Choosing the right business structure is a critical decision for architects establishing their private practices in California. While California Limited Liability Companies (California LLCs) are popular for their flexibility and tax benefits, architecture practices in California are expressly prohibited from operating as a California Limited Liability Company (California LLC).

While the question, “why is an architecture practice not permitted to use a California LLC?” has been answered in previous articles cited and summarized below, the experienced corporate attorneys at San Diego Corporate Law inquiries on a weekly basis from architects receiving mixed information from other attorneys or advisors leading them to believe that in certain circumstances it might be permissible to practice architecture in a California LLC.

This blog references and links to previous articles with regard to the business structures and business entities architects may use to practice architecture in California, but the purpose of this article is to highlight and explore the specific provisions of the California Corporations Code that prohibits the use of a California LLC to render professional services as an architect in California.

California Corporations Code Section 13401

The Moscone-Knox Professional Corporations Act is found in California Corporations Code Sections 13400-13410. California Corporations Code Section 13401(b) provides the authority for licensed architects to practice in California as California Professional Architecture Corporations with the purpose of rendering professional services in their practice of architecture.

California Corporations Code Section 13401 also provides two definitions required to properly analyze the restrictions on the use of California LLCs by architects practicing architecture in California.

California Corporations Code Section 13401(a)

California Corporations Code Section 13401(a) provides the definition of “Professional Services” as follows:

“‘Professional services’ means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.”

Thus, Professional Services under the definition provided by California Corporations Code Section 13401(a) encompasses many professions, including architecture under California Business and Professions Code Sections 5610–5610.7.

California Corporations Code Section 13401(d)

California Corporations Code Section 13401(d) provides the definition of “Licensed Person” as follows:

“‘Licensed person’ means any natural person who is duly licensed under the provisions of the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act to render the same professional services as are or will be rendered by the professional corporation or foreign professional corporation of which the person is, or intends to become, an officer, director, shareholder, or employee.”

Thus, Licensed Person under the definition provided by California Corporations Code Section 13401(d) means those persons licensed in the professions listed above as providers of Professional Services under California Corporations Code Section 13401(a), which includes architects in California.

California Corporations Code Section 17701.04

Two subsections of California Corporations Code Section 17701.04 explicitly outline restrictions on the use of a California LLC for the provision of architectural services.

Professional Services, as defined under California Corporations Code Section 13401(a), refers to professional services, such as the practice of architecture, that require a license, certification, or registration by governmental agencies or other entities and regulatory boards such as the California Architects Board. California Corporations Code Section 17701.04 establishes that individuals or entities practicing as an architect cannot form a California LLC for these purposes.

California Corporations Code Section 17701.04(b)

One of the primary legal barriers to architecture practices utilizing a California LLC can be found in California Corporations Code Section 17701.04(b), which reads:

“A limited liability company may have any lawful purpose, regardless of whether for profit, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business. A domestic or foreign limited liability company may provide architectural services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act, if the applicable provisions of the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act authorize a limited liability company or foreign limited liability company to hold that license, certificate, or registration.”

California Corporations Code Section 17701.04(b) is one of the more confusing sections in the analysis of restrictions on using a California LLC for an architecture practice. While the first half of the second sentence of California Corporations Code Section 17701.04(b) does read:

“A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act…”

the second half of that sentence requires there to be applicable provisions the California Business and Professions Code or other applicable Act to actually authorize the use of a California LLC, which authorizing provisions do not exist at the time of this writing for the practice of architecture.

California Corporations Code Section 17701.04(e)

Another of the legal barriers to a professional architecture practice utilizing an LLC in California can 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.”

This section of the California Corporations Code explicitly prohibits LLCs from providing Professional Services in California under California Corporations Code 13401(a) by those Licensed Persons, including architects, under the definition of California Corporations Code Section 13401(d).

Secretary of State Form LLC-1 Regarding an Architecture Practice Using a California LLC

As shown in the image above, in order to file California Secretary of State Form LLC-1, the filer must agree to the following provision:

“A California limited liability company may not provide professional services in California. (California Corporations Code sections 13401 and 7701.04(e).) If your business is required to be licensed, certified or registered, before submitting this filing to the California Secretary of State’s office, it is recommended that you contact the appropriate licensing authority in order to determine whether your services are considered professional. For licensing requirements in California, please refer to the CalGold website at http://www.calgold.ca.gov or the California Department of Consumer Affairs website at http://www.dca.ca.gov.

A filer may successfully file California LLC Articles of Organization despite the warning depicted and quoted above, however, acceptance of Articles of Organization by the Secretary of State does not constitute the consent of the California Secretary of State to practicing architecture with a California LLC under the California Corporations Code.

