Frequently Asked Questions

A compilation of frequently asked questions covering the Strategic Partner Program, available strategies and services, MSO technical details, sales processes, and other key topics. This resource provides quick answers to common inquiries, allowing Strategic Partners to easily access the information they need.

1. Seeing Flow of Funds: From S-Corp to C-Corp

Overview of Fund Movement Through the MSO Strategy

 

The MSO (Management Services Organization) serves as a tax-efficient structure that receives deductible payments from the S-Corporation (operating company). The strategy leverages IRS-compliant business arrangements to move funds in a legally defensible way.

 

Mechanics of the Flow

  • The S-Corp pays a management fee to the C-Corp (MSO) in exchange for services.
  • This management fee is deductible for the S-Corp and thus reduces its taxable income.
  • The management fee calculation starts with reasonable compensation for the business owner, based on regional standards.
  • Additional expenses may be included, such as:
    • Sales & Marketing (e.g., advertising, digital services)
    • General & Administrative (e.g., legal, HR, compliance)
    • Operational overhead (e.g., IT, financial management)

This increases the total amount that can be shifted to the C-Corp/MSO.

 

What Happens Inside the C-Corp (MSO)?

The C-Corp, once funded, can use the money in several ways:

  1. Deductible Spending: Wages, vendor payments, or administrative overhead.
  2. After-Tax Spending: On non-deductible items (e.g., entertainment).
  3. Accumulated Profits:
    • Invested within the C-Corp (stocks, insurance, private equity).
    • Loaned outside to a trust or LLC under a note receivable.
    • Distributed as a dividend (taxable at capital gains rates).

Client Variability

Every client structure is unique:

  • Different levels of fees charged.
  • Different internal uses of funds.
  • Different exit strategies from the MSO.
 

GTC provides a custom cash flow analysis for each client to model this based on their industry, compensation norms, risk tolerance, and goals.

What Is the “Delta” and Why Does It Matter?

 

The “delta” represents the financial uplift created by tax deferral and reinvestment through the MSO structure over time. Instead of paying taxes annually, the client retains that money, redeploys it (often into business growth or financial strategies), and earns compounding returns.

 

This creates a wealth-building cycle that significantly alters the client’s financial position by the time of exit or transition.

Illustrative Example: 10-Year Tax Deferral Strategy.

 

Let’s assume a business owner defers $250,000 annually for 10 years. That totals $2.5 million in gross tax deferral — money that would have otherwise gone to taxes.

 

If those funds are consistently invested and grow at 9% annually, the value after 10 years is approximately $4.39 million.

Exit Scenario Comparisons

  • Estate Planning Hold:
    If the owner holds the MSO until death and transfers it to heirs, the full $4.39 million can pass through with a step-up in basis, avoiding federal income tax.
  • Worst-Case Taxable Scenario:
    • $1.64 million in total interest/gains taxed at the 21% corporate rate → approx. $344,000 in taxes paid over 10 years.
    • Remaining funds then fully distributed to the owner, taxed at 23.8% qualified dividend tax rate.
    • Final net after-tax amount to the owner: approximately $3 million.
 

Key Insight

Even under the most conservative, fully taxable exit path, the MSO strategy produces an after-tax benefit of $3 million — capital that would have otherwise been lost to taxation. In the optimal case, the structure transfers nearly $4.4 million tax-free to heirs.

The Strategic Role of Life Insurance

 

Life insurance is often the preferred vehicle inside the MSO structure because it directly solves the core problems faced by successful privately held business owners:

  • Continuity Protection: Ensures business operations and succession are protected if the owner or a key stakeholder passes away.
  • Buy-Sell Planning: Provides immediate liquidity to fund shareholder exits or partner buyouts.
  • Estate Liquidity: Offers a tax-efficient source of capital to cover estate taxes, avoiding forced asset sales.
  • Legacy Preservation: Ensures wealth can be passed to heirs income tax-free.
 

Insurance is also compliant with long-standing IRS codes and, when paired with split-dollar arrangements, can be owned outside the MSO — avoiding future double taxation at exit.

 

Tax Advantages of Life Insurance

 

Life insurance policies come with unique tax efficiencies:

  • Tax-deferred accumulation of policy cash values.
  • Tax-free access to policy values via loans or withdrawals (if structured correctly).
  • Tax-free death benefit to heirs or corporate beneficiaries.
  • No exposure to annual capital gains or dividend taxation during the policy’s accumulation phase.
 

These characteristics make it a natural solution for clients focused on long-term planning, risk mitigation, and intergenerational wealth transfer.

 

Can Investments Be Held in the MSO? Absolutely.

Clients can, and often do, hold investments inside the MSO (C-Corp). These may include:

  • Treasury management solutions (short-term fixed income, laddered bonds).
  • Public equities and fixed income portfolios.
  • Private funds, structured notes, or alternatives.
 

However, there are key tax implications to consider:

  • All gains (whether short-term or long-term), as well as interest and dividends, are taxed at the flat 21% corporate rate.
  • There is no preferential rate for long-term capital gains inside a C-Corp.
  • If funds are later distributed to the owner personally, an additional 23.8% dividend tax applies.
 

Despite this, MSO-held investments can be valuable for clients seeking working capital reserves, low-risk yield, or strategic reinvestment inside the business entity.

 

Structuring Investments Outside the MSO: A Powerful Alternative

For clients prioritizing long-term growth, estate planning, or income flexibility, we often recommend moving funds outside the MSO via a loan structure:

  1. The MSO loans capital to a personally held LLC or irrevocable trust.
  2. That outside entity holds the investments (e.g., ETFs, equities, real estate).
  3. A note receivable is created, paying interest back to the MSO.
 

Why this structure works:

  • Avoids dividend taxation — principal and returns grow outside the double-tax environment.
  • Enhances estate planning — ownership can be transferred or protected.
  • Preserves tax deferral — capital gains are taxed at the individual level, not the corporate rate.
  • Flexible — allows diversification of investment strategy across entities.
 

Summary: Insurance vs. Investments – It’s Not Either/Or

Purpose

Ideal Vehicle

Location

Tax Profile

Risk mitigation, continuity, estate liquidity

Life insurance

Outside MSO (via split-dollar)

Tax-deferred + tax-free death benefit

Liquidity reserves, short-term capital

Fixed income, treasuries

Inside MSO

Taxed at 21%

Long-term wealth accumulation

ETFs, stocks, alts

Outside MSO (loan to LLC/trust)

Personal capital gains rates, estate optimized

GTC helps each client determine how to structure each layer of their capital stack to align with cash flow needs, tax efficiency, and long-term goals.

Core Messaging Framework: The Three Universal Problems

 

Every privately held business owner with $5M–$20M in enterprise value and $2M+ in annual net income is likely facing these three challenges:

 

Problem 1: Losing Capital to Taxes

“Our growth is strong, but we’re watching hundreds of thousands — sometimes millions — go out the door in taxes every year.”

The MSO redirects tax-bound dollars back into the business or wealth plan, creating capacity to fund growth, planning, and protection strategies.

 

Problem 2: Exposure to Business Risk and Lack of Continuity Planning

“If something happened to me, I’m not sure what would happen to the company — or my family.”

Most owners haven’t fully addressed continuity risks like disability, partner exit, or keyman issues. GTC structures help solve this by using recovered tax dollars to fund risk management tools, including insurance-backed buy-sells and liquidity planning.

 

Problem 3: Family Wealth (Estate Tax, Value Capture & Exit Readiness)

“I’ve built significant wealth in the business, but I’m unsure how to protect it, transfer it, or fund the taxes that come with it.”

