How and Why to Implement a Management Service Organization (MSO) For Your Client

What is a Management Service Organization (MSO)?

An MSO is a valuable tool for protecting your client's assets, saving on taxes, and using those savings to hedge against risks. While traditionally seen in the healthcare industry, MSOs have been around for decades. However, after the Tax Cuts and Jobs Act of 2017, this structure has become advantageous for most business owners.

Why Consider an MSO? 

An MSO safeguards both business and personal assets while protecting the retained earnings of operating companies. By enhancing cost efficiency through resource sharing across the enterprise, MSOs provide significant financial advantages. Integrating a C-corporation with an MSO can further reduce tax liabilities, enabling tax-efficient use of earnings for purposes such as deferred compensation and key person insurance, which can also aid in employee retention.

How Does it Work?

Adding an MSO to an enterprise allows income received within the MSO's 21% tax environment, generating significant savings compared to pass-through income taxed at 32-37%.

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7 Steps to Implement an MSO

1 - Identify the Target Client

• Business owner*
• Minimum $2M annual net income*
• Their business is a pass-through entity (LLC, Partnership or S-Corp)*   
  *These three fact patterns must all be present

2 - Deliver Elevator Pitch

The goal is to ask the business owner these leading questions to get to the big question. 

"I can see that you're highly successful, which likely means you're paying a significant amount in federal income taxes. Now, imagine if there were a tax planning strategy that could return to you half of what you pay in taxes each year—but with a catch: the funds can only be used for two specific purposes—either accelerating the growth of your business or safeguarding your family’s wealth. Would that interest you?"

• If the business owner says no, it may be best to move on.
• If the business owner says yes, follow up by asking, "how much did you pay in federal taxes last year?”
  • Whatever he/she says, cut that number by 50% and ask, “if your tax bill was reduced to [half the amount stated], and you had [half the amount stated] of cash, what would you do with it?”

At this point, the economic benefit to the business owner is substantial enough that it would be safe to ask the owner to provide you with information on the Client Advice Form and join a Zoom call with Guardian Tax Consultants (GTC), the advisor, and the client to discuss how to achieve this tax reduction through their tax planning strategies.

3 - Data Collection with Client Advice Form 

The form captures: 

• The client's goals and challenges
• Gross/net revenue and business names
• Client's and partners' information (e.g., date of birth, ownership percentages)
• Business structure and financial data to evaluate MSO suitability

4 - Meet with the Client, Advisor, and Guardian Tax Consultants (GTC)

• GTC provides a discussion document outlining goals, challenges, and the potential impact of an MSO
• This goal is for the client to evaluate the MSO as an option without any immediate recommendation
• Action item: Schedule a follow-up Zoom meeting with all stakeholders (CPA, attorney) to review the discussion document and decide on proceeding with a feasibility report

5 - GTC Schedules a Meeting with You, the Client, and Their CPA

Review the discussion document and decide if the client will move forward with the MSO strategy and feasibility report

6 - GTC Completes a Feasibility Report (Tax and Risk Assessment)

Performed by a tax attorney, the assessment determines tax savings, reasonable compensation, and management fees, tying back to the client’s goals (insurance, retirement, transition, and wealth preservation).

7 - GTC Completes MSO Setup

• Money is deposited in the MSO operating account
• Strategic partners use accumulated earnings for business purposes
• Refer to SCHECHTER for insurance and wealth-building solutions 
• Evaluate further strategies like premium financing, split dollar, cash balance plans, captives, and cost segregation