MSOs and Management Services Agreements (MSAs): How to Structure for Success

Creating compliant, efficient, and scalable shared services across multi-entity organizations.

🏁 Introduction: Why Cost-Sharing Needs a Smarter Structure

As companies grow, many business owners find themselves managing multiple legal entities—operating companies, real estate holdings, professional corporations (PCs or PLLCs), or investment arms. While this segmentation offers strategic and legal advantages, it creates a new challenge: how to efficiently manage back-office functions across all entities.

Enter the Management Services Organization (MSO) and the Management Services Agreement (MSA).

When implemented properly, this structure allows a single MSO to provide shared administrative services—HR, payroll, compliance, finance, and leadership—under a formal MSA with each related entity. The result is not only operational efficiency but also tax advantages, liability protection, and scalable enterprise value.

At Guardian Tax Consultants, we guide clients through the design of compliant MSAs and MSO strategies that reduce risk and unlock growth potential.

📄 What Is an MSA and Why Use It?

A Management Services Agreement (MSA) is a legal contract between an MSO and one or more affiliated entities that outlines the services provided, how fees are calculated, and the terms of engagement. It’s the foundation that ensures:

• Proper documentation of intercompany service relationships
• Tax-compliant cost allocation
• Transparent and defensible management fee structures
• The ability for the MSO to retain profits and reinvest capital

Whether you’re running a multi-clinic healthcare group, a law firm with real estate holdings, or a closely held family business with multiple ventures, the MSA allows for centralized administration while maintaining legal entity separation.

⚖️ Legal and Tax Compliance: Avoiding Costly Mistakes

Without a well-drafted MSA, businesses run the risk of IRS scrutiny, disallowed deductions, or claims of improper transfers between entities. This can result in:

• Recharacterization of management fees as dividends or loans
• Exposure to transfer pricing violations (especially in cross-state or international settings)
• Commingling of liabilities or piercing the corporate veil
• SE tax reclassification on owner income
• Ineligible deductions or unexpected pass-through tax burdens

Guardian’s team works closely with attorneys and CPAs to structure MSAs that reflect arm’s-length standards and comply with current tax law. This means aligning documentation with actual services performed and ensuring payment models are both fair and supportable.

📊 Structuring Management Fees: Best Practices

The calculation of MSO fees under an MSA must follow sound principles that can stand up to audit and legal scrutiny. Here are the most widely accepted and effective methods:

➕ Headcount or Full-Time Equivalent (FTE)

Allocate fees based on the number of employees each affiliate benefits from, commonly used for HR and payroll services.

💰 Revenue-Based Allocation

Distribute costs proportionally by revenue generated, which makes sense when MSO services scale with production or client volume.

⌛ Time-Based or Actual Labor

Track the hours MSO staff spend on each entity. Ideal for hands-on consulting or legal and compliance teams.

📦 Tiered or Fixed-Fee Models

Offer pre-set service bundles for simplicity—“Bronze,” “Silver,” “Gold”—based on volume or complexity of support provided.

⚖️ Reasonable Compensation and SG&A Allocation

This method adds a layer of IRS-backed reasonable compensation benchmarks for executive services plus recovery of SG&A overhead—a smart approach for modeling fees that support long-term MSO profit accumulation.

🧠 Intangible Value Premium

When the MSO provides enterprise strategy, brand management, or IP oversight, it may charge an additional fee for intangible services—if documented with care and backed by value creation.

📋 Direct Expense Recovery

Services like software subscriptions, legal retainers, or real estate costs can be directly allocated based on actual use.

Consistency is critical. Whichever method—or combination—you use, it must be defensible, documented, and periodically reviewed to reflect changing operational realities.

🧮 Why MSOs Provide Tax and Capital Efficiency

Structuring the MSO as a C-Corporation gives business owners a powerful edge in managing retained earnings. While pass-through entities (S-Corps, partnerships, LLCs) must flow profits to the owner’s personal tax return—creating immediate tax drag—the C-Corp MSO pays a flat 21% federal tax rate and retains the rest.

This results in a 44% reduction in federal income tax per dollar retained versus top-bracket personal income.

Over several years, this difference becomes transformative. The MSO becomes a capital accumulation platform to:

• Fund deferred compensation or retention plans
• Support insurance premiums, real estate, or tech infrastructure
• Create liquidity for succession or buyouts
• Build strategic cash reserves for investment or expansion
• Deploy intercompany loans with clean tax treatment

And because the MSA locks in a legitimate business purpose for the fees—operational support and admin delivery—the retained profits are both compliant and purpose-aligned.

🧾 Summary: Why MSAs + MSOs = Long-Term Business Value

The MSO and MSA structure is one of the most overlooked—but most powerful—tools in multi-entity planning. It allows for:

• 🔒 Legal separation of operations and services
• 🧾 Documented management fee calculations based on IRS-accepted models
• 📊 Efficient tax structuring through C-Corp retained earnings
• 💼 M&A readiness with transparent cost centers and clean financials
• 💸 Capital accumulation to support insurance, compensation, and growth

Guardian’s proprietary process ensures every MSA is built for compliance today and strategic flexibility tomorrow.