This isn’t just about retirement — it’s about protecting the family’s financial legacy. Key issues include:

  • Estate Tax Risk: A business valued at $10M–$50M can trigger millions in estate tax liability if not planned for properly.
  • Liquidity Shortfall: Heirs may be forced to sell the business or borrow against it just to pay taxes.
  • Value Leakage: Without a structured exit plan, owners often receive far less than fair market value.
 

GTC helps create and fund strategies using recovered tax dollars to:

  • Maximize post-tax business value
  • Create tax-advantaged liquidity to cover estate liabilities
  • Transition wealth in a way that aligns with the family’s vision and values
 

Unified Value Proposition

“We help business owners recover tax dollars they’re already losing — and redirect that money to solve risk, continuity, and legacy challenges, so they can grow, protect, and transfer their family’s wealth.”

Short Answer: No Cap, But Strategic Design Is Critical

 

There is no legal cap or regulatory restriction on how the MSO (C-Corporation) can be owned. The IRS and state law allow tremendous flexibility in structuring ownership — but how the MSO is owned has long-term tax, legal, and estate consequences that must be addressed during the initial design phase.

 

Why Ownership Structure Matters

Ownership of the MSO determines:

  • Who receives profits and accumulated wealth
  • Who controls strategic decisions
  • How the entity exits or dissolves
  • What estate and asset protection benefits are available
  • How and where income is taxed
  • What succession pathways are available to children, partners, or trusts
 

Common Ownership Options

  1. Business Owner Personally
    • Most common starting point.
    • Offers control and direct tax planning flexibility.
    • All shares are part of the owner’s estate unless planning steps are taken later.
  2. Spouse or G2 (Second Generation)
    • Can be used for early wealth transfer or income shifting strategies.
    • Risk: If not structured properly, income attribution or step transaction issues may arise.
  3. Irrevocable Trust (e.g., IDGT, SLAT)
    • Protects the MSO from estate tax inclusion.
    • Shields assets from creditors and future estate exposure.
    • Often used to “freeze” the value of the MSO in the owner’s estate while transferring growth to heirs.
  4. Operating Company (as Parent or Sibling Entity)
    • Less common due to complexity and exposure to operational risk.
    • Can create complications for exit, funding, and legal segregation of risks.
    • Occasionally used for simplicity or centralized control.
  5. LLC or Family Office as Holding Company
    • Wraps the MSO under a broader family enterprise or investment platform.
    • Creates a clean exit path and enhances governance.
    • Can be combined with trusts for tax efficiency.
 

Ownership Structure Should Reflect Long-Term Intent

“How the MSO is owned from Day 1 should reflect where the business owner wants that value to end up 10, 20, or 30 years from now.”

A poorly chosen ownership structure may:

  • Trigger unnecessary gift or estate taxes
  • Prevent strategic sale or succession
  • Expose assets to creditor risk or disputes

A well-structured MSO will:

  • Protect accumulated assets
  • Optimize intergenerational transfers
  • Reduce or eliminate estate tax exposure
  • Create clarity for family, partners, and advisors
 

GTC’s Role in Structuring Ownership

GTC partners with estate attorneys and CPAs to:

  • Review ownership goals
  • Recommend optimal structures based on client-specific goals (e.g., legacy, exit, asset protection)
  • Ensure compliance with IRS rules and corporate governance best practices
  • Adjust structure over time as the business and family dynamics evolve

Ideal Client Profile for the MSO Strategy

The MSO strategy is designed for privately held businesses generating strong cash flow, experiencing significant tax drag, and lacking natural deductions. These businesses are ideal for advanced planning because they have real capital to redeploy and long-term goals that require structured solutions.

 

Eligible Entity Types

The MSO strategy can be implemented across any pass-through entity, including:

  • S-Corporations
  • Partnerships
  • LLCs taxed as partnerships or S-Corps

The key is that the business generates net operating income and has legitimate operating overhead and management infrastructure.

 

Target Industries

The strategy fits best with businesses that are:

  • Service-heavy
  • High-cash-flow
  • Low in natural deductions
  • Often owner-led or partner-driven
 

Common client profiles include:

  • Healthcare: dental, veterinary, surgical, outpatient clinics
  • Engineering and technical service firms
  • Construction and specialty contracting
  • Retail operations, especially multi-location and family-run
  • Professional and business services: legal, marketing, consulting, IT, and design
  • Franchisees and multi-entity holding companies
 

These businesses typically have:

  • Reliable, recurring cash flow
  • Minimal deduction strategies remaining
  • High taxable income levels that create pain and planning urgency
 

What Makes a Business a Good Fit?

Financial Characteristics

  • Annual net income of $1 million or more
  • Enterprise value of $10M–$50M
  • Limited ability to reduce taxes through traditional retirement plans, depreciation, or other write-offs
 

Behavioral Fit

  • Growth-minded owner
  • Open to legal and tax structure planning
  • Willing to coordinate with CPAs, attorneys, and advisors
  • Long-term vision for exit, family transition, or legacy
 

Key Discovery Triggers

Phrases you might hear in initial meetings:

  • “We’re doing great — and giving it all to the IRS.”
  • “There’s too much profit and not enough planning.”
  • “I’ve got money to invest but not a clear strategy.”
  • “We haven’t figured out succession or exit yet.”
  • “Our CPA says we’ve maxed out the basic deductions.”

These signals are strong indicators that the MSO strategy could unlock new planning capacity.

 

When It’s Not a Fit

  • Businesses with less than $1 million in annual profit
  • Owners not open to legal structure or collaborative planning
  • Startups or distressed companies with unpredictable cash flow
  • Sole proprietors or single-member entities without formal management setup

Why CPA Collaboration Is Essential

CPAs are often a business owner’s most trusted advisor — especially when it comes to taxes. That makes them gatekeepers in the client relationship. Engaging them early, respectfully, and collaboratively is critical for success.

 

The goal is not to “win over” the CPA, but to align interests and ensure they’re part of the planning process, so they feel empowered, respected, and incentivized to support the strategy.

 

When to Bring in the CPA

The best time to engage the CPA is:

  • Before or during the Discussion Doc presentation
  • After initial feasibility has been validated, but before entity setup
  • In some cases, during the Discovery Phase — especially when the client requests their CPA be involved early
 

How to Position GTC to the CPA (Sample Language)

Here’s a tested, proven script you can use when introducing GTC and the MSO strategy to a CPA:

“We work exclusively with privately held business owners and their advisory teams to help recover tax dollars that are currently going out the door. We’re focused on a couple of time-tested planning tools that are IRS-defined — we’re not inventing anything new. We bring in attorneys to review the structure and handle implementation, and we always want your input before moving forward. Our role is tax advisory — we don’t do tax returns or prep work, so there’s no competition with your firm.”

 

“We also want you to bill for your time on this. There’s real work involved and you should be paid for it — we often see CPAs earn $10K+ in billable time on these types of cases. We’ll provide full documentation, legal opinions, and walk through every detail together. Most importantly, we want to make sure you’re comfortable and your client stays fully protected.”

 

Key Messages That Reassure CPAs

  • No competition: GTC does not do tax preparation or returns — we stay in our lane.
  • Full legal signoff: All strategies are reviewed and documented by a licensed tax attorney, who signs the return position.
  • CPA billing encouraged: We want them to charge for their review, advisory time, and eventual filing updates.
  • Circular 230 safe harbor: Legal counsel ensures that the CPA won’t be exposed to preparer penalties or liability.
  • Decades of precedent: These strategies have existed for 40–50+ years; they just require coordination and attention to detail.
  • We do the servicing: GTC handles all entity maintenance, training, reporting, and communication — freeing the CPA from extra burden.
 

