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What are the 6 pieces of business knowledge/skills that the interior design should have?
1. business management
2. carrying appropriate insurance
3. financial management
4. an awareness of legal issues
5. business development
6. managing employees
What are the 5 organizational structures or business types an interior design business can take the form of?
1. Sole Proprietorship
2. Partnership
3. Corporation
4. Limited Liability Companies/Limited Liability Partnership
5. Joint Venture
What is needed to set up a sole proprietorship?
1. establish a name & location for the business
2. open a company bank account
3. have stationery printed
4. obtain whatever licenses are needed by the local jurisdiction
(5. if employees are hired, other state & local requirements must be met)
What are the advantages of a sole proprietorship?
1. easy set up
2. total management control by the owner
3. possible tax advantages to the owner because business expenses and losses may be deducted from the gross income of the business
What are the disadvantages of a sole proprietorship?
1. the owner is personally liable for all debts and losses of the company
2. more difficult to raise capital and establish credit
3. company usually ceases to exist when the owner quits or dies
Describe a general partnership business.
Two or more people share in the management, profits, and risks of the business.
Income from the business is taxed as ordinary income on personal tax forms.
Employees can be hired as with any form of business.
What are the advantages of a general partnership?
1. easy to form (sign a partnership agreement)
2. the business benefits from skills and talents of severl people (rather than just the sole proprietor)
What are the disadvantages of a general partnership?
1. all of the partners are responsible and liable for the actions of the others and personal assets of all partners are vulnerable to lawsuits, etc.
2. income is taxed at individual rates
3. if a partner wants to withdraw, the partnership is usually dissolved
What is a limited partnership?
Has general partners and limited partners; the limited partners are only investors and receive a portion of the profits but have no say in the management of the company; they are liable only to the extent of their investment (limited partnerships have generally given way to the limited liability company)
Describe a corporation (or a C corporation).
An association of individuals, created by statutory requirements, having an existence independent from its members.
The formation and conduct of corporations are governed by the laws of individual states and formal articles of incorporation must be drawn up by an attorney and filed with the appropriate state office to legally form a corp.
What are the advantages of a corporation?
1. The stockholders are financially liable only for the amount of money invested on the corp (since the corp is a separate legal entity.
2. A corp is generally taxed at a lower rate than are individuals (though it is taxed at 2 levels: taxed on profits and shareholders are taxed on their dividends)
3. Have a continuity independent of changes in stockholders, deaths of board of directors members or changes in the principals
4. Relatively easy to raise capital by selling stock in the corp.
What are the disadvantages of a corporation?
1. High initial setup costs

2. Continuing paperwork and formal requirements necessary to maintain the business
What is a subchapter S corporation?
Variation of the corporation with certain eligibility requirements and all the advantages of standard corp's but the profits or losses are paid or deducted from the stockholders' personal income taxes in proportion to the shares of stock they hold = advantageous when there are losses or when the state tax rates shift the financial benefits so that the individual is taxed rather than the corp
What is a professional corporation?
Similar to other corporations except that liability for malpractice in generally limited to the person responsible.
(Formed by interior designers, architects, lawyers, doctors, accountants, etc.)
Describe a limited liability company or a limited liability partnership.
Hybrid business organizations that combine the advantages of the corp and the partnership.

They are formed like a partnership wher the investors are called members and those who manage are called managers.

Unlike with partnerships, it is possible to have nonmenbers as managers.
What are the advantages of a LLC or LLP?
1. Liability is limited to a member's investment
2. Taxed as a partnership or corporation, at the owner's discretion, with only one level of taxation for members (unlike a C corp)
3. Generally easier to set up and operate than a corp.
Describe a joint venture.
A temporary association of two or more persons or firms for the purpose of completing a project.
A formal, written agreement should be developed that describes the duties & responsibilities of each firm, how profits and losses should be divided and how the work will be done.
Can't be sued like a corp can.
Profits may be taxed as a partnership or the individual members of the JV may be taxed separately.
What are the two main types of office organization often seen in ID or ARCH firms?
1. Departmental organization (marketing, design, spec, contract doc department, etc.
2. Studio organization (each studio is responsible for completing an entire project)
(or some combo of the two)
What are the advantages and disadvantages of departmental organization?
Advantages:
1. efficient organization
2. take advantage of many types of specialists
Disadvantages:
1. Communication between departments about any particular project can be a challenge
2. Discourages or make it impossible for anyone to gain a breadth of experience or share their knowledge in other aspects of project planning and completion.
What are the advantages of studio organization?
1. Close and immediate communication among members of the design team and the synergy of sharing ideas and group problem solving

