Peter J. Lamont is a business and commercial litigation attorney nationally recognized in a wide variety of highly specialized areas within the kitchen, bath, lighting, construction, and design industries. He routinely represents various national and international companies within the design sector, and has achieved the highest rating in both legal ability and ethical standards as awarded by AVVO (avvo.com).
Starting a design firm requires patience, perseverance, focus, and planning. Unfortunately, many design entrepreneurs fail to spend enough time on the planning phase and ultimately lose the business or incur significant liability. But those who do put their resources into thinking through their business setup generally experience significant growth and success in their firm. Below, we address the five main areas that all designers should focus on prior to starting their own design firm.
Professional Services Support
The first and most often overlooked area of a design startup is the designer's need for proper support personnel. Most lighting designers who are contemplating starting their own firm have limited financial resources. The money that they do have is typically spent on office space, furniture and equipment, supplies, and marketing efforts. While these are certainly important, the two most important resources in which a designer should invest are a good accountant and an experienced business attorney. Designers starting out on their own often attempt to handle the accounting and legal aspects of their business by themselves. Concerned with incurring high accounting and legal service bills, they find Internet resources and stock forms appealing. Yet, while the low cost of these is attractive, the results and protections they provide are anything but.
On the other hand, there is no need to hire a huge accounting firm or a worldwide law office. There are plenty of established and experienced accountants and attorneys in every town and city. There are also a number of online directories that can assist designers when selecting professional service providers. One of the best websites for searching accountants is the CPA directory (cpadirectory.com), and for searching for attorneys check AVVO (avvo.com). Both sites provide detailed listings of accountants and attorneys as well as their backgrounds in specific areas of practice.
When hiring an accountant, look for one who is a certified public accountant, and whose office can provide you with business startup services in addition to bookkeeping and related assistance. Without an accountant, designers can expose themselves to tax liabilities and mismanagement of client funds.
When choosing an attorney, look for one whose practice area is focused around business law and contracts. If possible, look for someone who has had experience representing design professionals. Also, many attorneys are now providing alternate fee arrangements for startup business services. Before meeting with an attorney, you should confirm that the attorney will not charge a consultation fee. If the attorney does, contact someone else.
Once you have selected your professional-services team, decide what business structure to establish and confirm that your business complies with any local, state, or federal licensing requirements. There is a tremendous amount of misinformation about the benefits and pitfalls of the various business structures. Your attorney and accountant can provide the most accurate information on this.
There are a number of ways in which a designer can do business. For example, an individual designer can operate as a sole proprietorship or a corporation. Two or more people interested in doing business together can form a partnership or a corporation. And there are variations on these basic formats, such as a joint venture or a professional corporation.
A sole proprietorship is the most basic and least formal business structure. Basically, the designer operates under his or her own name or under a "doing business under" name. In order to operate under an assumed name, either the designer or the designer's attorney must file paperwork with the county clerk or the state wherein they will operate.
Sole proprietors must also keep separate bank accounts for their business and home finances, but all income will be taxed on the designer's individual income tax return. But all liability remains the personal responsibility of the designer. Any settlements or judgments arising out of a lawsuit will come directly out of the designer's personal assets.
Many designers seeking to protect themselves from personal liability choose to incorporate. Incorporation is basically the process of the formation of a separate entity. The benefit of incorporating is that the designer and the business are no longer considered to be the same entity in the eyes of the law. Liability can attach to the corporation but not always to the individual designer.
A traditional corporation requires the filing of a Certificate of Incorporation and the distribution of stock. Incorporation also requires the formation of a board of directors to make major policy decisions and the delegation of officers to run the day-to-day affairs of the corporation. It is important to note that an individual designer can form a corporation; in this case, the designer simply wears multiple hats, meaning that he or she is the board of directors as well as all the corporate officers, and is usually the sole shareholder.
You may be surprised to learn that many designers operate without a proper contract, relying on an architect's contract, a stock form contract from the American Institute of Architects (AIA), or, even worse, an email agreement or a purchase-order agreement. Without a properly tailored contract, designers will not be able to adequately protect their rights to payment or to protect themselves from liability.