How CPAs Benefit

By collaborating with GTC, CPAs can:

  • Increase their billable revenue per client
  • Strengthen their relationship and retention with the client
  • Be seen as a proactive, creative problem-solver
  • Gain exposure to advanced strategies that may benefit their wider client base
 

When CPAs Push Back: How to Respond

If a CPA is resistant, it often stems from:

  • Lack of familiarity with the structure
  • Fear of IRS scrutiny or audit exposure
  • Concern about losing control of the client
 

Reinforce the message:

“We’re not here to replace anything — just to help recover capital the business owner is already losing. With your input, we can design this so it fits neatly into the overall tax plan. And again — you bill for your time and remain the client’s lead tax advisor.”

Overview

GTC believes in fair, transparent, and compliant compensation for advisors, strategic partners, and professional collaborators. The compensation you receive depends on the services you provide, your licensing status, and the role you play in implementing planning components such as insurance, investments, and advanced structures.

 

Standard Compensation Model

Life Insurance (Split-Dollar, Premium Finance, Traditional Whole Life)

  • Standard Split: 60/40
    • GTC receives 60% of target or commissionable premium
    • Advisor or partner receives 40%
  • Applies to:
    • Split-dollar life insurance
    • Premium-financed arrangements
    • Buy-sell and keyman policies
    • Estate liquidity plans funded by MSO cash

Note: GTC handles all design, underwriting, carrier relationships, and service.

Qualified Plans and Deferred Compensation

  • Case-by-case basis, depending on the structure and how the TPA (Third-Party Administrator) relationship is configured.
  • If the advisor introduces the platform or TPA, and provides service or investment oversight, compensation can be structured accordingly.
  • These plans may include:
    • Non-qualified deferred compensation
    • Executive bonus arrangements
    • 162 bonus plans
    • SERPs (Supplemental Executive Retirement Plans)
 

Assets Under Management (AUM)

  • GTC does not share in AUM.
    • All investment advisory revenue remains with the licensed advisor or RIA.
    • We are not an RIA and do not manage portfolios.

You keep 100% of AUM — and the MSO strategy often unlocks new AUM by redirecting tax-bound dollars into investments you manage.

 

Consulting Revenue and Annual Service Fees

  • GTC charges an annual consulting fee for strategy implementation and servicing.
  • In some cases, where the advisor is licensed, disclosed, and appropriately contracted, this fee may be shared.
  • Requires compliance review and written agreement.

We can discuss consulting fee participation on a case-by-case basis based on licensing, role, and state regulations.

 

Additional Opportunities

  • Entity Planning Fees: In some engagements, if you are bringing a legal, CPA, or insurance team to the table, and they provide execution support, you may be eligible for coordination or origination fees (with full transparency).
  • Referral Fees: Some partners receive formal referral fees where permitted — again, this is jurisdiction- and license-dependent.
 

Compliance and Disclosure

All compensation is structured to be:

  • Fully disclosed to the client
  • Compliant with state insurance and securities regulations
  • Based on services actually rendered and/or licensure held
 

If you’re not currently licensed for certain products (e.g., life insurance), GTC can act as broker of record and handle servicing, while still structuring a compliant compensation or referral relationship.

 

Summary by Revenue Type

Revenue Source

Split / Participation

Notes

Life Insurance

60/40 (GTC/advisor)

Applies to split-dollar, premium finance, etc.

Deferred Comp / Qualified

Case-by-case

Based on advisor/TPA relationship

AUM

100% retained by advisor

GTC does not manage assets

Consulting Fees

Potentially shareable (license dependent)

Must be compliant, disclosed

Referral / Origination

Varies — must be disclosed

Subject to state rules

The Owner’s Role: Strategic Leader, Not Operator

The business owner is the central stakeholder in the MSO strategy. Their role is not to manage the structure day-to-day, but rather to:

  • Understand and approve the overall design
  • Communicate the importance of the strategy to their internal team
  • Engage meaningfully at key planning checkpoints
  • Empower their team to carry out the plan

GTC handles the heavy lifting — the owner focuses on big-picture decisions and outcomes.

 

Initial Engagement (Feasibility + Setup Phase)

In the first phase, the owner is actively involved in strategy discussions, decision-making, and approvals. Their responsibilities include:

  • Participating in initial discovery and feasibility calls (typically 1–2 hours)
  • Reviewing the Discussion Doc and Feasibility Report
  • Selecting the preferred ownership structure for the MSO (e.g., individual, trust, G2)
  • Signing entity formation documents and bank paperwork
  • Introducing key internal stakeholders (e.g., bookkeeper, CFO, CPA, legal counsel)

Time commitment: 3–4 hours total over 2–3 weeks

 

Year 1: Implementation and Transition

During Year 1, the owner transitions from lead planner to strategic overseer. Responsibilities include:

  • Approving the first year’s management fee and expense allocations
  • Participating in 1–2 strategy calls per quarter (with GTC, CPA, and/or legal)
  • Helping train internal staff (or delegating this to GTC with their blessing)
  • Coordinating with the CPA on any tax reporting or changes to financials

Time commitment: 1 hour per quarter (initial year)

 

Ongoing Years: Oversight and Delegation

After Year 1, the strategy becomes routine. The owner’s time commitment drops significantly, and most responsibilities are handled by:

  • The internal finance or operations team
  • The owner’s family office or controller (if applicable)
  • GTC, which handles annual updates, compliance checks, and strategic reviews
 

The owner continues to:

  • Join an annual review with GTC and CPA (typically 1 hour)
  • Approve any adjustments to fee structure, investment strategy, or exit planning
  • Participate in succession or estate planning reviews if ownership or structure changes

Time commitment: 1–2 hours per year, unless changes are being made

 

Optional: Deeper Involvement

Some owners want to stay heavily engaged in:

  • Investment decisions
  • Exit planning scenarios
  • Estate strategy and trust coordination
 

That is welcomed and supported — GTC will tailor the engagement model accordingly. But most owners, once confident in the plan, choose to delegate and review, rather than manage.

 

Summary: Role by Phase

Phase

Owner’s Role

Estimated Time

Feasibility & Setup

Decision-maker, signer, team connector

3–4 hours

Year 1 Implementation

Quarterly check-ins, staff onboarding support

4–6 hours

Ongoing (Year 2+)

Annual reviews, approvals, oversight

1–2 hours/year

Optional Deeper Role

Investment coordination, estate/legal integration

Flexible

Overview: A Partnership Built on Structure and Simplicity

Once the MSO is implemented, the annual responsibilities are streamlined and repeatable. GTC takes the lead on strategy servicing, compliance, and reporting, while the client and their team provide the data and approvals necessary to keep the structure effective and compliant.

Our model is designed to minimize time demands on the owner while ensuring every part of the strategy is optimized each year.

 

GTC’s Responsibilities

Year 1 – Implementation & Enablement

  • Deliver a Feasibility Report outlining:
    • Allowable MSO management fee
    • Estimated tax deferral
    • Proposed use of savings (e.g., insurance, investments, exit planning)
    • Suggested ownership structure and potential exit paths
  • Coordinate entity formation, EIN application, and bank setup
  • Train internal team (bookkeeper, controller, or CFO) on:
    • Expense categorization
    • Cash flow management
    • How to interface with MSO vendors (e.g., insurance carriers, legal teams)
  • Oversee CPA collaboration and documentation for tax compliance

Goal: Establish the foundation, align stakeholders, and ensure everyone knows their role.

