PRM SEM 02 - 10. Setting Up a Practice Flashcards
License or Registration:
By the time you enter into practice you will be required to be either a Registered Architect or hold a licence under the Licensed Building Practitioner regime.
Or have one registered I licensed person in your office happy to “sign off” the drawings for Building Consent.
Or do design only and contract out your Consent drawings to a draughtsperson.
The latter two are unlikely due to the shifting of liability onto the shoulders of others for no significant reward. And generally architects and draughtspeople like to design, detail and have control of their own buildings all the way through the production process.
Remember, if registered you are bound by the Code of Ethics of the RAB (Registered Architects Board).
Advice:
Most young architects start out with one big job or commission. It’s important to have a strategy or plan to run your business after that job finishes.
The NZ Government through various agencies has free business advice programmes
eg www.business.govt.nz and there are many advisors/ mentors available if you pay.
For architectural practices the NZIA publishes Starting A Practice June 2008 and the Practice Notes on the subject.
You should seek advice from friends, colleagues and former employers too. You may know how to do architecture but do you know how to run a business?
Advisors: Accountant
You will need an accountant, so get one at the start and take advice from them. They can often save you money. Ask around and choose one who is familiar with the architecture / arts area.
They will advise you on legal matters in relation to tax (self employed need to register with IRD (Inland Revenue Department) and ACC (Accident Compensation Corporation)) and the legal need to keep adequate financial records, how to invoice properly, how to obtain the correct receipts etc
They can also assist you in preparing a business plan.
As your business develops they can give advice on your financial structure, proportion of overheads to income, salary levels, charge out rates …
Advisors: Lawyer
They can review tenancy agreements/contracts, car leases, photocopier leases (be careful to have the lease and service agreement from the same company!), liability etc
Advisors: Banker
You need a separate business account from your personal one to keep your accounting nice and clear. Some banks are wary of separate business accounts and will want your personal banking, credit cards, mortgage with them as well.
You may also need to borrow money or establish an overdraft at some stage, so you need to establish a good relationship with your bank.
See later section: finances.
Structure of practice: Types
Your first decision is whether you are working alone or with others.
Note we are talking about the business structure of your practice.
Many young architects share space with others including overheads like copiers, printers, meeting space, technical library etc but have separate businesses.
Architectural practices are generally of these types:
- Self Employed / Sole Trader/ Sole Practitioner
- Partnership
- Limited Liability Company
- Co-operatives
Structure of practice: Types
Your first decision is whether you are working alone or with others.
Note we are talking about the business structure of your practice.
Many young architects share space with others including overheads like copiers, printers, meeting space, technical library etc but have separate businesses.
Architectural practices are generally of these types:
- Self Employed / Sole Trader/ Sole Practitioner
- Partnership
- Limited Liability Company
- Co-operatives
Structure of Practice: Partnership
A popular model.
Must have a good working relationship with others that will stand disagreements.
Choose a partner that complements your strengths and weaknesses but shares your vision and works well with you.
Need a formal partnership agreement drawn up by a lawyer (entitlements, limits of authority, responsibilities of each partner, how to disengage).
Each partner has the right to participate in every aspect of the business.
Share both profits and its risks. Joint and several liability exists in a partnership, which means that in addition to his or her own negligence a partner is responsible for the default or liabilities of other partners.
Both liable to the full extent of your business and personal assets.
See attached NZIA Practice Note PN 1.302 Forms of Practice - Partnerships May 2007 for
more detail.
Structure of Practice: Self Employed / Sole Trader/ Sole Practitioner
Most popular model. Flexible, simple, cheap to operate.
Freedom to operate the way you like, adopt a lifestyle that suits you.
But can be inflexible with long hours too.
Need expertise in all areas.
Can be isolated without support, discussion and advice.
Liable to the full extent of your business and personal assets (house, car etc!).
Problems can arise through overwork, lack of work, health issues.
See attached NZIA Practice Note PN 1.301 Forms of Practice - Sole Practitioner May 2007
for more detail.
Structure of Practice: Limited Liability Company
Increasingly popular for small practices, standard for large practices.
Professionally liability is limited since a shareholders liability for a company’s contractual debts is limited to the extent of his or her shareholding.
