What is an MSO?

A Management Service Organization (MSO) is a business entity that provides various essential services to an Operating Company (OC). These services include:

• Business Management: Streamlining operations and improving efficiency.
• Human Resources: Managing recruitment, employee benefits, and compliance.
• Staffing: Providing skilled personnel to meet business needs.
• Information Technology: Ensuring robust IT infrastructure and support.
• Accounting: Handling financial records, audits, and tax filings.
• Marketing: Developing and executing effective marketing strategies.
• Sales: Driving revenue growth through optimized sales processes.
• Other Administrative Services: Covering all additional support services required by the business.

By consolidating these services under an MSO, business owners can shift income from higher individual tax rates to the lower corporate tax rates, thereby achieving significant tax savings.

How the MSO Saves Taxes

One of the most compelling benefits of the MSO structure is the tax savings it offers. By converting income from a pass-through entity, which is taxed at individual rates up to 37%, to a C-Corporation rate of 21%, significant tax savings can be realized.

For instance, consider an individual with $1 million in excess income. If this income is taxed at the individual rate of 37% plus the 3.8% Net Investment Income Tax, the total tax would be $408,000. However, if the same income is shifted to an MSO structured as a C-Corporation, it is taxed at the flat corporate rate of 21%, resulting in a total tax of $210,000. This shift results in a savings of $198,000, which can then be reinvested into the business or used for other strategic purposes.

How the MSO Protects Assets

An MSO provides robust asset protection by functioning as a separate legal entity. This separation ensures that the MSO’s assets are insulated from the liabilities and legal actions of the operating companies. By owning valuable business assets through the MSO, business owners can shield these assets from potential claims against the operating companies.

Furthermore, this protection can be amplified by having the MSO owned by a trust. A trust ownership structure adds an additional layer of security, safeguarding assets against personal liabilities of the business owners and ensuring that assets are managed according to the specific terms set out in the trust.

Compliance is Critical

To ensure the MSO structure is effective and compliant with IRS regulations, it is critical to document the business purposes of all transactions and services. This involves maintaining thorough records that detail the services provided, the fees charged, and the justification for these services. Proper documentation helps to substantiate the MSO’s operations and can protect against potential IRS challenges. Regular audits and reviews should be conducted to ensure ongoing compliance and to adapt to any changes in tax laws or business operations.

It is also important to document the business purposes for establishing the MSO and to outline how any accumulated earnings in excess of $250,000 will be utilized for future reasonable business needs. This ensures transparency and adherence to IRS guidelines, protecting the business from unnecessary scrutiny

Information for is for educational purposes only. Consult with your tax advisor and attorney.