 

Annual Maintenance (Years 2 and Beyond)

  • Calculate and document the updated management fee
  • Review MSO expenses and allocations for accuracy and defensibility
  • Coordinate with the client’s CPA for tax filing support
  • Provide annual report outlining:
    • Total fee moved to MSO
    • Net tax savings achieved
    • Summary of how cash was deployed
  • Review and adjust:
    • Investment strategy
    • Insurance funding
    • Entity ownership if estate goals evolve
  • Provide strategy updates as tax law or estate regulations change
 

Client Responsibilities

Owner (Business Principal):

  • Participate in:
    • Feasibility review (Year 1)
    • Planning calls (1x per quarter in Year 1; annually after that)
    • Sign off on entity setup, funding amounts, or ownership adjustments
  • Help communicate the value of the MSO internally
  • Approve use of cash (e.g., insurance premiums, note funding, legal or estate planning)

Time commitment: 3–4 hours Year 1; 1–2 hours annually thereafter

 

Internal Team (CFO, Controller, Bookkeeper):

  • Categorize expenses based on GTC guidance
  • Provide quarterly or annual reports to GTC for:
    • Management fee validation
    • Audit trail documentation
  • Serve as day-to-day contact for GTC servicing team

 

Advisor Responsibilities

Strategic Wealth Advisor:

  • Lead overall financial architecture for the client
  • Manage deployment of tax savings (investments, trust funding, insurance integration)
  • Ensure the MSO aligns with other structures (e.g., ILITs, GRATs, DAFs)

 

CPA:

  • Prepare tax returns for S-Corp and MSO (C-Corp)
  • Confirm deductibility of MSO fee
  • Interface with GTC to ensure consistent treatment
  • Bill separately for added advisory work (encouraged and supported by GTC)

 

Attorney (if applicable):

  • Draft or review trust structures, operating agreements, or advanced planning tools
  • Advise on corporate ownership transitions and succession scenarios

 

Summary Table: Annual Roles by Party

Role

Responsibilities

Timing

GTC

Fee review, entity servicing, reporting, compliance, coordination with CPA & advisors

Quarterly + Annually

Owner

Approvals, planning calls, strategy updates

1–2 hrs/year

Internal Staff

Bookkeeping support, reporting, categorization

As needed

CPA

Filing support, fee treatment, tax strategy coordination

Annual

Advisor

Investment planning, risk mitigation, long-term legacy coordination

Ongoing

Overview: Exiting Is a Strategic Choice, Not an Event

The MSO (C-Corp) is not a product with a set expiration date — it is a flexible planning structure that can be exited, repurposed, transitioned, or held indefinitely. The right exit path depends on the client’s:

  • Business exit timeline
  • Estate planning objectives
  • Desire for liquidity vs. legacy
  • Corporate earnings and investment inside the MSO

GTC proactively plans for exit scenarios from the very beginning — so clients are never caught off-guard or exposed to unnecessary tax or administrative burdens.

 

Primary Exit Strategies

1. Business Sale / Liquidity Event

If the business is sold:

  • The MSO may be sold alongside the business, especially if it owns critical assets (e.g., IP, branding, contracts).
  • Alternatively, the MSO may be retained by the owner as a legacy structure to manage post-sale liquidity, continue compensation to key personnel, or operate as a family office entity.

Tax impact:

  • Any retained earnings in the MSO at time of sale are subject to corporate and potential dividend tax if distributed.
  • If structured properly, post-sale, the MSO can be repurposed to defer future capital gains or manage long-term income.

 

2. Conversion to an S-Corp

The C-Corp/MSO can be converted to an S-Corp to:

  • Eliminate future exposure to double taxation
  • Allow for more flexible distributions
  • Transition value back to the owner or G2

Important: The IRS imposes a 5-year holding period after conversion before appreciated assets can be sold without triggering built-in gains tax.

 

3. Liquidation (Capital Gains Treatment)

The MSO can be formally dissolved and liquidated, triggering:

  • Capital gains treatment on the difference between the C-Corp’s basis and its fair market value.
  • No dividend tax, as liquidation is treated as a sale of shares, not a distribution of profits.

If the owner has capital losses elsewhere (from real estate, securities, etc.), they may be able to offset gains realized in liquidation.

 

4. Estate Planning Hold / Step-Up Strategy

One of the most powerful exit options is to simply hold the MSO until death and pass it to heirs via the estate:

  • Heirs receive a step-up in basis, eliminating embedded corporate gain.
  • The MSO may be converted into a family office, trust-owned entity, or retained as an investment vehicle.
  • If the MSO is owned via a grantor trust, it may already be outside the estate, avoiding inclusion entirely.

Tax impact: No capital gains, no dividend taxes, and step-up allows heirs to sell assets with no embedded tax liability.

 

5. Transition to G2 / Key Employees

The MSO can be:

  • Gifted or sold to children or next-generation leadership
  • Used to fund non-qualified deferred compensation or synthetic equity plans
  • Sold through a management buyout (MBO) using internal MSO cash

This allows the owner to transition out gradually while retaining control and ensuring business continuity.

 

6. Emergency Wind-Down / Business Failure Scenario

If the operating company fails or shuts down:

  • The MSO may be wound down by:
    • Using retained earnings for deductible expenses (e.g., owner compensation, debt service)
    • Distributing residual cash after tax
  • In most cases, the MSO can be closed cleanly, with minimal exposure, provided all filings and final distributions are documented.
 

Tax Considerations by Exit Type

Exit Strategy

Tax Outcome

Business Sale

C-Corp sale or retained entity, taxable on liquidation

S-Corp Conversion

Future distributions taxed once, but 5-year clock applies

Liquidation

Capital gains on appreciation, no dividend tax

Estate Hold (Death)

Step-up in basis, no cap gains or dividends to heirs

G2 / Key Employee Transfer

Gift or sale strategies — estate/tax planning applies

Wind-Down (Failure)

Deductible drain + final cash-out at corporate/dividend rates

GTC’s Role in Planning the Exit

We don’t just set up the MSO — we map out the endgame and update it annually. GTC:

  • Models potential exit values and taxes
  • Coordinates with CPAs and estate attorneys
  • Repositions ownership or assets proactively (e.g., move to trust, loan to LLC)
  • Ensures all documentation, tax reporting, and compliance are complete
 

Exit planning is not something we leave until Year 10 — we build it into the strategy from Day 1.

GTC’s Planning Model Is Built Around Strategic Collaboration

 

No MSO strategy works in a vacuum. That’s why GTC has built a national network of expert collaborators, including attorneys, CPAs, TPAs, wealth managers, trust specialists, and insurance designers — all of whom are familiar with the nuances of MSO structuring.

We don’t just drop in names — we spearhead engagement, coordinate Zoom meetings, and manage follow-through to keep implementation aligned, compliant, and efficient.

Who We Work With

Depending on the client’s goals, complexity, and planning phase, we coordinate with:

  • Tax Attorneys:
    For legal opinion letters, Circular 230 compliance, S-Corp/C-Corp structuring, and entity flow documentation.
  • Estate Attorneys:
    For trust creation (SLATs, IDGTs, ILITs), ownership restructuring, gifting strategies, and intergenerational transfers.
  • CPAs and EA Firms:
    To handle corporate tax return integration, document MSO fee treatment, and coordinate ongoing reporting.
  • TPAs and Plan Designers:
    For non-qualified deferred comp, cash balance plans, and retirement overlays inside/outside the MSO.
  • Insurance and Investment Specialists:
    To structure split-dollar plans, design premium finance solutions, and oversee compliant investment strategies.