“However claims can be brought in tort (negligence) against any company employee
(which includes directors) found to be personally responsible as well as the company itself, which in law is one ‘persona’. Incorporation should not be thought of as a handy umbrella against indemnity claims.”
Source:_NZIA Starting A Practice
Ownership can be separated from management, which is not the case in a partnership.
Directors and officers of a company operate under their terms of employment, and the company can hire professional managers to run business.
Able to issue shares when it needs to raise funds.
Tax more straightforward than for a partnership.
Structure of Practice: Co-Operatives
All those who work in the enterprise own, control and profit from it.
A common ownership co-operative is owned collectively, with individuals having a nominal shareholding.
In a co-ownership co-operative members hold dividend earning shares. Both types of co-operative should be legally established and both carry limited liability.
A Strategic Structure and Plan:
Your practice structure should not just reflect your desired mode of practice but your business strategy and where you see your practice being in the future, especially if you plan to grow and either employ staff or perhaps team up or merge with another practice.
You may choose to work with someone just like you, but think about choosing a partner who complements your skills and weaknesses. Many partnerships have a “front room I backroom” model with one partner getting jobs and running the business with another doing the design or running the documentation side of things. One large Auckland firm has a three pronged model with one partner focused on business, one on design and one on document production.
Setting Up a Practice: Finances
You will need a new business bank account separate from your personal one to keep your accounting nice and clear. Prepare for this by being a good credit risk and having a good relationship with your bank now!
Some banks are wary of separate business accounts and will want your personal banking, credit cards, mortgage with them as well.
You will need an overdraft at some stage to cover the overheads between fee payments. You will have many outgoings but income will be monthly.
Banks are in the business of loaning money but don’t like to take a risk. You must appear reliable and business-like in your attitude and documents.
The bank will want to know what personal assets (savings, car, house) and liabilities (existing loans, hire purchase agreements, credit cards) you have and may want collateral/security/a guarantee for any loan.
Most banks like you to have all your business with them: personal and business banking, mortgage etc In addition this allows them a measure of security and the ability to monitor your financial position.
If you wish to borrow money after you have been trading for a while the bank will want to see your past year or two’s accounts (money in, money out, profit and loss).
Interestingly banks like to see lots of “movement” and cash flow in a business rather than profit. Lots of little business transactions indicate a business is trading and has more life than one or two jobs. And often you can move from loss to profit easily by small adjustments in fees and time management.
Setting up a Practice: Taxes
Self employed, individual partners, companies etc all need to register with IRD (Inland Revenue Department) and ACC (Accident Compensation Corporation).
You will probably need to register for GST (Goods and Services Tax) with the IRD as well.
You are legally required to keep adequate financial records.
More on this in the next lectures on business and accounting.
Setting Up a Practice: Insurances
You probably have contents insurance for your office equipment and vehicle insurance for your car. These now become tax deductible.
A registered architect is required by the RAB to have Professional Indemnity (Pl) Insurance. The vast majority of NZ architects join the NZ Architects Co-operative Society (NZACS) and buy it through them.
Generally Pl Insurance protects you by providing cover against claims (even if you are found negligent in legal proceedings).
It can pay for a defense, legal costs, technical advice and reports and damages.
Make sure you are honest in filling out the application forms, otherwise you may not be adequately covered.
Don’t wait to insure yourself later, your application may be rejected.
Make sure you don’t underinsure yourself, again you may not be adequately covered.
Notify them of changing circumstances otherwise again you may not be adequately
covered!
Notify them as you become aware of any issue that could lead to a claim.
Like all insurance the excess, amount insured and premiums you have to pay vary so
ask around.
NZACS also give advice when issues arise and advice on risk management.
Consider life insurance, again don’t underinsure yourself and don’t wait too late.
Consider private health insurance and income insurance.
Health insurance can get you an operation faster in a private hospital.
Income insurance will cover you in the event of illness by paying you a percentage of your annual income. Be very careful here though. It can be expensive and may not pay out as much as you think. Ask around.
You will have to pay an annual ACC (Accident Compensation Corporation) rate to cover yourself in the event of an accident (previously this was paid by your employer).
And again the pay out in the event of an accident may not be adequate for your needs.
Even as a self employed person you must be aware of your obligations under the Health and Safety at Work Act 2015 and Occupational Safety and Health (OSH) to maintain a safe workplace and work procedures.
