In order to streamline operations and structure a business in a tax efficient manner, many companies will create a Management Services Organization (MSO). This strategy can be used in any industry.
Using a MSO for your business is a valuable way to reduce your tax burden and formalize your operations into clear and separate components.
If you’re interested in learning more about MSOs, this article will provide an overview of what they are, how they are structured, and why they can be incredibly beneficial for your business.
What is a MSO?
A Management Services Organization is an entity that provides business services to an Operating Company (OC). The services a MSO provides can vary greatly depending on the needs of the OC and the industry it participates in. Services may include human resources, staffing, IT, accounting, marketing, sales, administration, operations, and risk management.
4 Benefits of Establishing a MSO
1. Clarify and Formalize the Separation Between Different Parts of the Business
Avoid co-mingling errors. Many entrepreneurs are naturally inclined to establish separate entities for supporting operations. These entities are usually set up to show delineation between the different operating lines of the business. But often, the entities end up co-mingling personnel expenditures and resources.
In light of this, establishing a MSO with an official Management Service Agreement is a highly beneficial practice for formalizing operations and keeping services divided into separate entities.
2. Reduce Tax Rates by Establishing a C Corporation
When structured properly, MSOs offer several key tax advantages for the OC. One of these benefits is the ability to reduce taxes by creating a C Corp.
MSOs structured as C Corps are taxed at a flat rate of 21%. This represents significant savings, as individual tax rates typically fall around 32-37%, plus a potential additional 3.8% net investment income tax.
This could add up to possible tax savings of 19% or more!
3. Establish a Fiscal Year End for Strategic Tax Planning
When you set up a MSO, you can choose to establish it with a fiscal year end. This allows you to maximize your opportunities for tax planning by separating the dates of individual and MSO tax returns. Individual tax returns are due on April 15. A C-Corp MSO, on the other hand, will file as a separate entity, with taxes due on the 15th of the third or fourth month following the fiscal year end.
This separation could allow you to defer income recognition for more tax planning opportunities.
4. Improve Your Purchasing and Debt-Servicing Power
C Corporations can be significantly more efficient at paying non-deductible (after-tax) items like life insurance premiums and principal payments on debt.
If you’re paying a combined 40.8% in taxes (37% individual plus 3.8% net investment), you might have to earn $1.69 in order to pay that tax and have $1 remaining. If you’re a corporation, on the other hand, that same $1 may only require earning $1.27 with a 21% tax.
Since life insurance premiums and principal payments on debt are both typically non-deductible expenditures, it could essentially be $0.42 cheaper per dollar to make those payments through a C Corporation.
Find the Strategic Wealth Creation Plan that Works for You
At Goheen Companies, we pride ourselves on delivering innovative and unique wealth creation strategies for high-net-worth individuals. Whatever your, or your clients, specific goals may be, we’ll work diligently to deliver a comprehensive strategy that’s tailored to those needs.
If you’re interested in learning more about MSOs or one of our other wealth creation strategies, please fill out this form to get in touch with a member of our team.