> ## Documentation Index
> Fetch the complete documentation index at: https://mso.getlemma.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Intercompany loans between MSO and PC: structure and example clause

> How MSO-to-PC loans get papered so they hold up as real debt: required elements, the AFR interest floor, an annotated example clause, repayment hygiene, and danger patterns.

MSO-to-PC loans typically fund the professional entity through the credentialing J-curve, before claim revenue arrives. Papered properly, they are ordinary related-party debt. Papered badly, or not at all, they are disguised equity, a CPOM-tainted sweep, or simple commingling.

**Take this to counsel and a CPA.** The example clause below is illustrative and annotated to explain the drafting choices; it is not a template to adopt. Related-party lending sits at the intersection of tax, corporate, and healthcare regulatory law.

## When you need one

* Funding a new PC's expenses before its first payer payments
* Covering a management fee shortfall during a ramp
* Funding a specific capital need in the PC
* Bridging a temporary cash gap from a large recoupment or a payer delay

**When you don't:** to move routine profit between entities. That is a management fee, and it needs an invoice. See [Move money between PC and MSO](/guides/banking/move-money-mso-pc).

## Required elements

A note that will hold up as debt has all of these. Missing any of them invites recharacterization.

| Element                                                             | Why                                                  |
| ------------------------------------------------------------------- | ---------------------------------------------------- |
| **A written promissory note**, executed before the money moves      | An oral or after-the-fact loan is not a loan         |
| **Principal amount**, or a revolving facility with a stated maximum | Defines the obligation                               |
| **Maturity date**                                                   | Perpetual debt is equity                             |
| **Repayment schedule**                                              | And it must actually be followed                     |
| **Interest rate at or above the AFR**                               | See below, this is the one most often missed         |
| **Events of default**                                               | What a real lender would require                     |
| **Board or manager consents on both sides**                         | Each entity independently authorizing                |
| **Booking on both sides**                                           | Loan payable / receivable; interest expense / income |
| **Actual payments matching the schedule**                           | The behavioral evidence                              |

## The interest rate floor

**Charge no less than the IRS Applicable Federal Rate (AFR)** for the note's term class:

| Term class     | Length                      |
| -------------- | --------------------------- |
| **Short-term** | 3 years or less             |
| **Mid-term**   | Over 3 years, up to 9 years |
| **Long-term**  | Over 9 years                |

The IRS publishes AFRs monthly.<sup>1</sup>

**Below-AFR related-party loans trigger imputed interest under IRC § 7872**, meaning the parties are treated as though market-rate interest were paid regardless of what actually happened, with the associated income and deduction consequences. They also invite arm's-length recharacterization under **IRC § 482**, which authorizes the IRS to reallocate income among commonly controlled entities.<sup>2</sup>

Confirm the applicable rate and treatment with a CPA. Rates change monthly, and which AFR applies depends on the note's terms and compounding.

## Annotated example interest clause

Illustrative language, with annotations explaining each choice:

> **Interest.** The outstanding principal balance shall bear interest at a rate per annum equal to the greater of (a) \[X]% and (b) the mid-term Applicable Federal Rate published by the Internal Revenue Service for the month in which this Note is executed, compounded annually. Interest shall accrue from the date of each advance and be payable \[quarterly / at maturity].

### Why each element

**"the greater of (a) \[X]% and (b) the ... Applicable Federal Rate"**

The **AFR floor**. Setting a fixed rate alone risks it falling below the AFR if rates rise between drafting and execution. The "greater of" construction guarantees compliance regardless of when the note is signed, and it also lets you set a commercially sensible rate above the floor where that is appropriate — a real lender would charge more than the AFR to an unrated borrower with no revenue.

**"mid-term"**

Must match the note's actual term class. A three-year note uses short-term; a five-year note uses mid-term. Using the wrong class is a drafting error that undermines the whole clause.

**"for the month in which this Note is executed"**

Fixes the reference month. Without it, the rate is ambiguous.

**For a revolving facility, this construction is not sufficient.** If the note permits multiple advances over time, either set the rate per advance by reference to the AFR for that advance's month, or specify a single rate determined at execution that applies to all advances. Say which; ambiguity here is a real problem when the loan is examined.

**"compounded annually"**

The compounding basis affects the AFR you must use — the IRS publishes annual, semiannual, quarterly, and monthly compounding rates. Match the stated compounding to the published rate you're referencing.

**"Interest shall accrue from the date of each advance"**

Interest runs from when money actually moves, not from execution. Important for a revolving facility.