Design contracts must be clear and easy to understand. Form contracts that contain legalese can be confusing and are often considered to be unenforceable by certain courts. The best contracts state the terms and conditions in clear and concise language.
One area of a contract that must specifically be addressed is the scope-of-work provision. This area gives rise to the most litigation. A designer must be clear in the contract as to the scope of the work, and must fully explain what he or she will and will not be doing. In the event that changes to the scope of work are required, these should be made part of the contract as addendums for change-order purposes.
Another significant area of a contract to consider thoughtfully are the indemnification provisions. In its most simple form, indemnification is a legal and contractual principal that requires a corporation or individual to hold another individual or entity harmless when faced with a particular set of circumstances. Indemnification provisions are often overlooked, but they can create a significant risk of liability if they are not properly developed.
An experienced business attorney will review contracts that a designer may be required to sign and can formulate the designer's contract to provide for maximum protection. While form contracts such as those prepared by the AIA may offer some basic protection to the designer, they are very general and fail to address particular issues relevant to a lighting designer. Thus, it is better business protocol to have an individually tailored contract prepared and reviewed on an annual basis.
In addition to protection through the contract, lighting designers should obtain professional liability insurance. This type of insurance is widely available, generally affordable even for startup firms, and can protect the designer against various claims arising out of his or her professional design services.
A designer should enlist the help of an insurance broker who specializes in professional liability coverage. You should explain in detail the full extent of your services in order to obtain adequate coverage for your activities.
Typically, a professional liability policy will, for a fee, cover claims made against the designer that arise out of the rendering of professional design services. Such policies do not cover claims for nonpayment of fees by the designer's client. But when a designer sues a client for outstanding fees, the client routinely will bring counterclaims against the designer for professional malpractice or negligence, all in an effort to offset their payment obligations. In most circumstances, professional liability coverage would be triggered by such a counterclaim.
Many designers confuse general liability insurance with professional liability coverage. General liability insurance will not protect a designer from professional malpractice claims. General liability typically covers property damage and bodily injury claims. A designer who is opening a studio or an office and expects foot traffic may want to have general liability insurance to protect against claims made by a client who might be injured while on the premises. Many designers choose to forgo general liability insurance either as a cost savings or because bodily injury claims are limited, though. While general liability coverage is not necessary for every designer, professional liability coverage should be a basic staple of any lighting design practice.
Liability can also be triggered as a result of poor or improper record keeping on the part of the designer. There are a few general rules with respect to record keeping that every new design business should adhere to. The first of these is that every client should have its own client file, and all communication between the designer and the client should be kept inside it.
A client file should be maintained in reverse chronological order, meaning that the most recent communication or correspondence should be on top. Every written piece of correspondence—including emails, letters, contracts, and drawing sign-off sheets—should be maintained in the file.
Another tenant of proper record keeping is that all verbal communication should be reduced to some form of writing. Verbal communication is often at the heart of a lawsuit concerning the designer's failure to provide proper services. Too frequently, designers do not keep records of telephone calls or face-to-face conversations and are forced to rely on memory—and memory does not hold much weight at trial. A far better practice is to take detailed notes of all telephone and verbal communications, which should include the date and name of the person with whom the designer is speaking. These notes also should be placed in the client file. When it is the designer's routine business practice to maintain notes of verbal communications, such communications may be deemed admissible at trial. Proper record keeping is a critical component in preventing unnecessary litigation and should not be overlooked by the designer.
Deciding to start one's own design firm—for lighting, architecture, or some other business—is no small undertaking. It is worth investing the time that is necessary to properly research the appropriate business model to use, as well as to determine the professional services support, both legal and financial, that you will need. Doing all of this will start your firm off on the right foot and put it on the path to success. More importantly, it means you can focus your time on design, which was the purpose of the business to begin with. To not invest in the proper planning is to put oneself at a disadvantage before you've even started your first project.