Sunday, January 4, 2015

Establishing an Architectural Office: Partnerships

A partnership is an unincorporated association of two or more persons or entities to operate a business with the intention of making a profit. It is a single business owned by two or more people. Unless defined in a partnership agreement, all aspects of the business are typically divided equally among each partner. The partnership, however, is not a separate legal entity that is distinct from the partners.

Partnerships are formed by registering the business as a partnership with the Securities and Exchange Commission (SEC) and with the Professional Regulation Commission (PRC)- Professional Regulatory Board of Architecture (PRBoA). Typically, the legal name of the business is required to be the names of the individual partners.

This form of office organization may be considered in two major types: two or more equal active partners, or a senior or a junior partner. Partnerships exist where all partners are registered and licensed architects, where partners are architects and engineers or any allied professional, or even where only person is a registered architect but the other partners are contractors, lawyers, or good businessman in related fields. The law however requires, that the registered architect or architects in the partnerships shall hold the majority share (75%) of the firm. Which is best will greatly depend upon the qualifications, financial status, capabilities and interest of the partners.

Partnerships are more complex than proprietorships. A partnership agreement should be in writing and should address issues such as the following:
  • financial (capital) contributions of the partners
  • responsibility and authority of the partners
  • fiduciary duties of the partners
  • liabilities of the partners
  • operation and management of the partnership
  • distributions of profit and loss
  • transferability of interests
  • admission of new partners
  • resolution of disputes
  • dissolution of the partnership

The most obvious advantage of a partnership is the fact that more than one practitioner means more cash – backing more actual hands or bodies to do the work, more minds to think out the problems, and more client contacts that may be made. In a well-developed partnership, the various phases of the work are as equally divided as is possible, each responsible of the portion delegated to him. The partners may be equal by virtue of the equal investments in the business, or may be unequal unequal due to unequal investment.

Regardless of the amount of investment, unless special responsibility is agreed upon, all partners are responsible for the debts of the partnership, and a contractual agreement by one partner binds all partners. Certainly wihtout a good agreement or confidence in partners, it might be an undesirable situation at times. This is the disadvantage wherein all liabilities are shared by the partners. Each partner has liability for all of the business and professional liability debts of the entire partnership jointly and severally. Each partner is not only liable for his or her own actions, but the actions of all the employees and partners within the business. Partners personal assets are also at risk and can be used to satisfy the partnership’s debt, whether or not the individual partner was personally involved. Therefore, should a business vendor or a professional liability claimant make a claim against the partnership, each partners personal assets may be reached to satisfy the claim. An architect considering becoming a partner in a firm should carefully weigh the amount of liability to which he or she will become subject, and whether or not the capital contribution being made might soon be lost to existing creditors and claimants.

Taxes are filed by completing and submitting an “annual information return”, which identifies the income, deductions, gains and losses of the business. Similar to the sole proprietor, all earnings and loses “flow through” to the partners’ personal tax returns.

In a good working partnership, someone needs to be the business-getter, the "front man" who can handle the cash flow and general business phases. Different persons need the ability to design, and to supervise the production work and field construction. Each partner could belong to a different club or service organization in order to have diverse contacts for possible business and probably should live in a different suburban area for the same reason. These things may require some adjustment but probably will benefit the partnership in the end.

In a senior-junior partnership, the arrangement usually starts when an older, established architect begins to feel that he is working too hard, that he has a bright energetic employee, or that he would like to retire in a few years. Most often, the younger partner is a long-time employee who supposedly knows the operation of the office, complements the architect's abilities, and wants to be on his own. The senior partner is the one with the investment. Agreement regarding returns may may be varied, but the senior partner will retain control. If the idea is to provide for ultimate retirement of the older partner, there may be a gradual increase in percentage for the younger partner with a corresponding decrease in the percentage for the one, until, at ultimate retirement, the office belongs to the younger. This may take a considerable period of time of course. While this is often an arrangement between only two men, there is no reason that more than one junior partner cannot be included.

So partnerships sound better than proprietorships? The advantages are that, when properly constituted, the partners expertise complements each of the others. The financial base may be more broad and in greater depth as each partner has some money. The partners will probably live in different client contacts. And with more partners to share the required work necessary for best operation, the amount of extra work time, beyond normal week, may be shortened. The primary disadvantage is that partners may not agree about business after an initial period of "togetherness". The one who attends meetings, play golf, has client oriented lunches, may be considered by the others as having an enjoyable time. Unless strict control over contract signatures and cash flow is maintained, it is possible that unwelcome work situations may result. Several partners may want to work on design with no one interested in production documents or contract administration (estimating, specifications writing, etc.).


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