2. Project manager has daily contact with the design and production team as well as the client
What are the 6 types of insurance the designer should have?
1. Professional liability insurance (aka malpractice insurance or errors and omissions insurance)
2. General liability insurance
3. Property insurance
4. Personal injury protection insurance
5. Automobile insurance
6. Workers' compensation insurance
(& health and life insurance, valuable papers insurance, business life insurance)
What is professional liability insurance?
Protects the designer in case some action by the designers causes bodily injury or property damage.
(from incorrect spec's, mistakes on drawings, incorrect installation of furniture)
What is general liability insurance?
Protects against claims of property damage, liability and personal injury caused by the designer or employees, consultants or other people hired by the designer.
What is personal injury protection insurance?
Protects the designer against charges of slander, libel, defamation of character, misrepresentation, and other torts
What are the 2 types of insurance the owner is required to have in AIA Doc A251 (General Conditions of the Contract for Furniture, Furnishings and Equipment)?
1. Liability insurance
2. Property insurance for the full insurable value of the work
(must be "all risk" type rather than "specified peril" type; all risk is broader in coverage)
The General Conditions of the Contract require that the contractor carry insurance that will protect them from what 6 things?
1. worker's comp claims
2. claims from injury, occupational sickness or death of employees
3. claims for injury or death of nonemployees
4. claims for personal injury
5. claims for damages other than to the work because of destruction of tangible property
6. claims for damages related to use of motor vehicles
(& possibly insurance for any portions of the work that are stored off site or that are in transit to the site)
What are the 2 broad categories of accounting that the financial management of a design firm depends on?
1. Basic accounting that all businesses must do to keep track of money for day-to-day operations, banking, taxes, and auditing
2. Active financial management so the firm owners know that financial status of the business and can use financial reporting to help make decisions critical to the firm's survival and profit
Define accounts payable.
Claims from the suppliers of goods or services (such as consultants) but not yet paid for
Define accounts receivable.
Money that others owe to the business through invoices for services.
Define assets.
Any type of tangible or intangible resource that can be measured in monetary terms. Include current assets (resources that are converted into cash within one year), fixed assets (long-term items, ie, equipment & property) & other assets (securities or copyrights)
Define chart of accounts.
A list of the various accounts a business uses to keep track of money along with corresponding account numbers used for data processing
Define direct labor.
All labor of technical staff, principals, and support staff that is directly chargeable to projects.
Define direct personnel expense.
The expense of employee salaries plus the cost of mandatory and discretionary expenses and benefits such as payroll taxes, health insurance, etc.
Define indirect labor.
All labor not charged to a project or revenue-producing account (administration, general office time and marketing)
Define discretionary distribution.
Voluntary distribution of profits to owners and nonowners, such as performance bonuses, profit sharing, incentive compensation, etc.
Define gross revenue.
All the revenue generated by a business for a period of time stated.
Define liabilities.
Claims by people outside the business and claims by the owners of the business against the total assets of the business.
Define overhead.
Expenses incurred in order to keep a business operating whether or not any revenue is being generated, such as rent, power and telephone.
What are the 2 basic accounting methods?
1. Cash

2. Accrual
Describe cash accounting.
Revenue and expenses are recognized at the actual time the business receives the cash or pays a bill.

Fairly simple; used by single-person or small firms but can''t be used by a corporation if the businss maintains an inventory.
Describe accrual accounting.
Revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands.
Makes it possible to get a better overall picture of the financial status of a business and produce the reports vital for active finiancial management.
What method of bookkeeping does accrual accounting use?
Double-entry bookkeeping: all transactions are listed chronologically in a journal; they are then posted to a ledger in which transactions are grouped into individual accounts.
What are the 3 common types of accounting reports that can be generated?
1. balance sheet
2. profit and loss statement (or income statement)
3. cash flow statement
What is a balance sheet?
Summarizes all assets and liabilities and shows the financial position of a business; total assets must equal total liabilities plus the net worth or owner''s equity

(Net worth of a firm is the total assets less the total liabilities.

Owner''s equity is the money invested in a business by the owners or stockholders.)
What is a profit and loss statement?
Lists all the income and expenses of a business for a certain period of time which shows either a profit or loss for that period.
What is a cash flow statement?
Shows actual inflows and outflows of cash (anything accepted by a bank) or cash equivalents (short-term investments that can be quickly converted into cash)
What are the most important aspects of financial management that allows a design firm to stay in business, grow and make a profit?
Active planning
Monitoring
Controlling of financial information
Acting on the information
What is the most fundamental equation for financial planning in any profit-oriented business?
profit + expenses = revenues

(assumes the business will make a targeted profit and must then control expenses and generate appropriate revenue to make that happen)

OR
revenue - expenses = profit

(assumes that profit is whatever may be left over after expenses are subtracted from whatever revenue may be generated)
How do design firms typically control expenses?
Increase revenue?
Control expenses: reducing overhead cost wherever possible
Increase revenue: increasing the amount of work the firm does or increasing fees
What is shown in a project progress report?
The hours and labor costs for each phase of a project for the current reporting period as well as the amount to date and compares these numbers with estimated hours and dollars.
Costs for consultants, overhead allocations nad reimbursable expenses are also shown.
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