Architecture Firm Entity Structure: LLC, S-Corp, or Partnership for Your Practice

By Yarik Yarosh, CPA ·September 4, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 4, 2026 · FL CPA license AC61704 · CPA Ontario

Architecture firms face a particular challenge that manufacturing, construction, and real estate businesses do not: architecture is classified as a Specified Service Trade or Business (SSTB) for purposes of the QBI deduction under IRC 199A. This means the 20% QBI deduction phases out and eventually disappears as the owner’s taxable income rises above $191,950 (single) or $383,900 (married filing jointly) for 2026. The phase-out range is $75,000 (single) or $150,000 (MFJ) under the One Big Beautiful Bill Act. Above $266,950 (single) or $533,900 (MFJ), the QBI deduction is zero.

This SSTB classification interacts with the entity structure decision. An S-Corp election can save self-employment tax, but it may also affect the QBI deduction calculation. The right structure depends on the firm’s income level, the number of owners, and the growth plan.

✓Key takeaway

Architecture firms are SSTBs because they provide services in the field of “consulting” or “any trade or business where the principal asset is the reputation or skill of one or more employees or owners” (Treasury Regulation 1.199A-5). The QBI deduction phases out between $383,900 and $533,900 (MFJ) for 2026. Below the threshold, the deduction is available at 20% of QBI. Above the threshold, it is zero. The S-Corp election reduces self-employment tax by splitting income into salary (subject to payroll tax) and distributions (not subject to payroll tax), but the salary must be reasonable. Most states require architecture firms to organize as Professional LLCs (PLLCs) or Professional Corporations (PCs). Multi-owner firms typically operate as partnerships or multi-member LLCs taxed as partnerships, which offer flexibility in profit allocation and buy-in structures.

Why does the SSTB classification matter?

For a sole proprietor architect earning $200,000, the QBI deduction is approximately $40,000 (20% of $200,000), saving roughly $8,800 in federal income tax at the 22% bracket. For a firm owner earning $500,000, the QBI deduction is zero because of the SSTB phase-out. The same owner in a non-SSTB business (construction, manufacturing) would receive a QBI deduction of up to $100,000, saving $37,000 in federal tax.

This gap creates a planning incentive: if the firm owner’s taxable income is near the phase-out range, strategies to keep income below the threshold (retirement plan contributions, charitable giving, timing of billing) can preserve the QBI deduction. Every dollar of taxable income above the threshold within the phase-out range costs not only the marginal tax rate but also a proportional loss of the QBI deduction.

For firm owners well above the threshold, the SSTB status is simply a permanent loss. The entity structure decision then focuses entirely on SE tax savings and liability protection, without the QBI variable.

When does the S-Corp election make sense?

The S-Corp election is the most common structure for profitable single-owner architecture firms. It works by splitting income into two streams:

W-2 salary: Subject to payroll tax (employer and employee FICA, totaling 15.3% up to the wage base). The salary must be reasonable for the services performed.

Distributions: Not subject to payroll tax. The distribution is the remaining profit after salary and other expenses.

Hypothetical example

Round numbers. An architect earns $300,000 of net profit after all business expenses.

As a sole proprietor (Schedule C): SE tax on $300,000 is approximately $33,400. Income tax on $300,000 (MFJ, standard deduction) is approximately $45,000. Total tax: $78,400.

As an S-Corp with $120,000 salary: Payroll tax on $120,000 is approximately $18,360. The remaining $180,000 passes through as a distribution, with no payroll tax. Income tax on $300,000 (including the salary and distribution) is approximately $45,000. Total tax: $63,360.

SE tax savings: $15,040 per year. Over 10 years, the S-Corp saves approximately $150,000 in payroll taxes. The S-Corp has additional compliance costs (payroll processing, Form 1120-S, W-2 preparation), typically $3,000-$5,000/year, but the net savings are still substantial.

QBI consideration: At $300,000 taxable income (MFJ), the firm is below the $383,900 phase-out threshold. The QBI deduction is 20% of $180,000 (the S-Corp distribution, which is the QBI) = $36,000, saving approximately $7,920 in income tax. The salary does not count as QBI.

The salary level also affects retirement plan contributions: a higher W-2 salary increases the employer contribution limit for a Solo 401(k) or SEP IRA, but also increases payroll tax. The retirement plans guide for architecture firm partners covers how to balance these competing factors.

Illustrative numbers only, not a real client and not advice for your facts.

How are multi-owner architecture firms structured?

Most multi-owner firms are organized as partnerships (or multi-member LLCs taxed as partnerships). The partnership structure offers several advantages:

Flexible profit allocation: Partners can allocate income disproportionately to their ownership percentages, as long as the allocations have “substantial economic effect” under IRC 704(b). A senior partner who brings in 70% of the revenue can receive 70% of the profits even if ownership is split 50/50.

Multi-tier structures: A partnership can have different classes of partners (equity partners, income partners, junior partners) with different profit-sharing formulas. This allows the firm to reward producers and incentivize growth without changing the ownership structure.

Buy-in flexibility: New partners can buy in through capital contributions, promissory notes, or sweat equity arrangements. The partnership agreement governs the terms, and the tax treatment of the buy-in depends on whether the new partner acquires an interest in capital (which may trigger income recognition for the existing partners) or an interest in future profits only.

An S-Corp is less flexible for multi-owner firms because it allows only one class of stock. All shareholders receive distributions in proportion to their ownership, with no ability to allocate profits disproportionately. For firms with multiple partners at different levels, the partnership structure is almost always preferable.

What are the state-level requirements?

Most states require architecture firms to organize as Professional LLCs (PLLCs), Professional Corporations (PCs), or Professional Limited Liability Partnerships (PLLPs). The specific requirements vary by state, but common features include:

All owners must be licensed architects (or licensed in a related profession, depending on the state)
The firm must register with the state board of architecture
The entity name must include a professional designation (PLLC, PC, etc.)
The firm’s professional liability is not eliminated by the entity structure (the licensed professionals remain personally liable for their own professional acts, though the entity shields owners from the malpractice of other owners)

The federal tax treatment is independent of the state organizational form. A PLLC taxed as a partnership files Form 1065. A PC can elect S-Corp status. The state-level requirements affect entity formation and liability, not federal tax classification.

How do partner buy-ins work?

When a new partner joins an architecture firm, the buy-in transaction has tax consequences that depend on the structure:

Capital interest purchase: The new partner pays the existing partners for a share of the firm’s assets (including goodwill). The existing partners recognize gain or loss on the sale. The new partner’s basis in the partnership interest is the purchase price. If the partnership makes a Section 754 election, the new partner gets a step-up in the inside basis of the partnership’s assets, which increases future depreciation and amortization deductions.

Profits interest: The new partner receives an interest in future profits only, without paying for existing capital. Under Revenue Procedure 93-27, a profits interest granted for services is generally not a taxable event at the time of grant (if certain conditions are met). The new partner begins receiving allocations of future income, and the value builds over time.

Sweat equity with vesting: The new partner receives an ownership interest that vests over time (3-5 years). This can be structured as a profits interest (tax-free at grant) or a capital interest with an IRC 83(b) election (tax paid at grant on the current value, which may be low).

Related guides:

Structuring your architecture practice?

The Professional Practice Assessment is a fixed $250. You get a written, CPA-reviewed analysis of the entity options, SSTB impact, SE tax savings, and buy-in structures for your specific situation.

Book a free call →

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Architecture Firm Entity Structure: LLC, S-Corp, or Partnership for Your Practice." Blue Cloud CPA, September 4, 2026. https://bluecloudcpa.com/guides/architecture-firm-entity-structure-llc-scorp

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.