 

How Engagement Is Managed

GTC Leads the Process

We serve as the project manager and compliance hub. That means:

  • We invite third parties into structured Zoom meetings (never ad hoc).
  • We provide context and documents in advance so time is used efficiently.
  • We stay on the call and ensure all parties understand roles, deadlines, and outcomes.
  • We ensure all strategic moves are properly coordinated and legally sound.

 

You Retain Your Role

Advisors, CPAs, and attorneys remain in control of their respective disciplines. GTC is not a threat or a replacement — we are the structure architects who rely on these professionals to bring each layer of planning to life.

 

We Document Everything

Every step of the engagement is:

  • Tracked and summarized in written communication
  • Supported by legal or tax guidance
  • Compliant with all applicable rules (insurance, tax, and securities as needed)

 

Compensation: Does It Change When We Bring in Third Parties?

No. Bringing in outside experts does not change your compensation structure.

  • Insurance splits remain intact
  • Referral or origination arrangements are respected
  • GTC may engage the third party directly, or you may bring your own — we’re agnostic as long as the work is done correctly and compliantly

 

What If I Already Have My Own Network?

That’s great. GTC is flexible:

  • We’re happy to work with your existing attorney, CPA, or specialist.
  • We can train them on MSO structuring and help them implement alongside us.
  • Or, if a specialty arises that your team doesn’t cover (e.g., split-dollar, family office design, legacy structuring), we can plug in experts where needed.

Our ecosystem is designed to fill the gaps, not replace the core.

 

The MSO is a powerful structure — but its power is unlocked only when executed with precision. That’s why GTC functions not just as a design firm, but as a collaboration engine. We coordinate every party, every call, and every document — so that nothing falls through the cracks and every client gets the outcome they’re planning for.

The primary purpose of an MSO is to solve a specific business challenge by providing a structured framework to improve business operations, financial management, and strategic growth. An MSO is not just a tax strategy—it is a business structuring tool that enhances efficiency, scalability, risk management, and long-term planning.

 

A properly structured MSO offers several business advantages, including:

  • Risk Mitigation & Asset Protection – Separating management functions from the operating company to protect assets from lawsuits, creditors, and liability exposure.
  • Operational Efficiency – Consolidating HR, payroll, financial planning, and business oversight under a dedicated entity for improved performance.
  • Business Succession & Continuity Planning – Providing a structured process for ownership transitions, buy-sell agreements, and estate planning.
  • Cash Flow & Financial Stability – Improving liquidity and access to capital by centralizing financial management.
  • Tax Efficiency – Once structured properly, an MSO allows revenue to be allocated to a C-Corp taxed at 21%, rather than being taxed at individual income tax rates. However, tax efficiency is not the goal—it is a structural benefit that results from solving key business challenges.

 

An MSO is only appropriate when it aligns with the business’s needs, enhances financial flexibility, and provides measurable benefits beyond tax considerations.

Businesses generating $2 million to $15 million in net income and facing specific operational, financial, or strategic challenges can benefit significantly from an MSO.

 

An MSO is best suited for businesses that:

  • Have a specific business challenge that matches the MSO’s capabilities, such as:
    • Risk Transfer – Separating liabilities and structuring operations to mitigate legal exposure.
    • Asset Protection – Structuring assets to shield them from lawsuits or creditor claims.
    • Unfunded Liabilities – Managing obligations like deferred compensation, pension funding, or contractual obligations.
    • Keyman Insurance Planning – Ensuring financial stability in case of the loss of a critical executive or partner.
    • Succession Planning – Structuring buy-sell agreements, ownership transitions, and estate planning strategies.
  • Are frustrated by high federal income tax liabilities and large quarterly estimated tax payments without a structured plan to improve cash flow or reinvest savings.
  • Need a centralized solution for financial management, business growth, or operational efficiency.
  • Have a long-term vision but struggle to structure the business to support sustainable scaling and risk management.

 

A feasibility study evaluates whether setting up an MSO is suitable for a business. It considers reasonable compensation, management fees, and accumulated earnings. This study, performed by a tax attorney, ensures readiness with IRS standards and documents the business purposes for retained earnings.

The feasibility study determines:

  • The core business problem – Does the business have a specific challenge that an MSO can help solve?
  • How an MSO improves operations – Will shifting key functions to an MSO create more efficiency, stability, or risk reduction?
  • Financial impact – Does the tax efficiency improve cash flow enough to fund the business solution?
  • Management fee validation – Are the fees charged by the MSO justifiable and in line with market standards?

Additionally, the feasibility study evaluates:

  • Risk Transfer Benefits – Can the MSO help mitigate liability, separate high-risk assets, or structure business operations to reduce exposure to lawsuits or creditors?
  • Unfunded Liabilities – Does the business have long-term obligations, executive compensation, or benefit plans that need structured funding?
  • Succession Planning Readiness – Can the MSO facilitate ownership transitions, buy-sell agreements, or estate planning strategies?
  • Keyman Protection & Business Continuity – Will the MSO provide a framework for financial stability in the event of an unexpected loss of a key executive or partner?
  • Operational Separation – Does the business have functions that should be centralized in the MSO, such as management services, intellectual property, or financial administration?

By conducting a feasibility study, the business ensures that the MSO is structured properly, aligns with strategic goals, and complies with IRS regulations while providing meaningful business benefits beyond just tax efficiency.

An MSO is a separate legal entity (typically a C-Corporation) that provides measurable, real services to the operating company. The value of services shifts from the operating company to the MSO, meaning the MSO becomes responsible for:

  • Financial Management & Risk Oversight – Bookkeeping, tax planning, payroll management, and cash flow optimization.
  • HR & Workforce Planning – Employee benefits administration, staffing solutions, and executive compensation structuring.
  • Business Consulting & Strategic Operations – Long-term planning, growth strategy, and infrastructure improvements.
  • Legal & Compliance Services – Contract management, corporate governance, and industry-specific compliance requirements.

 

At a minimum, the MSO should shift the value of the owner and their services to the MSO, with the owner receiving reasonable compensation and a W-2 wage. This ensures that the MSO has a legitimate business purpose and that the compensation structure aligns with IRS guidelines.

 

Additionally, the more services and value the MSO provides, the more reasonable and necessary management fees may be charged. For example, if the MSO manages financial administration, workforce strategy, risk management, and operational planning, it justifies a higher management fee than an MSO that provides only one or two services.

 

By structuring the MSO properly, the business ensures that:

  • Value creation is clearly documented and aligns with economic substance rules.
  • Management fees are reasonable and necessary, avoiding IRS scrutiny.
  • The MSO operates as a true service provider, enhancing efficiency and financial stability.

 

This value transfer is critical because the IRS requires the MSO to demonstrate real business activity. If structured correctly, the MSO enhances operational efficiency, strengthens financial stability, and provides a long-term strategic advantage for the business owner.

The accumulated earnings tax (AET) applies when a C-Corporation retains earnings beyond a reasonable amount without a valid business justification. The IRS limit for retained earnings is $250,000 for most businesses ($150,000 for personal service corporations like law or accounting firms).

 

If earnings exceed this limit without a documented business purpose, the IRS can impose a 20% penalty tax on the excess retained earnings. However, businesses can retain earnings above this threshold if they have a valid, documented business reason.

