Setting up
Setting up a new practice
Architects are not trained to set up and run small businesses, so the necessary skills must be acquired by extra training while working for someone else, or bought in from outside, or a combination of both. Remember that the decision to set up an architectural practice does not have to be made quickly. The idea can gradually develop as you gather all the necessary information to know what is involved before making the decision to proceed. You can also continue to earn a salary while employed elsewhere, and build up some capital while the idea of the new practice develops.
If the practice is going to be small – perhaps one or two people working in a home office on domestic projects – the logistics of setting up will be easier and the capital required significantly less than for a new practice with, say, three to five staff based in commercial premises hoping to take on large projects and to grow quickly. No two practices will be set up or run in exactly the same way, but there are basic, core requirements that must be met by all practices so they operate in accordance with the ARB Architects Code: Standards of Conduct and Practice, and as successful businesses, no matter what size they are.
Technology and digital communication now make it possible to operate a small practice at a professional level with little more than one person and a laptop – however, that person must have all the skills necessary to run a successful business, and those skills have not changed since the days of drawing boards and T-squares.
Setting up a new practice can be broken down into four separate stages, with the level of commitment required increasing at each stage.
STAGE 1: Questions, conversations and research- STAGE 2: Decisions
- STAGE 3: Setting up
- STAGE 4: Ready to trade
STAGE 1: Questions, conversations and research
At this stage the new practice is just an idea in your head or a chat in the pub after work. You are not spending any money, and no decisions are final. At the end of this stage you may have nothing on paper but you will either have decided against the idea, or to take it to the next stage.
Here are some questions before proceeding to the next stage:
And here are some questions specifically for the future sole practitioner:
While you are still working for someone else, you can carry out useful preparation for your own practice:
If you are thinking of setting up on your own straight out of college, because you have been made redundant or you cannot find work, or because someone has offered you an interesting project, you will not have the luxury of earning and learning while you go through the initial stages of setting up. It will be challenging, and you will need advice from a good accountant and possibly a solicitor, a good business plan and sufficient capital, as well as the right personality – and, if possible, a good mentor.
STAGE 2: Decisions
At the end of this stage you should be ready to prepare a preliminary business plan for your practice, with decisions made on the following points:
The long-term plan is important, because the type of work will largely dictate the type of practice you set up. If you want to grow the practice to work on large commercial projects, then the office premises, the IT set-up and the clients will all be different from the start, compared to the practice that wants to stay small, to work mostly with domestic clients and on relatively small projects.
STAGE 3: Setting up
At the end of this stage you should have decided on the type of premises you will operate from, discussed your preliminary business plan with an accountant, confirmed what capital will be available, selected a bookkeeper, decided on a company structure, obtained quotes from a specialist insurance broker and decided on a bank. You should have a clear image in your head of how the practice will operate, but you can still be working for someone else and building up more capital.
Have a meeting with your selected accountant and discuss:
Select an insurance broker, and obtain quotes for:
Prepare a more developed business plan, covering the following:
Now that you know the risks and what is involved in setting up your practice, ask yourself again: Is this really what I want to do? Do I have what it takes to make this business successful? Am I ready now for the final preparation stage and to start spending money?
Once you have answered ‘yes’ to these questions, you are almost ready to start trading.
STAGE 4: Ready to trade
On completion of this stage you will be running your own practice.
In the early days of your company, advice from your accountant is a good investment. If the company is well set up in the first place and you have a clear understanding of how it will be run and managed and the performance monitored throughout the year, there is a much better chance not only that you will be successful, but that you will be more relaxed and able to concentrate on the architectural services you aim to provide.
Succession planning, retirement, emergency plan and insolvency
It might be hard to think about closing the practice when you are setting it up, but it is important to consider and plan for the day the practice will cease trading. The office manual should have a section covering future plans for the practice, succession and planned closure of the practice, as well as an emergency plan to cover illness, accidents or the death of key individuals.
Succession planning
When founding directors or partners retire, larger practices are often passed on to a next generation of architects who may already be partners or directors of the company. Some practices are purchased by another practice. Small and very small practices, including sole practitioners, usually cease trading when the principal architect retires. This can be because your own name is attached to the practice and you do not want others to trade using your name, or because clients only come to the practice because of what you personally can offer – so think carefully about the name when setting up the practice. If you are thinking of selling your business there are specialist advisers who can assess your company and its assets and give you advice on what it is worth and how to find a purchaser. Whether you are selling or closing the practice, you will need to set up a plan – ideally at least three years in advance.
Emergency plan
Serious illness or the death of key individuals might mean the practice cannot continue to trade. To cope with such events an emergency plan should be in place and kept updated as necessary.
