How Your Firm Is Organized Determines Who Bears Liability, How Profits Are Taxed, and How Ownership Transfers
Every architecture practice operates under a legal business entity structure that determines how the firm is owned, how profits and losses are taxed, how the owners are protected from personal liability for the firm's obligations, and how ownership interests can be transferred when partners retire, sell, or bring in new owners. These are not abstract legal concepts - they are practical decisions that affect what happens when a client sues the firm, how much the owners pay in taxes, and whether the firm can survive the departure or death of a founding principal. The ARE PcM exam tests business entity structures as a practice management competency relevant to architects in leadership roles who may be involved in establishing or restructuring a firm's legal organization.
Sole Proprietorship
A sole proprietorship is the simplest form: one individual owns and operates the business. No separate legal entity is created - the owner IS the business. Tax treatment: all business income passes through to the owner's personal tax return (Schedule C); the owner pays self-employment taxes on net income. Liability: the sole proprietor has UNLIMITED PERSONAL LIABILITY for all business debts and obligations, including professional liability claims. If a client wins a judgment against the firm, they can pursue the owner's personal assets (home, bank accounts, investments). Advantages: simplicity; no corporate formalities. Disadvantages: unlimited personal liability; difficult ownership transfer; terminates at owner's death or incapacity.
General Partnership
A general partnership is created when two or more individuals operate a business together without forming a corporation or LLC. Partners share profits and losses per their partnership agreement. Liability: all general partners have unlimited personal liability for the partnership's debts and obligations - INCLUDING for the acts of other partners. If your partner commits professional negligence, your personal assets are exposed. This joint and several liability risk makes general partnerships relatively rare for professional service firms that carry significant liability exposure. Advantages: simple to form; pass-through taxation.
Limited Liability Company (LLC) and Professional Corporation (PC)
LLC: Provides limited liability protection (owners' personal assets generally protected from business debts) combined with pass-through taxation (income taxed at member level, not at entity level). Flexible management structure. Most states allow licensed architects to form LLCs for their practices. The most popular entity structure for new professional practices due to liability protection + tax flexibility. Professional Corporation (PC) or Professional Limited Liability Company (PLLC): Many states require licensed professionals (architects, engineers, doctors) to operate under a PC or PLLC rather than a standard LLC - to ensure that professional licensing requirements apply and that the liability protections do not extend to professional negligence claims (in most states, E&O liability "pierces" the corporate veil for professional negligence). The specific rules vary significantly by state; architects should consult counsel in their state when establishing a firm entity.
Key Exam Points
- Sole proprietorship: simplest; unlimited personal liability; no separate entity; terminates at owner's death.
- General partnership: two+ owners; unlimited joint and several liability including for partners' acts.
- LLC: limited liability + pass-through taxation; most popular for new professional practices.
- PC/PLLC: required by many states for licensed professional practices; professional negligence may still pierce corporate liability protection.
- Entity selection is state-specific - consult counsel; PcM exam tests concepts, not specific state rules.
AREprep's PcM practice management content covers business entity structures, their liability and tax implications, ownership transfer mechanisms, and other firm management fundamentals - giving ARE PcM candidates the professional practice business structure knowledge the exam tests in practice management scenario questions about firm organization, owner liability, and the operational implications of different business entity choices.
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