 

Common business purposes that justify retained earnings include:

  • Business Expansion & Growth – Funding technology, equipment, R&D, or new market entry.
  • Succession & Ownership Transition Planning – Funding buy-sell agreements and ownership transfers.
  • Insurance Planning for Business Protection – Purchasing key-person insurance, COLI policies, or self-insuring risk.
  • Debt Repayment & Financial Stability – Paying off high-interest loans or maintaining reserves for downturns.
  • Working Capital & Operational Reserves – Ensuring liquidity for payroll, seasonal fluctuations, or large contracts.
  • Mergers, Acquisitions & Investments – Retaining capital for strategic acquisitions or partnerships.

 

Proper documentation is required to support retained earnings, including board resolutions, financial projections, contracts, and tax/legal opinions.

Not inherently. An MSO structured correctly with proper documentation and real business activity will not increase audit risk. The IRS is concerned with abusive tax structures, not legitimate management entities providing real services.

 

To minimize audit risk, the MSO should:

  • Charge reasonable management fees based on industry standards.
  • Provide actual services and maintain documentation of those services.
  • Ensure reasonable compensation for the owner and key employees, supported by independent studies.
  • Maintain financial separation between the MSO and the operating company.
  • Document all transactions and maintain proper corporate governance.

 

If these steps are followed, an MSO should withstand IRS scrutiny and operate as a legitimate and effective business structure.

Reasonable compensation refers to the wages or salary paid to owners and employees of the MSO that must align with industry standards, job responsibilities, and the services provided. It is a critical compliance factor to ensure the MSO structure is legitimate and not viewed as an income-shifting mechanism by the IRS.

 

Factors considered in determining reasonable compensation:

 

A. Industry Benchmarking & Third-Party Analysis

  • Compensation must be supported by independent industry benchmarks comparing similar roles in similar businesses.
  • Compensation surveys, salary databases, and third-party HR studies can provide objective data to validate wage levels.
  • The MSO should document comparisons to salaries in similar industries and geographic locations.
  • Independent attorneys or valuation experts can assess and validate compensation levels, ensuring alignment with IRS standards.

 

B. Job Responsibilities & Time Commitment

  • The owner’s compensation should reflect actual duties performed for the MSO, not just a passive ownership role.
  • A documented breakdown of job descriptions, responsibilities, and hours worked strengthens compliance.
  • If an owner splits their time between the MSO and the operating company, the salary should be adjusted accordingly.

 

C. Reasonable Compensation vs Dividends

  • The MSO owner should be paid a W-2 salary reflecting fair market wages for their role.
  • Distributions or retained earnings beyond a reasonable salary should be documented and justified for business purposes.
  • Excessive dividend distributions without sufficient salary can trigger IRS scrutiny and potential reclassification as wages.
  • By using objective third-party data, job documentation, and clear salary structures, the MSO ensures readiness with IRS standards while maximizing tax efficiency.

The management fee is the payment the operating company makes to the MSO for administrative, strategic, and operational services. This fee must be reasonable, necessary, and based on the actual value of services provided, ensuring the MSO functions as a legitimate business entity.

 

A. Components of Management Fee Calculation

 

  • To determine an appropriate management fee, the MSO should:
    • Define the scope of services
    • The MSO must clearly outline the services it provides, such as payroll, HR, financial planning, business consulting, legal compliance, and risk management.
    • The broader the scope, the higher the justified fee.
    • Calculate direct costs and operational expenses

 

  • The management fee should cover direct costs related to providing services, including salaries, technology, office space, and administrative support.
  • Additional fees may apply for specialized consulting, tax planning, or business development services.
  • Compare fees to industry standards
  • Fees should align with what an external third-party firm would charge for the same services.
  • Independent valuation experts or tax attorneys can help benchmark fees to industry norms.
  • Ensure fees reflect arm’s-length pricing
  • Fees must be set at fair market value, ensuring the MSO is not used solely for income shifting.

 

If the MSO provides substantial operational oversight, fees may be higher, while limited services would justify lower fees.

 

B. Factors That Increase Management Fee Justification

 

  • The number and complexity of services offered – More specialized and high-value services justify a higher fee.
  • The expertise of MSO leadership – If the MSO has highly qualified personnel, fees can be adjusted to reflect their strategic contributions.
  • Long-term business value – If the MSO improves financial stability, cash flow, and operational efficiency, higher fees may be warranted.

 

C. Documentation to Support Management Fees

 

  • To withstand IRS scrutiny, the MSO should maintain:
  • Service agreements that detail the scope of work, fee structure, and payment terms.
  • Invoices and payment records showing actual transactions between the MSO and the operating company.
  • Independent evaluations validating that fees align with industry benchmarks and reasonable compensation principles.

 

By following these guidelines, the MSO ensures that management fees are properly structured, legally compliant, and tax-efficient, while still reflecting the real economic value provided to the operating company.

Yes. An MSO should not limit other tax or business strategies but rather work in synergy to help the business client achieve maximum financial efficiency and risk management.

 

An MSO can integrate with:

 

Deferred compensation plans

  • Allowing tax-deferred income for owners and key employees.

Cash balance pension plans

  • Creating structured retirement contributions while reducing taxable income.

Cost segregation studies

  • Accelerating depreciation for real estate to offset tax burdens.

R&D tax credits

  • Providing tax advantages for companies investing in innovation.

Premium financing for insurance planning

  • Structuring life insurance policies without draining liquidity.

Opportunity zone investments

  • Using the MSO’s retained earnings for reinvestment into tax-favored projects.

 

Key consideration: The MSO should be structured not as a tax-first entity but as a business-first entity that works alongside other tax and wealth-building strategies to enhance overall financial efficiency, cash flow, and business growth.

An MSO plays a critical role in succession planning, especially for multi-generational businesses (Gen 2 and Gen 3 transitions). It allows:

 

Wealth shifting during life

  • The MSO can help move assets and business ownership gradually to the next generation, avoiding large taxable events upon death.

Trust integration for estate planning

  • An MSO can fund irrevocable trusts, allowing the business owner to structure wealth transfers in a tax-efficient manner.

Employee retention programs 

  • The MSO can be used to fund executive compensation and long-term incentive programs (LTIPs) for key employees, ensuring management continuity when ownership transitions.

Buy-sell agreements & estate tax funding

  • The MSO can hold life insurance policies to cover liquidity needs when ownership changes hands.

 

By structuring an MSO within a multi-generational estate plan, business owners can protect assets, minimize tax liabilities, and ensure leadership continuity while gradually transferring control to the next generation.

While MSOs are widely used in healthcare, they are also common in:

 

  • Engineering and manufacturing
  • Legal and financial services
  • Real estate investment firms
  • Technology and software companies
  • Private equity and investment firms

 

Additionally, any company with minimal deductions or depreciation and high taxable net income with strong cash flow should evaluate the suitability of an MSO to determine whether it can provide financial efficiency, tax relief, and operational advantages.

Exiting an MSO can be done through:

 

  • Converting the MSO to an S-Corporation for tax efficiency.
  • Selling the MSO along with the operating company as part of a full business exit strategy.
  • Merging the MSO with another management entity to consolidate operations.
  • Dissolving the MSO and transitioning services back in-house.

 

When selling a business, having an MSO in place can increase business valuation, as buyers see pre-established management structures as a way to ensure smoother operations post-acquisition. Proper exit planning ensures that tax and legal implications are properly managed.

