titles and entitlements

Highly successful architects are often smart about structuring an ownership transition program, but the design community as a whole hasn't followed that path. “It's a power issue with a small firm. It's hard to give a piece of the practice to someone else while you're still working,” says David Pfeffer, an attorney with LePatner & Associates, New York City, adding that planning should begin 10 years before retirement.

Small firms are beginning to use the term principal to connote a high-level manager, even though the person is not an equity partner. Law firms have been doing that for years. Although it's perfectly legal, Pfeffer says architects should be aware that claims over billing rates or misrepresentation could arise from clients who think they're dealing with an owner. “When someone holds themselves out as a principal, it connotes ownership to a lot of people,” he says. Although it's a minor issue, “architects would just have to be careful not to imply they're owners when they're not.”

Likewise, promoting employees to associate doesn't legally entitle them to a percentage of the firm's profits. In fact, in rare cases being a minority shareholder may work against an employee. “They can be responsible for more than their share of liability if the firm is involved in a claim or malpractice suit,” LePatner says. “Firms are often sued for an amount appropriate to how many shareholders or partnerships there are.”