The Professional Corporation (PC) and Management Services Organization (MSO) Relationship: A Step-by-Step Guide for Legal Compliance

In highly regulated industries such as healthcare, legal services, and finance, structuring business operations in a compliant and efficient way is essential. One common structure used in the healthcare sector is the Professional Corporation (PC) and Management Services Organization (MSO) relationship.

This arrangement allows licensed professionals, such as physicians, dentists, and other healthcare providers, to maintain legal control over medical practices while outsourcing administrative and management tasks to an MSO. However, failure to structure this relationship properly can result in regulatory violations, penalties, and business disputes.

This guide provides a step-by-step approach to structuring a compliant PC-MSO relationship, ensuring that both entities operate within legal and regulatory frameworks.

What Is a Professional Corporation (PC)?

A Professional Corporation (PC) is a type of business entity that allows licensed professionals to operate a practice while benefiting from limited liability protection.

Key Features of a PC:

  • Must be owned and controlled by licensed professionals in the field (e.g., physicians, lawyers, accountants).
  • Subject to state-specific regulations, including corporate practice of medicine (CPOM) laws in healthcare.
  • Protects individual professionals from certain business liabilities, but not malpractice claims.
  • Governed by professional boards that oversee licensing and compliance.

A PC ensures that only licensed professionals can provide medical or legal services, preventing unlicensed individuals or companies from directly influencing clinical decisions.

What Is a Management Services Organization (MSO)?

A Management Services Organization (MSO) is a separate business entity that provides administrative and non-clinical services to a PC.

Key Features of an MSO:

  • Owned by non-licensed individuals or business entities, allowing for private investment.
  • Provides business management, marketing, staffing, billing, IT, and compliance support.
  • Allows professionals to focus on their expertise (e.g., practicing medicine) while offloading administrative burdens.
  • Helps businesses scale efficiently and comply with operational regulations.

The PC and MSO work together through a legally binding contract called a Management Services Agreement (MSA), which outlines the scope of services and financial terms.

Step-by-Step Guide for Structuring a Compliant PC-MSO Relationship

1. Understand State Laws and Regulatory Frameworks

  • Different states have varying regulations regarding the PC-MSO structure, particularly in the healthcare sector.
  • Many states enforce Corporate Practice of Medicine (CPOM) laws, which prohibit non-licensed individuals from influencing medical decisions.
  • Consult an attorney to ensure compliance with state laws and federal regulations such as Stark Law and Anti-Kickback Statutes (for healthcare practices).

2. Set Up the Professional Corporation (PC)

  • Ensure that the PC is formed under state laws governing professional corporations.
  • Appoint licensed professionals as shareholders, directors, and officers.
  • Obtain necessary business licenses, permits, and malpractice insurance.
  • Establish clear governance policies to maintain compliance with industry regulations.

3. Establish the Management Services Organization (MSO)

  • Form the MSO as an independent business entity, such as an LLC or C-corporation.
  • Define the ownership structure, ensuring compliance with investment and regulatory restrictions.
  • Develop a clear business model that separates clinical services (PC) from administrative services (MSO).
  • Secure proper business insurance and ensure compliance with employment and data protection laws.

4. Draft a Legally Sound Management Services Agreement (MSA)

The MSA is the foundation of the PC-MSO relationship, and it must be structured carefully to avoid regulatory pitfalls.

The MSA should include:

  • Scope of services – Defines which non-clinical services the MSO will provide (e.g., HR, payroll, billing, IT).
  • Compensation model – Determines how the MSO will be compensated (e.g., flat fee, percentage of revenue).
  • Regulatory compliance – Ensures that financial arrangements comply with CPOM laws and federal healthcare regulations.
  • Control and oversight provisions – Clearly outlines the separation of clinical decision-making (PC) and business operations (MSO).
  • Termination clauses – Defines the process for ending or modifying the agreement if necessary.

5. Maintain Separation Between PC and MSO Functions

To ensure compliance and avoid potential legal disputes, the PC and MSO must operate as separate and distinct entities:

  • The PC retains complete control over medical decisions and patient care.
  • The MSO handles only administrative, financial, and operational aspects of the business.
  • No revenue-sharing models that violate Stark Law or Anti-Kickback Statutes (in healthcare settings).
  • All contracts, financial transactions, and service agreements must be clearly documented.

6. Ensure Proper Compensation Structure

  • The MSO must charge fair market value for its services to avoid legal scrutiny.
  • Compensation structures must not be tied to the PC’s profits or patient referrals, as this could violate federal laws.
  • Regularly review financial arrangements to ensure compliance with changing regulations.

7. Conduct Ongoing Compliance Audits

  • Regularly review corporate structure, agreements, and financial transactions to ensure continued compliance.
  • Conduct legal audits and regulatory assessments to detect any risks or non-compliance issues.
  • Keep detailed financial records, contracts, and operational policies for legal protection.

8. Address Employment and Staffing Issues

  • Employees who provide clinical services must be hired and paid by the PC.
  • Employees who provide administrative services must be hired and paid by the MSO.
  • Clearly define employee roles to avoid confusion and legal conflicts.

Common Pitfalls to Avoid in a PC-MSO Relationship

  1. Blurring the Lines Between Clinical and Administrative Control
    • The MSO must not have any control over medical decisions or patient care.
    • Any interference in clinical decision-making can trigger legal violations and enforcement actions.
  2. Non-Compliant Financial Arrangements
    • Revenue-sharing models that tie MSO compensation to patient volume can violate Stark Law and Anti-Kickback Statutes.
  3. Failure to Follow State-Specific Regulations
    • Not all states allow the PC-MSO structure in the same way, so legal consultation is essential.
  4. Inadequate Documentation and Compliance Policies
    • Without proper contracts, audits, and records, both entities could face fines, lawsuits, or forced dissolution.

How We Can Help

At KMSD Law, we specialize in business law, healthcare compliance, and professional corporation structuring. Whether you are a licensed professional looking to establish a PC-MSO structure or an investor seeking to operate within regulatory frameworks, we can help you:

  • Set up a legally compliant PC-MSO structure tailored to your industry.
  • Draft a strong Management Services Agreement (MSA) that protects both parties.
  • Ensure compliance with state laws, CPOM rules, Stark Law, and Anti-Kickback Statutes.
  • Conduct compliance audits and risk assessments to safeguard your business.

We offer free case consultations, so contact KMSD Law today to discuss your business structure and ensure you remain legally compliant and protected.