Yes. An MSO helps business owners with:

 

  • Transitioning ownership through family trusts – Allowing tax-efficient generational wealth transfers.
  • Funding estate taxes through corporate liquidity strategies – The MSO can hold insurance policies or financial reserves to cover estate liabilities.
  • Structuring deferred compensation plans – Creating long-term executive retention packages to keep key personnel engaged in the business.
  • Using an MSO to fund charitable foundations – Structuring donor-advised funds (DAFs) or private foundations to support philanthropic goals.
  • Providing liquidity for estate equalization – Ensuring that non-business heirs receive fair distributions without requiring the sale of company assets.

 

By aligning an MSO with estate planning tools, business owners can ensure continuity, financial security, and long-term tax efficiency for future generations.

An MSO must:

 

  • Maintain annual financial records and board meeting minutes.
  • File corporate tax returns and comply with federal and state tax laws.
  • Document all service agreements with the operating company.
  • Justify compensation and management fees through independent reviews.

 

This is not an exclusive list—these are examples of key compliance requirements. Each MSO should have a customized compliance plan that aligns with industry regulations, state laws, and financial best practices.

An MSO should be reviewed annually to:

 

  • Ensure compliance with tax laws and business needs.
  • Evaluate management fees and service structures.
  • Assess financial and operational performance.
  • Identify additional problem matches – Businesses evolve, and an MSO should be periodically reassessed to determine if it can solve new operational, financial, or risk-related challenges.

 

Regular reviews keep the MSO aligned with business objectives and reduce compliance risks.

An MSO can complement and strengthen existing banking and lending relationships by improving financial stability, cash flow management, and debt servicing capabilities. When structured correctly, an MSO enhances a company’s financial profile, making it more attractive to lenders and investors.

 

Key benefits of an MSO for banking and lending relationships:

 

Enhances Debt Coverage Ratios

  • An MSO can increase cash flow stability, which strengthens debt service coverage ratios (DSCR) and makes financing options more favorable.

 

Improves Financial Transparency

  • By centralizing management services, the MSO can provide clearer financial documentation, making it easier for lenders to assess business performance.

 

Facilitates Capital Access

  • With a structured MSO in place, businesses may qualify for larger credit lines, lower interest rates, and more favorable loan terms due to improved financial predictability.

 

Supports Growth & Expansion Plans

  • Lenders may view an MSO as a structured vehicle for growth, enabling businesses to expand operations, acquire assets, or reinvest profits efficiently.

 

Strengthens Financial Relationships

  • Properly implemented MSOs can deepen relationships with banks by showing proactive financial management, risk reduction strategies, and long-term stability planning.

 

By working in synergy with financial institutions, an MSO provides a structured, tax-efficient, and growth-oriented approach that enhances business creditworthiness, borrowing capacity, and strategic financial planning.

Yes, it can, however, we generally recommend C-Corporations due to the following reasons:

 

  • C-Corps allow retained earnings without pass-through taxation.
  • S-Corps have restrictions on ownership and tax structuring that may limit flexibility.
  • C-Corps provide more options for executive compensation and benefit plans.

 

While S-Corp MSOs are technically possible, most businesses benefit from a C-Corp structure due to the ability to retain earnings, structure competitive compensation, and minimize personal tax liabilities.

An MSO can:

  • Manage payroll and HR functions for the operating company.
  • Provide group benefits such as healthcare, retirement, and bonus plans.
  • Structure executive compensation in tax-efficient ways.

 

It is important to note that the MSO is the adopting employer for these plans, as they typically fall under a controlled group due to ownership relationships.

 

This means the MSO must ensure compliance with IRS and ERISA rules, especially if it administers 401(k) plans, deferred compensation programs, or health benefits.

 

By centralizing employment benefits, the MSO enhances workforce stability, employee retention, and operational efficiency.

Yes, an MSO can retain cash reserves if they are documented for a valid business purpose and do not trigger accumulated earnings tax concerns.

 

Common reasons for holding reserves include:

  • Planned business expansion – Funding future acquisitions or infrastructure improvements.
  • Economic downturn protection – Ensuring financial stability during uncertain market conditions.
  • Capital investment needs – Reserving funds for major technology or equipment upgrades.
  • Strategic reinvestment – Allocating retained earnings to fund future tax-efficient business growth strategies.

 

To remain compliant, the MSO should document board resolutions, financial projections, and clear business justifications for holding cash reserves.

Yes. An MSO can centralize vendor management to streamline procurement, improve efficiency, and reduce costs.

 

An MSO can:

  • Negotiate bulk purchasing agreements for supplies, technology, or operational services.
  • Manage service contracts and standardize vendor relationships across multiple business entities.
  • Ensure compliance with regulatory or industry-specific procurement standards.

 

By consolidating purchasing power, an MSO can improve financial efficiency and reduce operational costs across all associated businesses.

An MSO removes administrative burdens from the operating business by:

 

  • Centralizing back-office functions like HR, payroll, accounting, and compliance.
  • Standardizing business processes to improve efficiency and reduce duplication.
  • Leveraging technology to automate financial reporting, contract management, and strategic planning.

 

By shifting these responsibilities to an MSO, the business can focus on core revenue-generating activities while maintaining better control over operational expenses.

If an MSO becomes unnecessary, businesses can:

 

  • Gradually transition services back in-house while maintaining tax compliance.
  • Sell or merge the MSO with another management company.
  • Dissolve the MSO while ensuring all tax and legal obligations are properly handled.

 

Additionally, if the MSO is no longer needed for management services, the C-Corporation can change its purpose to function as a family office to manage assets, oversee investments, or administer wealth transfer strategies for business owners and their families.

 

Proper planning ensures that the MSO transition does not disrupt financial stability or create unexpected tax liabilities.

A properly structured MSO can increase the overall valuation of a business by:

 

  • Demonstrating well-documented financial management and governance.
  • Creating predictable cash flow and improving EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
  • Reducing tax burdens, thereby increasing net profitability.
  • Establishing operational continuity that makes the business more attractive to potential buyers.

 

When businesses are sold, an MSO structure can make the company more appealing to investors by ensuring strong financial oversight and risk management.

If an MSO is audited, businesses should:

 

  • Contact Guardian Tax Consultants and the attorney that prepared the independent reports to review the feasibility study and documentation.
  • Provide documentation of legitimate business activities (contracts, invoices, and board minutes).
  • Justify management fees and compensation using third-party valuation reports.
  • Demonstrate compliance with IRS guidelines on reasonable compensation, service agreements, and retained earnings.

 

Having a reasonable basis defense using an independent feasibility study helps limit audit exposure. This is why the feasibility process and annual service review are critical—ensuring that the MSO is audit-ready and operating within compliance guidelines.

Yes. An MSO provides an additional legal and financial layer that can help:

 

  • Isolate operational liabilities from the core business.
  • Protect valuable assets by holding intellectual property, real estate, or financial reserves.
  • Reduce exposure by ensuring proper insurance and risk management policies are in place.

 

While an MSO is not a shield against all legal claims, it does provide added protection by properly structuring business functions and assets.

An MSO can manage insurance strategies by:

 

  • Owning and administering corporate-owned life insurance (COLI) for key executives.
  • Structuring split-dollar insurance plans to provide tax-efficient funding for estate planning and business continuity.
  • Using life insurance as an asset to build liquidity and protect against financial risks.
  • Handling premium financing strategies to preserve cash flow while maintaining necessary coverage.

 

Funding life insurance with after-tax C-Corp dollars is more efficient than in a pass-through entity, as it allows for structured tax planning and long-term financial security.

An MSO can be structured to help a business pay down debt faster while reducing the overall tax burden.

 

For example: A business owner has a $5,000,000 loan at 8% interest on a 30-year schedule.

