Intercompany money movement

Intercompany money movement is any transfer of funds between the PC and the MSO. Because they are separately owned legal entities, every transfer must be characterized as something, a fee for services, a loan, or a repayment, and must be documented as that thing. Transfers with no characterization are the single most common structural defect in MSO-PC groups.

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The arm’s-length principle

The organizing idea: the two entities should transact as if they were unrelated parties. Everything else follows from it. Would an unrelated practice pay this fee for these services? Would an unrelated lender make this loan on these terms? Would an unrelated party accept this documentation? The principle does real work in three separate legal frames simultaneously: A transfer that satisfies all three is defensible. Most defective transfers fail all three at once.

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The three characterizations

Every dollar moving between your entities is one of these. If you cannot say which, that is the problem.

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1. Management fee, payment for services

The primary flow. PC → MSO, monthly, for services rendered under the MSA. Requirements:

• Calculated per the MSA’s stated method
• An actual invoice from the MSO, numbered and dated, describing the period and the services
• Paid by the PC, from the PC’s account, on the PC’s authority
• Booked as expense by the PC and revenue by the MSO, at identical amounts
• Filed in both entities’ records

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2. Loan, funding with an obligation to repay

Typically MSO → PC, funding the credentialing ramp before revenue arrives. Requirements:

• A written promissory note, principal, maturity, repayment schedule, interest rate, events of default
• Board or manager consents on both sides
• An interest rate no lower than the applicable federal rate (AFR) for the note’s term class. Below-AFR related-party loans trigger imputed interest under IRC § 7872 and invite arm’s-length recharacterization under § 482.¹
• Actual payments matching the schedule
• Booked as loan payable/receivable, with interest expense and income recognized

See Intercompany loans between MSO and PC for the required elements and an annotated interest clause.

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3. Distribution, return of capital to an owner

PC → its shareholder, or MSO → its members. Not between the two entities, because neither owns the other. A “distribution” from the PC to the MSO is a category error with consequences. The MSO is not the PC’s shareholder. Whatever that transfer is, it is a fee or a loan repayment, and characterizing it as a distribution is evidence that the parties treat the PC as though the MSO owns it, which is the CPOM allegation.

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Why a sweep is not a fee

The most common defect: an automated transfer moving PC cash to the MSO on a schedule, with no invoice and no service documentation. What is actually wrong with it:

1. No invoice means no evidence of price for services. The transfer looks like profit extraction, which is the fee-splitting fact pattern.
2. Automation implies control. An MSO that can pull PC funds without the PC acting has withdrawal authority over the practice’s receipts.
3. The amount usually isn’t the contractual fee. Sweeps take what’s there, not what the MSA specifies, which means the MSA doesn’t describe what actually happens.
4. It’s unauditable. A reviewer sees cash leaving the PC with no supporting document.

The fix is not complicated: invoice, then pay. The MSO issues an invoice; the PC pays it. The money can move on the same day it always did.

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The monthly sequence

Order matters. The PC covers its own obligations first. A fee paid ahead of clinical payroll, leaving the PC unable to pay its clinicians, is not a fee an arm’s-length practice would agree to.

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When the PC can’t pay in full

Common during the ramp. Two legitimate options and one wrong one. Defer part of the fee, documented in writing, with a stated expectation of when it will be paid. Lend the PC the money, on a proper note at no less than the AFR. What not to do: quietly skip it, or let the MSO pay PC expenses directly with no intercompany entry. The second is how commingling happens in practice, not through fraud, but through a Friday-afternoon convenience. A perpetually accruing, never-paid management fee is itself a red flag. It suggests the fee was never a real price the PC could support, which is both an FMV problem and evidence that the PC’s economics don’t work. See Where the profit lives.

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What diligence reconstructs from your bank data

During a fundraise, a sale, or a lender’s review, someone will pull several years of bank statements from every entity and rebuild the money flow. What they are testing: Clean intercompany hygiene raises valuation, and it does so through a specific mechanism: quality-of-earnings adjustments. An MSO whose fee income is fully documented, invoiced, and cash-collected has EBITDA a buyer can underwrite. An MSO whose fee income includes years of accrued-but-unpaid amounts has EBITDA a buyer will discount. See How investors read MSO-PC financials.

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Practices that hold up

• Invoice monthly, without exception, even when the amount is the same every month
• Pay from the correct account, by the correct entity
• Never pay one entity’s expense from the other’s account without an intercompany entry
• Reconcile intercompany balances every month — they must be equal and opposite
• Paper every loan before the money moves, not afterward
• Review the fee annually against FMV, and document the review
• Keep the invoices — they are the evidence, and they are what someone will ask for

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Sources

1. IRC § 7872 (below-market loans and imputed interest); IRC § 482 (allocation among related taxpayers). The IRS publishes applicable federal rates monthly: Applicable Federal Rates. Confirm current rates and treatment with a CPA.