In a limited company where there is more than one director, the remaining directors may be able to take over and appoint a new director so the practice can continue to trade, subject to professional qualifications, or the remaining directors can arrange to close the practice.
If you are a sole practitioner, the emergency plan will be specific to your practice and your circumstances. You could ask the company accountant to be an executor of your Will, as this is a service that many accountants provide. It is important for all sole practitioners to write a Will and instruct the executors on how to close the practice and who will inherit the company assets, and a copy of the emergency plan should be kept with your Will. Any monies in a limited company bank account should be distributed to the beneficiaries, and all invoices should be paid before the company is struck off at Companies House, as once a company is struck off any remaining funds will go to the state.
If you are a sole practitioner or the sole director of a limited company you must ensure that, in the event of sudden death, arrangements are in place to hand over the work in progress, close the practice and arrange for the limited company to cease trading. Having a company secretary is no longer mandatory for limited companies, but in these circumstances it is helpful to have a company secretary who is familiar with your business and your clients, and has access to the company bank account. The company secretary does not have to be someone who works for the practice full-time. It could be the company bookkeeper, or a family member.
For sole practitioners and sole traders, your sudden death and the resulting closure of your practice would be dealt with by your executors in accordance with the instructions in your Will and your emergency plan.
All practices should keep sufficient funds in the company bank account to cover the cost of closing the practice in an emergency. These costs include professional fees (lawyer, accountant, bookkeeper and possibly a consultant architect) and PI insurance run-off costs that must be paid for a minimum of six years, even after death.
Retirement or planned closure
In the case of a pre-planned closure, for example due to the retirement of a key individual or sole practitioner, work will decrease gradually as new projects no longer come into the office. A date can be set as the last day you or anyone in the practice will give advice. PI insurance must be maintained by the company or the sole trader for a minimum of six years (or up to 12 if contracts are under seal), and this period must run from the date of the last piece of advice given. Take advice on run-off insurance from your insurance broker a year or so before you plan to retire.
Remember that while the practice is winding down the overheads will remain the same and you will still be working, but income will reduce, so financial provision should be made for this and funds set aside in the company bank account.
When the practice is going to close because a sole practitioner is retiring, a three-year wind-down programme should be produced, with a date for the company to cease trading and the insurance run-off period. During this period careful consideration must be given to what projects are accepted into the practice and how long they will take to complete, including making good defects periods. When taking on new projects during this period you should inform your clients that the practice will cease trading on a given date.
If the practice has employees who will be made redundant, they must be given notice and may be entitled to statutory or contractual redundancy.
Insolvency – failure of the business
Despite all your efforts and hard work, and all the money you have put into your business, there is still a possibility that it will fail, and these circumstances may be outside of your control. With a limited company, as soon as your liabilities are greater than your assets your company is insolvent, and it is an offence to continue to trade if your company is insolvent.
If you have a limited liability company you may be able to enter into a voluntary winding up. If you are a sole trader you may end up declaring yourself bankrupt, and you could lose your personal assets. If you are a partnership all partners could be declared bankrupt.
Always monitor cashflow carefully, and at the first sign of a cashflow problem seek professional help. The first phone call will be to your accountant. With good advice you may be able to take corrective action and save the business as well as your reputation.
The market
It is important to establish that there is a market for the product or service you are going to provide, and that you will be able to compete with your competitors. Where you chose to locate your office, the geographical area that you will cover and the range of projects you will take on will depend to a large extent on what work there is, how good you are at getting it, and the competition. The decisions you make about the new practice and the market research to support it will go hand in hand.
Key decisions
Research
Once you have done the research and know the market, and you have decided what type and size of practice you want and where it should be located, you can develop a business plan.
Regardless of the area you choose to work in, and for even the smallest domestic projects, you should develop a good relationship with each client and maintain this throughout the project and beyond.
Alternative company structures
The very small architectural practice will normally be a sole trader or a limited liability company. Partnerships and limited liability partnerships are less common these days. Your accountant or lawyer will be able to advise you on which option is best for your circumstances, and once you have decided which best fits your requirements you should be able to find all the current information you need either on the government website or the Companies House website. It is possible to change the name or the structure of your business after a few years of trading, but making a well-informed choice when setting up should avoid the need to do this.
Sole trader
It is easy to set up as a sole trader and, despite the term, you can take on employees. As a sole trader your tax status is ‘self-employed’ and you will pay Income Tax on the profits of the company. The tax status of employees will be PAYE (pay as you earn). However, you are totally responsible for the debts of the company and if you cannot pay them you may have to declare yourself bankrupt and risk losing your possessions or even your home.