Reasons for Prohibition Against a California Limited Liability Company for California Architects

The main reason for prohibiting the use of California LLCs by licensed architects is to ensure compliance with professional regulations and protect the public from potential harm caused by unqualified or unethical individuals providing architecture services by upholding public accountability standards specific to the practice of architecture. The State of California wants to ensure that only licensed architects who have met certain education and training requirements are able to offer their expertise and advice in a professional capacity as an architect.

The reasoning behind this restriction stems from the nature of architecture services, which requires specialized knowledge and experience, and is subject to stringent regulation by the State of California and the California Architects Board. Professions such as architecture demand accountability not just to clients but also to their professional licensing boards.

The California LLC structure, known for its liability protections and manager/member flexibility, is deemed incompatible with the heightened accountability standards the State of California applies to architects. Thus, architects practicing in California must choose alternative structures that better align with the regulatory oversight and public protection goals of the State of California.

California Professional Architecture Corporations require adherence to stricter regulations regarding ownership and governance. Licensed architect shareholders of a California Professional Architecture Corporation must be licensed to practice architecture (see: “Who May Be a Shareholder of a California Professional Architecture Corporation?“), ensuring that ethical standards and professional expertise guide the practice of architecture.

Permitted California Business Structures for Licensed Architects

Licensed architects in California are restricted in the types of business entities they may form due to California law in the California Corporations Code discussed above. These California laws are designed to ensure compliance with professional standards of practice and maintain accountability for practicing architecture in California.

A previous article titled “Can an Architect Practice Architecture Using a California LLC?” explored answered the question of whether a licensed architect could use a California LLC, discussed some of the possible consequences of practicing architecture in California as a California LLC, and explored the options available to licensed architects who might already be practicing architecture as a California LLC.

This section will provide an overview of the permitted business structures that licensed architects may utilize, including California Professional Architecture Corporations, partnerships, and sole proprietorships, while providing links to articles containing more information about the specific requirements and considerations for each business entity structure.

Sole Proprietorships for California Licensed Architects

A sole proprietorship is the simplest and most common business structure for licensed architects looking to practice architecture in California. It is an unincorporated business owned and operated by the licensed architect personally, making it straightforward to set up and maintain. For licensed architects in California, understanding how a sole proprietorship functions and the associated considerations is critical to ensuring compliance and achieving success.

Key Features of Sole Proprietorships for California Licensed Architects

One of the primary advantages of a sole proprietorship is ease of formation. There are minimal regulatory requirements compared to other business structures, which reduces the time and cost of starting a practice. Sole proprietors simply need to obtain the appropriate professional licenses and any required local permits to begin operations.

Another notable feature of a sole proprietorship is that the licensed architect has complete control of the business. This autonomy allows licensed architects to make decisions and manage their practice without needing approval from partners or shareholders.

However, sole proprietors are personally liable for all debts and obligations of their business. For California licensed architects, this means that personal assets can be at risk if claims arise from architecture services or other business activities. It is crucial for sole proprietors to consider obtaining adequate liability insurance to mitigate this risk.

Tax Considerations of Sole Proprietorship for Practicing Architecture

From a tax perspective, sole proprietorships are treated as “pass-through” entities. This means the business income is reported directly on the owner’s personal tax return, simplifying the tax filing process. However, sole proprietors are subject to self-employment taxes, which includes both the employer and employee portions of Social Security and Medicare taxes.

Is a Sole Proprietorship Right for You?

While a sole proprietorship may offer simplicity and independence, it is essential to weigh the potential risks and benefits relative to other business structures, such as California Professional Architecture Corporations. Licensed professionals should assess their long-term business goals, liability exposure, and the administrative requirements when selecting a business entity. For more detailed guidance on sole proprietorships for licensed professionals in California, consult “Sole Proprietorship vs Professional Architecture Corporation in California” and “What are the Business Structure Options for Solo Architects in California?” or schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law to ensure compliance and alignment with your professional objectives.

Partnerships for California Licensed Architects

A partnership is one of the simplest business entity structures available for two or more licensed architects looking to collaborate professionally. For California architects, partnerships may offer a straightforward structure for operating an architecture practice. However, it is essential to understand the benefits, limitations, and regulatory implications before forming a partnership for practicing architecture.

Key Features of Partnerships for California Licensed Architects

A California General Partnership is formed when two or more individuals agree to engage in a business together for profit, without formally organizing another form of business entity. Partners share ownership, responsibilities, profits, and liabilities equally unless otherwise agreed upon through a written partnership agreement. Importantly, in California, general partnerships do not require registration with the state to be established, but they must comply with local licensing and regulatory requirements applicable to the practice of architecture. Partners of a California General Partnership have joint and several liability for all debts, liabilities, obligations, and legal judgments against the California General Partnership.