**"payable \[quarterly / at maturity]"**

A real choice. **Quarterly payment** produces the strongest evidence that the loan is a loan, because there is observable cash movement. **Payment at maturity** is simpler but means years with no payment activity, which weakens the debt characterization. If the PC's cash flow permits quarterly, use it.

### Two further drafting decisions

**Subordination.** Is the loan subordinated to the management fee, or pari passu? If the PC has limited cash, which gets paid first?

* **Subordinating the loan to the fee** means the MSO gets its fee before it gets loan repayment, commercially odd from a lender's view, but it keeps the fee flowing, which matters for the fee's characterization as a real, cash-paid price.
* **Pari passu** is more conventional but can starve the fee.

State it explicitly. Silence produces disputes and, worse, inconsistent behavior that neither document explains.

**Revolving vs single-draw.** A single-draw note is simpler. A revolving facility better matches a ramping PC's actual need, but requires the per-advance rate and accrual mechanics above.

## Repayment hygiene

<Steps>
  <Step title="Make the payments">
    Actual transfers, matching the schedule. A note whose schedule is never followed is evidence the loan was never a loan.
  </Step>

  <Step title="Book both sides">
    Loan payable on the PC's books, loan receivable on the MSO's. Interest expense and interest income recognized as it accrues.
  </Step>

  <Step title="Reconcile monthly">
    The two balances must be equal and opposite. Divergence compounds.
  </Step>

  <Step title="Report interest">
    Interest income is income to the MSO. Confirm information-reporting obligations with your CPA.
  </Step>

  <Step title="Document any modification">
    An amendment, with board consents. A schedule quietly ignored is worse than one formally extended.
  </Step>
</Steps>

## Danger patterns

| Pattern                               | Why it fails                                                          |
| ------------------------------------- | --------------------------------------------------------------------- |
| **A perpetual "loan" never repaid**   | It is equity, and the MSO cannot hold equity in a professional entity |
| **No written note**                   | No loan; just a transfer                                              |
| **Rate below the AFR**                | Imputed interest under § 7872; § 482 exposure                         |
| **Wrong AFR term class**              | Same                                                                  |
| **Forgiveness with no documentation** | Income to the PC, and evidence the loan was never real                |
| **A loan used to strip PC receipts**  | The sweep problem wearing a different label                           |
| **No board consents**                 | Not authorized by either entity                                       |
| **Payments never made**               | Behavioral evidence contradicting the document                        |
| **Balances not reconciled**           | Books don't tie; a standard diligence finding                         |
| **Loan booked on one side only**      | Same                                                                  |

**Negative PC equity propped up by undocumented intercompany loans is one of the red flags that kills or reprices deals.** It signals two problems at once: the PC's economics don't work, and the group papers over it with transfers. See [How investors read MSO-PC financials](/concepts/finance/how-investors-read-mso-pc-financials).

## Verify

* [ ] Written note executed before the money moved
* [ ] Principal, maturity, and repayment schedule stated
* [ ] Rate at or above the correct-term AFR, with the compounding basis matching the published rate
* [ ] Revolving-advance mechanics specified if applicable
* [ ] Subordination relative to the management fee stated
* [ ] Board and manager consents on both sides
* [ ] Booked on both sides with interest recognized
* [ ] Payments actually made per schedule
* [ ] Balances reconciled monthly, equal and opposite
* [ ] Any modification documented by amendment

## Sources

1. IRS, [Applicable Federal Rates](https://www.irs.gov/applicable-federal-rates), published monthly.
2. IRC § 7872 (below-market loans and imputed interest); IRC § 482 (allocation of income among related taxpayers). [26 U.S.C. § 7872](https://www.law.cornell.edu/uscode/text/26/7872) · [26 U.S.C. § 482](https://www.law.cornell.edu/uscode/text/26/482). Confirm current application with a CPA.


## Related topics

- [Move money between PC and MSO (the right way)](/guides/banking/move-money-mso-pc.md)
- [Set up bookkeeping and consolidation](/guides/banking/set-up-bookkeeping.md)
- [Prepare for taxes across entities](/guides/banking/prepare-for-taxes.md)
- [Intercompany money movement](/concepts/banking/intercompany-money-movement.md)
- [Working capital and lending against healthcare AR](/concepts/finance/working-capital-and-ar-lending.md)
- [How investors read MSO-PC financials](/concepts/finance/how-investors-read-mso-pc-financials.md)
- [MSA clause anatomy](/reference/legal/msa-clause-anatomy.md)