Limited liability company
Many small architectural practices are set up as limited liability companies. The limited liability company structure works equally well for a sole practitioner as for larger practices. Having a limited liability company can give your business more credibility than if you operate as a sole trader. It allows the practice to grow and directors to join and leave the practice, but the biggest single advantage is that the limited company is responsible for what it does and personal assets are not linked to the company. However, if you are a company director and you have a bank loan, the bank manager may ask you for a personal guarantee. Also, individual liability can remain in tort. Overdraft facilities may also require a director’s personal guarantee.
If you set up a limited company, your business stationery must show the following information:
Partnership
The type of company structure you will adopt is one of the most important decisions you will make when setting up a new practice, so make sure that you obtain advice and that you have carefully considered all the advantages, disadvantages and risks before making a decision.
| COMPANY STRUCTURE | ADVANTAGES | DISADVANTAGES | TAX AND NATIONAL INSURANCE |
|---|---|---|---|
| Sole trader | Easy to set up Less onerous accounting |
Liability is unlimited Personal assets are not separate from business assets |
Register for NI with HMRC Pay Class 2 NI contributions Pay Class 4 NI contributions Self-employed status for sole trader PAYE applies (for any employees) Income Tax payable on profit Company may have to register for VAT |
| Private limited liability company | Separate legal identity Easy to set up Greater credibility Easier to raise finance Easier to remove a director than a partner Directors can join and leave the company Limited liability Can be set up by one person Can have a company secretary* Lower tax Possible to defer tax by retaining money in the company Directors' pension contributions are tax efficient** Personal assets are separate from business assets Dividends can be paid NI can be reduced by paying in dividends Entitlement to more state benefits than as a sole trader |
Detailed accounts required by law Accounts must be filed at Companies House and are available to the public online Named person with significant control (PSC) Name and address available to the public online Annual confirmation statement (previously annual return) is obligatory Penalty for late filing of accounts Less flexibility for dealing with company losses Individual liability can remain in tort*** |
Companies Act 2006 applies Register with Companies House before trading Register for NI with HMRC Class 1 NI contributions paid by employer and employee PAYE applies to directors and employees Corporation Tax payable on profit Dividends can be paid to directors Company may have to register for VAT |
| Partnership | Similar to sole trader Get solicitor's advice on partnership agreement |
Similar to sole trader Partners are jointly liable |
Self-employed tax and NI status for partners PAYE for employees |
| Limited liability partnership | Similar to limited liability company Get solicitor's advice on partnership agreement |
Similar to limited liability company Partners are not jointly liable |
Self-employed tax and NI status for partners PAYE for employees |
Architects Registration Board (ARB)
The Architects Registration Board is the body set up by Parliament as the independent UK regulator of architects. Anyone who is involved in designing and constructing buildings, and describes themselves as an architect, must be registered with the ARB.
Architects Code: Standards of Conduct and Practice
As an architect you are expected to:
The Architects Code: Standards of Conduct and Practice can be found on the ARB website.3
Royal Institute of British Architects (RIBA)
The Royal Institute of British Architects is a professional body for architects, primarily in the United Kingdom but also internationally, founded for the advancement of architecture under its charter. Membership of the RIBA has many advantages but is not mandatory for architects.
The RIBA values
Honesty, integrity and competency, as well as concern for others and for the environment, are the foundations of the RIBA's three principles of professional conduct, set out below. All members of the RIBA are required to comply.
THE THREE PRINCIPLES
The supporting Guidance Notes include the following sections:
The Code of Conduct and the supporting Guidance Notes can be found on the RIBA website, www.architecture.com.4
RIBA accreditation: Chartered Practice, Conservation Architect
RIBA Chartered Practice accreditation
Once you have set up your new company you must decide whether the practice is to be an RIBA Chartered Practice. Small practices and even sole practitioners can apply for RIBA Chartered Practice accreditation at any stage. This could be after the first year, once the practice is more established.
The main advantages of practice accreditation are:
In order to register your practice you must complete an application, pay a yearly subscription and comply with certain criteria relating to CPD, health and safety, employment policy, PI insurance cover and quality management systems. Directors or partners must be RIBA Chartered Architects and members of the ARB, and you will be asked to participate in benchmarking surveys.
Full details and application forms are available from the RIBA.
RIBA Conservation Architect Accreditation
Both the RIBA and the SPAB (Society for the Protection of Ancient Buildings) run courses for architects who wish to specialise in conservation work or the refurbishment of old buildings. Individual architects who already have some experience and are willing to comply with the International Council on Monuments and Sites (ICOMOS) Guidelines on Conservation can apply for RIBA accreditation at various levels:
In order to register for conservation accreditation you must already have some experience, and you must complete an application with case studies and pay a yearly subscription. Accreditation is valid for five years. Full details and application forms are available from the RIBA.