

Practicing architecture with a California Professional Architecture Corporation is not as simple or straightforward as practicing architecture as a sole proprietor, however, a California Professional Architecture Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the architect from the professional business assets of the architecture practice that architect sole proprietorships lack.

Administrative Requirements of Practicing Architecture with a California Professional Architecture Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Architecture Corporation provides, architects are faced with the complexity of establishing a California Professional Architecture Corporation. While this formation process is complex, architects may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Architecture Corporation, leaving architects with essentially the same tasks they would undertake to establish a sole proprietorship. It is also worth noting that legal fees and costs of forming a California Professional Architecture Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Architecture Corporation, every year after the initial formation of a California Professional Architecture Corporation a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Architecture Corporation, San Diego Corporate Law can assist in the annual requirements of practicing architecture with a California Professional Architecture Corporation.

Despite the additional administrative requirements of practicing architecture with a California Professional Architecture Corporation compared to practicing architecture as a sole proprietorship, an experienced corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Architecture Corporation” for more information.

Taxation of California Professional Architecture Corporations

As with architect sole proprietorships, tax considerations are a critical aspect to be examined when planning to practice architecture with a California Professional Architecture Corporation. While architects practicing architecture with a California Professional Architecture Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, architects practicing architecture with a California Professional Architecture Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to architecture practices is essential for architects choosing a business structure in which to operate their architecture practices.

Business Income Taxation When Practicing Architecture with a California Professional Architecture Corporation

A California Professional Architecture Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again against the individuals receiving the dividends (referred to as “double taxation”). However, a California Professional Architecture Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed. This article will focus on S Corporation taxation of California Professional Architecture Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Architecture Corporation after payment of a reasonable salary to the architect are passed directly to the architect as the shareholder who in turn reports those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Architecture Corporation to pay personal income tax of the net profits of the architecture practice.

For more information about the election of S Corporation status for a California Professional Architecture Corporation, see “Can a California Professional Architecture Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Architecture with a California Professional Architecture Corporation

Unlike architect sole proprietorships, which require the architect sole proprietor to pay self-employment tax on the entire net profit of the professional practice, the architect-shareholder of a California Professional Architecture Corporation is not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the architecture practice, with a California Professional Architecture Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the architect. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salary of the architect only and not the net profit of the California Professional Architecture Corporation, which may result in significant annual tax savings compared to a sole proprietorship.

Additional Medicare Tax When Practicing Architecture with a California Professional Architecture Corporation

As discussed above for architect sole proprietorships, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Architecture Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to architects practicing architecture with a California Professional Architecture Corporation if the reasonable salary of the architect exceeded the thresholds, meaning for all intents and purposes, practicing architecture with a California Professional Architecture Corporation does not subject architects to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Architecture Corporations

California Professional Architecture Corporations must pay an annual franchise tax that architect sole proprietorships do not pay. The franchise tax paid by a California Professional Architecture Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by architect sole proprietorships, the annual franchise tax is very small in comparison to self-employment taxes and the Additional Medicare Taxes paid by architect sole proprietors.

Conclusions About Taxation of California Professional Architecture Corporations

Understanding the tax benefits of a California Professional Architecture Corporation is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Architecture Corporations, see “What Tax Benefits Does a California Professional Architectural Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Architecture with a California Professional Architecture Corporation

Practicing architecture with a California Professional Architecture Corporation, while more complex than practicing architecture as a sole proprietorship, overcomes many of the personal liability protection and asset protection shortcomings of architect sole proprietorships. A California Professional Architecture Corporation is a separate legal entity distinct from the architect, thus offering a legal distinction between the architect and the architecture practice as well as personal and business assets of the architect.

Personal Liability Protection for Architects When Practicing Architecture with a California Professional Architecture Corporation

Practicing architecture with a California Professional Architecture Corporation resolves most of the risks faced by architect sole proprietors for personal liability. California Professional Architecture Corporations provide a separate legal entity distinct from the architect, meaning the architect is generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the architecture practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of architects are personal to the architects and not shielded by the existence of the California Professional Architecture Corporation, however, malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the architect from this risk.

