How Physicians May Use MSOs to Help Address Taxes & Other Practice Concerns

For physician practice owners, balancing patient care with running a business is no small task. The business side of medicine comes with staffing challenges, compliance requirements, and shrinking reimbursement rates. Yet one of the most significant obstacles is federal taxation, which often takes a substantial portion of earnings.

A Management Services Organization (MSO) is a structure that separates the medical side of a practice from the business side. The clinical entity focuses on patient care, while the MSO takes on non-clinical functions such as billing, payroll, HR, IT, and facilities. This separation is not only organizationally helpful, but it may also create opportunities to shift some income into a lower federal corporate tax bracket.

Because every physician’s practice and financial situation is unique, it is important to work with a team like Finley Davis Private Wealth to evaluate how an MSO could fit into a broader strategy. With the right plan, physicians may be able to optimize their practice structure while mitigating tax burdens and creating room for long-term planning.

A Typical Physician Practice Structure

Many practices are organized as professional corporations (PCs), professional limited liability companies (PLLCs), S-Corporations, or LLCs.

In a common structure:

• The same entity handles both clinical and administrative functions.
• Income flows directly to the physician owners and is taxed at individual federal income tax rates, which may be as high as 37%.
• Clinical risk and business assets remain closely tied together.

While straightforward, this setup may create fewer opportunities for tax efficiency and long-term planning.

How an MSO Structure Works

An MSO for physician practice owners separates medical care from business operations:

• The clinical entity continues providing patient care.
• A newly formed MSO manages billing, payroll, IT, HR, and facilities.
• The practice pays the MSO under a management services agreement.
• The MSO is taxed at the federal corporate rate of 21%.

This structural adjustment may allow physicians to shift some income away from the higher federal individual tax brackets into the lower corporate tax rate environment.

Hypothetical Case Study*: Dr. Collins and Her Partners’ MSO Strategy

Consider the example of Dr. Amanda Collins, an orthopedic surgeon earning approximately $1,100,000 annually from her practice. She worked alongside two physician partners, each in a similar situation. Together, they shared the same goals: reduce their annual tax burden, protect their assets, and create opportunities for long-term retirement planning.

At their income levels, a substantial portion of practice revenue was taxed at the 37% federal individual rate. Despite already having malpractice coverage and successful practices, they wanted a structure that could work harder for them financially.

Working with Finley Davis Private Wealth, the partners established an MSO:

• By shifting business operations into the MSO, a significant amount of taxable income moved from the 37% federal individual rate to the 21% federal corporate rate.
• This created potential tax savings that could be redirected into retirement growth vehicles and other tax-deferred planning strategies.
• The MSO allowed them to layer in additional planning, such as trust ownership and insurance-based strategies, which may support both asset protection and long-term estate planning.

By using the MSO structure, Dr. Collins and her partners not only mitigated their annual tax burden but also created a platform for deferred growth and retirement opportunities. The result was a structure that gave them more control over their future planning while allowing them to stay focused on patient care.

*No case study is used to imply future performance. Case studies are intended to illustrate services available through the adviser. They do not necessarily represent the experience of any clients.

Why Physicians Consider MSOs

Physician practice owners often explore an MSO structure for more than just organizational convenience. The model can be an effective planning tool when the goal is to create tax efficiency, protect assets, and design a more strategic pathway to retirement and succession.

1. Tax Efficiency at Higher Income Levels

At higher income levels, much of a physician’s compensation may fall into the 37% federal individual tax bracket. By shifting some income into an MSO, that income may instead be taxed at the 21% federal corporate rate. This differential creates room for strategies that allow physicians to retain more of what they earn. In addition, the MSO can sponsor retirement plans or deferred compensation programs, providing opportunities for long-term, tax-advantaged savings.

2. Asset Protection and Risk Management

Even with malpractice coverage, physicians remain exposed to the possibility of creditor judgments or malpractice breaches. An MSO separates clinical services from business operations. This structure may reduce the risk of personal and business assets being tied together, adding another layer of protection around wealth physicians have worked hard to build.

3. Operational Organization

Running payroll, vendor contracts, IT, and billing inside the same entity that provides clinical care often leads to inefficiency. By moving these functions into an MSO, physicians may simplify management, negotiate stronger vendor terms, and improve cash-flow consistency.

4. Ownership Flexibility

Unlike professional corporations that must generally remain physician-owned, an MSO can include non-physician ownership. This creates planning options such as involving family members, business partners, or even trusts in ownership. For physicians thinking about succession or legacy planning, this flexibility can be a valuable advantage.

5. Growth and Transferability

As practices grow, a single entity that combines medicine and administration may become difficult to scale. An MSO creates a platform that is easier to expand across locations or transfer to new partners. It can also make a practice more attractive to potential buyers because the business functions are already separated and professionally managed.

Is an MSO Right for Your Practice?

The MSO structure is not right for every practice, and it requires coordination between legal, tax, and financial professionals. For physicians already thinking strategically about their income and long-term goals, however, the MSO may offer a tax-efficient way to align their practice structure with their future plans.

At Finley Davis Private Wealth, we collaborate with physicians and their advisors to evaluate whether an MSO could help mitigate taxes and strengthen long-term strategies. Our role is to support the vision you already have for your practice and your wealth.

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