Tax Considerations of Partnerships for Practicing Architecture

One of the main considerations when choosing between these a partnership for an architecture practice is the tax implications.

Partnerships are subject to pass-through taxation, a process that allows the income, deductions, and tax credits of the partnership to “pass through” to the individual partners rather than being taxed at the business entity level. This means that the partnership itself does not pay federal income taxes. Instead, each partner reports their share of the profits or losses of the partnership on their personal income tax return, based on their ownership interest.

In addition to income taxes, partners of a partnership are generally considered self-employed for tax purposes. This designation requires them to pay self-employment taxes, which cover Social Security and Medicare contributions. Unlike employees, who split these taxes with their employer, self-employed individuals are responsible for the full tax rate, currently 15.3% of net earnings. The self-employment tax liability of each partner is calculated based on their share of the net income of the partnership.

It is crucial for architects considering a partnership business structure for their architecture practice to understand the income tax and self-employment tax obligations of partnerships and plan accordingly, as these taxes can significantly impact personal income tax liability.

Is a Partnership Right for You?

While a partnership may offer simplicity and independence, it is essential to weigh the potential risks and benefits relative to other business structures, such as California Professional Architecture Corporations. Licensed architects should assess their long-term business goals, liability exposure, and the administrative requirements when selecting a business entity for their architecture practice. For more detailed guidance on California General Partnerships for licensed professionals in California, consult “What are the Business Structure Options for Architecture Group Practices in California?” or schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law to ensure compliance and alignment with your professional objectives.

California Professional Architecture Corporations for California Licensed Architects

In California, licensed architects have the option to form a California Professional Architecture Corporation with the California Secretary of State as the business entity structure to practice architecture. A California Professional Architecture Corporation is a specialized type of California Corporation that is specifically designed for licensed architects.

Key Features of California Professional Architecture Corporations for California Licensed Architects

One of the main advantages of forming a California Professional Architecture Corporation is that it offers personal liability protection for the licensed architect shareholders who own the California Professional Architecture Corporation. This means that all debts, liabilities, obligations, and legal judgments against the architecture practice that are not subject to a personal guaranty or based on malpractice or professional errors and omissions will stay with the California Professional Architecture Corporation and no flow to the licensed architect shareholder (see: “What Liability Protection Does a California Professional Architecture Corporation Provide?“).

However, there are certain restrictions on who can own and manage a California Professional Architecture Corporation which require only licensed architects to be shareholders (see: “Who May Be a Shareholder of a California Professional Architecture Corporation?“).

Tax Considerations of California Professional Architecture Corporations for Practicing Architecture

Forming a California Professional Architecture Corporation can also provide tax benefits to licensed architect shareholders (see: “What Tax Benefits Does a California Professional Architectural Corporation Provide?“). For example, a California Professional Architecture Corporation can make an S Corporation election, which allows for pass-through taxation (see: “Can a California Professional Architecture Corporation Be an S-Corp?“). Electing to be taxed as an S-Corp means that the profits and losses of a California Professional Architecture Corporation are passed through to the personal tax returns of the individual shareholders rather than being subject to double taxation at both the corporate and individual level.

Additionally, California Professional Architecture Corporations do not subject licensed architect shareholders to self-employment taxes, and licensed architect shareholders who also provide architecture services must only pay payroll taxes on that portion of their income from the California Professional Architecture Corporation that are paid as W-2 wages.

It is important for architects to consult with a tax advisor when considering forming a California Professional Architecture Corporation, as both the personal financial situation of the licensed architect shareholder and pro forma professional practice financials of each licensed architect will be factors in determining if a California Professional Architecture Corporation is the most tax efficient structure to use when practicing architecture.

Is a California Professional Architecture Corporation Right for You?

Based upon limited liability protection and tax efficiency, a California Professional Architecture Corporation is the best choice for most licensed architects practicing architecture in California.

To assist in the decision about whether a California Professional Architecture Corporation is the best business entity structure for your business, see “When to Use a California Professional Architecture Corporation” and “When Not to Use a California Professional Architecture Corporation” for more detailed information about choosing a corporate business entity structure to practice architecture.

If you are already practicing architecture in a California LLC, 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” for more detailed guidance on moving from a California LLC to a California Professional Architecture Corporation.

If you are not already practicing architecture in a California LLC, see “Four Things to Know About Starting Your Architecture California Professional Corporation“, “The 7 Steps for Forming a California Professional Architecture Corporation“, “How Long Does It Take to Form a California Professional Architecture Corporation?” for more detailed guidance on forming a California Professional Architecture Corporation for your architecture practice.

To speak with a corporate attorney knowledgeable in matters of forming California Professional Corporations for architecture firms, schedule a consultation with the experienced corporate attorneys at San Diego Corporate Law.