Person Asset Protection for Architects When Practicing Architecture with a California Professional Architecture Corporation

The separate legal entity and distinction between the architect and the architecture practice provided by a California Professional Architecture Corporation means that, unlike a sole proprietorship, the California Professional Architecture Corporation separates the personal assets of the architect from professional business assets of the architecture practice. Therefore, claims by creditors and legal claimants against the California Professional Architecture Corporation are generally limited to the professional business assets of the California Professional Architecture Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the architect.

Conclusions About Personal Liability and Asset Protection When Practicing Architecture with a California Professional Architecture Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against the California Professional Architecture Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Architecture Corporation the choice for architects who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their architecture practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Architecture Corporations, see “What Liability Protection Does a California Professional Architecture Corporation Provide?” for more information.

Conclusions About Practicing Architecture with a California Professional Architecture Corporation

When deciding if practicing architecture as a California Professional Architecture Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Architecture Corporations are more complex, California Professional Architecture Corporations resolve many of the significant risks and limitations inherent to practicing architecture as a sole proprietorship. The advantages and disadvantages of operating with a California Professional Architecture Corporation are compared below together with a recommendation for when a California Professional Architecture Corporation is the best legal structure for practicing architecture.

Advantages of California Professional Architecture Corporations

While practicing architecture as a sole proprietorship is simple to establish, doing so carries significant risks and is not tax efficient for most architecture. California Professional Architecture Corporations significantly reduce liability risks and are more tax efficient for most architecture.

A California Professional Architecture Corporation is a separate legal entity, which means the architect is generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability). For architects in high-liability architecture practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for architects, meaning the debts, liabilities, and legal judgments against their architecture practice are not generally satisfied from the personal assets of the architect.

Disadvantages of California Professional Architecture Corporations

The primary benefit of a sole proprietorship is its simplicity, and in turn the primary disadvantage of a California Professional Architecture Corporation is the relative complexity of formation and operation. However, architects may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Architecture Corporation, leaving these architects with essentially the same tasks they would undertake to establish and maintain a sole proprietorship.

When is a California Professional Architecture Corporation the Right Business Structure for Practicing Architecture?

A California Professional Architecture Corporation can be an ideal option for architects starting architecture practices based upon the tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Architecture Corporations provide. Small-scale architecture practices with the expectation of revenue growth can benefit from starting as a California Professional Architecture Corporation to avoid the future need to reestablish the architecture practice as revenue grows. Similarly, small-scale architecture practices in high-risk practice areas may benefit from the limited liability protection and separation of personal assets from professional business assets provided by a California Professional Architecture Corporation regardless of revenue or profitability.

For a more detailed understanding of the differences between architect sole proprietorships and of California Professional Architecture Corporations, and when a California Professional Architecture Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Architecture Corporation” and “Sole Proprietorship vs Professional Architecture Corporation in California” for more information.

Practicing Architecture with a California Corporation or California S-Corp

Practicing architecture with a California Corporation or California S-Corp is essentially identical analysis to that of practicing with a California Professional Architecture Corporation, so that analysis will not be repeated.

The main differences between practicing with a California Professional Architecture Corporation or a California Corporation or California S-Corp are (1) that the name requirements of a California Architecture Professional Corporation do not apply to California Corporations or California S-Corps; and (2) that California Corporations or California S-Corps may have unlicensed shareholders as long as only the licensed architect is practicing architecture in California Corporation or California S-Corp.

For a more detailed understanding of practicing architecture with a California Corporation or California S-Corp, see “Can an Architect Practice Using a General Stock Corporation in California?” for more information.

Architects in California May Not Practice Architecture as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies for an architectural practice, so this topic will be briefly discussed here.

California law and the California Architects Board explicitly prohibits architects from providing architectural services or operating their architectural firm as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Instead, California requires architects who wish to operate in corporate form to own business structures such as California Professional Architecture Corporations, California Corporations, or California S-Corps.

For a more detailed understanding of the prohibition on the use of LLCs for architecture practices in California, see “Can an Architect Practice Architecture Using a California LLC?” and “Can I Use a PLLC to Practice Architecture in California?” and for more information.

If an LLC or PLLC is currently being used for a professional practice in California, see “10 Steps to Convert LLC to Professional Architecture Corporation in California” and “Four Reasons Not to Convert LLC to Professional Architecture Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Architecture Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Architectural Corporation” for more information about bringing the professional practice into compliance with California law.