Limited Liability Company

There is an emerging trend regarding formation of Limited Liability Corporations (LLCs) by design firms entering the design/build arena. LLCs are a hybrid form of business organization that combines the liability protection of corporations with the tax and accounting advantages of partnerships.

How it works: A design firm forms an LLC. The design/build business is then conducted solely through this separate legal entity. The design/build LLC secures D/B contracts with project owners and then contracts with a design firm (i.e., the parent company that formed the LLC) and a contractor to do the work.

Advantage: The parent design firm is not liable for the activities of the design/build LLC as long as the LLC is indeed set up as a separate entity.

Warning: The LLC can't be just a corporate shell with assets commingled with the parent design firm, or the "corporate veil" can be easily pierced and the design firm will be liable for the activities of the design/build LLC. Further, LLCs are relatively new and are not yet approved in all states. Nor have they been substantially tested in the courts. However, some attorneys feel that as long as LLCs meet the standard tests of incorporation, they should provide liability protection and therefore allow a design firm to enter the D/B field without jeopardizing the assets of the parent design company.

XL Design Professionals suggest that design professionals proceed cautiously in this area. If LLCs are established, every step should be taken to make sure they are indeed separate legal entities. Seek expert legal advice. Also, the best protection against liability for firms entering the design/build arena is ardent risk management and loss prevention practices. This includes careful client, contractor and project selection and contract language that keeps construction-related liabilities where they belong -- with the contractor.