 

By using an MSO to accelerate repayment, the owner can pay off the debt in 5 years while saving significant interest costs.

 

  • Under a C-Corp (21% tax rate), the business needs $1,539,979 in pre-tax income per year to cover payments.
  • Under a Pass-Through Entity (40% tax rate), the business would need $2,027,639 per year.

 

By using an MSO structure, the business saves nearly $487,660 per year in pre-tax income requirements, improving cash flow efficiency and accelerating debt reduction.

Yes, an MSO makes a business more attractive to private equity firms by:

 

  • Establishing strong financial controls and governance.
  • Reducing operational inefficiencies through centralized management.
  • Creating clear financial records and tax-efficient structures that appeal to investors.

 

A well-managed MSO can improve exit strategies, investment opportunities, and overall market valuation.

A properly structured MSO can increase the overall valuation of a business by:

 

  • Demonstrating well-documented financial management and governance.
  • Creating predictable cash flow and improving EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
  • Reducing tax burdens, thereby increasing net profitability.
  • Establishing operational continuity that makes the business more attractive to potential buyers.

 

When businesses are sold, an MSO structure can make the company more appealing to investors by ensuring strong financial oversight and risk management.

Yes. An MSO provides an additional legal and financial layer that can help:

 

  • Isolate operational liabilities from the core business.
  • Protect valuable assets by holding intellectual property, real estate, or financial reserves.
  • Reduce exposure by ensuring proper insurance and risk management policies are in place.

 

While an MSO is not a shield against all legal claims, it does provide added protection by properly structuring business functions and assets.

An MSO can operate within a larger business ecosystem, providing:

 

  • Shared administrative functions for multiple entities under common ownership.
  • Centralized cash flow management to optimize working capital.
  • A unified compliance and governance structure to minimize risk across entities.

 

This approach allows businesses to maintain independent legal structures while benefiting from shared resources and strategic oversight.

Yes, an MSO can:

 

  • Serve as a management hub for family-owned businesses and investments.
  • Administer trusts, tax planning, and estate strategies.
  • Oversee financial reporting and risk management for family assets.

 

A properly structured MSO can enhance family wealth preservation and multi-generational financial planning.

Before deciding how to withdraw MSO funds, the first question to ask is:

 

What’s the goal for the money?

 

The strategy for withdrawing MSO funds depends on whether the goal is business expansion, executive retention, estate planning, or personal use. Without a clear purpose, general tax strategies may not be the most efficient or compliant approach.

 

Here are six common ways business owners use MSO funds efficiently:

 

  1. Estate Preservation & Liquidity
    • Split-dollar insurance – The MSO can purchase a split-dollar life insurance policy to fund estate planning while keeping assets within the business.
    • Liquidity planning – The MSO can hold funds for estate settlement or buy-sell agreements, reducing the need for asset liquidation.
    • Trust funding – MSO funds can be used to fund irrevocable life insurance trusts (ILITs) to minimize estate taxes.

 

  1. Key Employee Retention & Compensation
    • Executive bonus plans – The MSO can issue non-qualified deferred compensation plans, offering tax-efficient incentives for key employees.
    • Insurance-backed retention plans – The MSO can fund long-term incentive plans (LTIPs) through life insurance strategies.
    • Phantom stock or stock appreciation rights (SARs) – Allows employees to participate in company growth without direct ownership transfer.

 

  1. Deductible Business Expenses
    • Management & consulting fees – The MSO can pay for advisory services, strategic planning, and leadership consulting, which are deductible expenses.
    • Operational costs – MSO funds can be allocated to HR, payroll processing, and compliance administration.
    • Technology & infrastructure investments – The MSO can fund digital transformation, cybersecurity improvements, and automation initiatives.

 

  1. Non-Deductible Expenses & Capital Investments
    • Paying down debt – The MSO can help accelerate loan repayment, improving financial flexibility.
    • Equipment purchases – Using MSO funds for non-deductible business assets can be more efficient than pulling from a pass-through entity.

 

  1. Business Expansion & Investment
    • MSO-funded loans to the operating company – The MSO can lend funds to the operating business for acquisitions, expansions, or strategic investments.
    • Outside investments – MSO capital can be used to invest in joint ventures, private equity, or alternative assets, as long as it serves a valid business purpose.

 

  1. Dividends & Corporate Distributions
    • Strategic dividend payments – When structured correctly, dividends can be issued at favorable tax rates.
    • Asset distributions – The MSO can distribute corporate assets tax-efficiently through structured planning.

 

The MSO operates as an ordinary business. Wages paid are deductible as a legitimate business expense, just like in a traditional company.

Yes. However, similar to your existing business, business and personal travel may be combined, as long as the business portion is clearly substantiated.

Yes, vehicle expenses are deductible under the same rules that apply to your current business. We would evaluate where the deduction is most advantageous.

There are several deductions available, especially for C-Corporations. Common examples include:

  • Paying family members wages
  • Medical Expense Reimbursement Plans (deductible to the MSO, tax-free to you)
  • Long-Term Care Insurance
  • Cash Balance Pension Plans
  • Additional fringe benefits (see attached summary for C-Corps)

“Qualified Business Use” refers to the utilization of MSO funds for legitimate and purposeful business activities. These uses are consistent with allowable business deductions and support operational, growth, or risk management objectives.

 

Qualified uses include:

  • Lending to the LRD entity for operating expenses
  • Acquiring new business opportunities (e.g., income-producing real estate)
  • Ensuring business continuity (e.g., key-person life insurance, golden handcuff policies)
  • Investing in new ventures aligned with the MSO’s business purpose

 

Non-qualified uses include:

  • Paying personal mortgage obligations
  • Purchasing groceries or household goods for the family
  • Covering general cost-of-living expenses (e.g., clothing, non-business utilities, personal travel)

 

These non-qualified expenses are considered personal consumption and are not deductible by any type of business entity, including an MSO.

Business income in a C-Corporation like the MSO is taxed at a flat federal corporate rate of 21%. This compares favorably to pass-through entities (like LLCs or S-Corps), where income flows through to the individual and may be taxed at rates up to 37%, depending on the owner’s personal tax bracket.

Yes — but only the interest earned on the loan is subject to tax. The principal repayment is not taxed.

For example:

  • An LLC borrows $1,000,000 from the MSO
  • Over 5 years, $200,000 in interest accrues under the terms of the loan agreement
  • When the loan is repaid — either in payments or lump sum — the MSO receives $1,200,000 total: o $1M principal (non-taxable)
    • $200K interest (taxable at 21%)

If the MSO forgives a loan, the portion of the loan forgiven is normally taxable to the recipient (the forgive). In lieu of forgiving a loan, the borrower can repay the loan in full to the MSO and then distribute the capital to the owner/shareholder which is favorably taxed as qualified dividend.

 

The decision to forgive versus retain a loan depends on where you want the capital — inside the MSO, personally, or in another entity you own. Some clients prefer to pay tax on the gain in exchange for gaining personal liquidity outside the MSO structure.

The example begins when the MSO loans $750,000 to the LLC, which then uses those funds to purchase real estate investments.

 

Here are the key assumptions used in the illustration:

  • MSO Loan Amount: $750,000 (post-21% tax)
  • Loan Terms: 15 years @ 4% AFR
  • Property Growth Rate: 9.5% CAGR
  • Rental Yield: 5% annually
  • Depreciation Period: 27.5 years
  • Tax on 1040 Income: 37%

 

This model demonstrates the use of MSO capital to create compounding returns through investment while remaining tax efficient.

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