Sole trader

Architects can practise as sole traders (also referred to as sole principals or sole practitioners) either entirely alone, or with employed staff. Many architects choose this form of practice, attracted by the freedom of carrying on a business on their own account, in tune with their own talents, over which they have absolute control. Although the portfolio of work of sole traders can be limited to small projects, this is not necessarily the case, and sole traders often handle a limited number of medium-range projects, particularly if they have efficient IT systems in place and employ or sub- contract some assistance. However, this is generally considered one of the hardest forms of practice in that sole traders can feel isolated from their fellow professionals. While they are entitled to all the profits from the business, they also have to manage it single-handedly and face the risks alone. Sole traders are responsible for debts and any damages awarded against them for breach of contract or tort, and are liable to the full extent of their personal and business assets. They can be made bankrupt. Many sole traders may work with a non-architect co-director and trade as a limited company to limit these liabilities.

4.3.2 Partnership

The Partnership Act 1890 defines partnership as ‘the relationship which exists between two or more persons carrying on business in common with a view to profit’. Although there is no legal requirement for a written agreement, it is strongly recommended that a partnership be established by a formal deed of partnership setting out the rights and responsibilities of the partners. These should be discussed and agreed before they are written into the deed, which should ultimately be drawn up by a solicitor. Compatibility of objectives, skills and personalities is of crucial importance, and the executive responsibilities of each partner must be clearly identified. Matters such as the name of the practice, the apportioning of profits and losses, payment of interest on capital, and banking arrangements and authority should be agreed and recorded in the partnership deed. Other matters it should clarify are pension provision, retirement, and the admission of new partners. It is usual to include some form of provision for dispute resolution, such as mediation, adjudication or arbitration.

In a partnership the equity is owned by the partners; they share both the profits and the risks, and have the right to participate in the daily management of the business. Partnership offers many advantages, and it remains a popular form of practice. It is generally more efficient for several principals to combine staff, facilities, accommodation, etc., although this could be done without forming a partnership (see below). The key advantages lie in the profit sharing, the greater potential for new work through the pooling of client contacts, the security a partnership offers to a client and, of course, the benefits of sharing and developing design ideas. However, partnership carries with it a high level of individual responsibility and risk, and there are other forms of collective practice that can offer many of the benefits of a traditional partnership while limiting individual liabilities.

Each partner is liable jointly with the others for all debts and obligations incurred while a partner, and should he or she die, this liability falls upon the estate. The partnership is liable for all negligent acts committed by any one of its partners, even though the others might have taken no part in such negligent action. The same applies to people who were partners at the time, but who have subsequently retired from the practice. A partner’s liability extends to all his or her business and personal assets. Someone bringing action for damages against a partnership may bring it against one or several partners, or against the partnership as a whole, or any combination of these. If brought against one person, that partner may recover the damages from the others but initially may have to bear the loss alone.

To join an existing partnership, a new partner will in some cases have to ‘buy into’ it. This will involve contributing a capital sum calculated on the basis of the share of the annual profits the partners will receive. As it is often difficult for a young partner to raise this sum, it is usually paid in stages over several years. It is increasingly common to offer a share in the partnership without any capital sum requirement, but in return the partner agrees to leave a proportion of earnings in the partnership as working capital. In some cases, the partnership agreement provides for a salary to be paid to one or more of the partners in addition to a share in the profits. Such partners are referred to as ‘salaried partners’. This is often a difficult position to be in, as the share of the profits is often very small, yet the liability is no less than that of the other partners.

New partners are sometimes drawn from outside the practice, but as a great deal of mutual knowledge and understanding is needed to make a partnership work successfully, they are frequently appointed internally. In many practices promising staff and potential partners are offered ‘associateships’. An associate does not normally share in the profits or risk, although they are often placed on a bonus scheme, and may be offered other additional benefits such as a health care package.

When a partner retires or leaves the partnership this does not remove liability, and similarly liability is not removed if the partnership dissolves. It is usual for partnerships to retain professional indemnity cover for any retired members.