How To Structure Your DSO Management Services Agreement So It Actually Works

If you are forming a Dental Support Organization or scaling into a multi-location dental group, the Management Services Agreement (MSA) is one of the most important documents you will ever sign. A properly structured MSA protects your clinical independence, reduces your tax burden, strengthens DSO EBITDA, and increases your long-term valuation.

Keep the Clinical Side Completely Separate

Corporate Practice of Dentistry (CPOD) laws require a clean separation between clinical and non-clinical functions. Dentists control clinical judgment. DSOs control business operations.

The dentist-owned clinical entity must maintain control of:

• Diagnosis and treatment

• Clinical staffing

• Patient care protocols

• Professional judgment

A compliant MSA ensures the DSO has zero authority over the practice of dentistry.

Build the DSO the Right Way

Most dental DSOs should be structured as LLCs taxed as partnerships, not S-corps or C-corps. This structure provides:

• Flexible ownership

• Ability to add investors

• Preferred returns

• Incentive equity

• Tax distributions

• Cleaner rollover equity treatment

The clinical entity provides dentistry. The DSO owns or manages non-clinical infrastructure such as IT systems, practice management software, marketing, branding, and administrative operations.

Some states allow DSOs to own clinical equipment; others do not. Your MSA should reflect your state’s CPOD restrictions.

What the DSO Should Actually Do

For the dental practice to deduct the management fee under Section 162, the DSO must perform real services, such as:

• Billing and revenue cycle management

• Payroll, HR, and recruiting

• IT systems and cybersecurity

• Marketing and patient acquisition

• Accounting and financial operations

• Supply chain and vendor management

These services must be performed and documented, not just listed in the agreement.

Setting the Management Fee: FMV Is Mandatory

This is the number one IRS audit trigger involving DSOs. A compliant management fee must be:

• Fair Market Value (FMV)

• Based on actual services

• Supported with benchmarking or valuation

• Paid through itemized invoices

Two defensible models include:

• Cost-Plus: reimburses DSO costs plus a reasonable margin.

• Percentage of Collections: common in the industry, but prohibited in some states.

If the fee is inflated or undocumented, the IRS may reclassify payments as nondeductible disguised distributions.

The Real Tax Strategies (Not QBI)

Most dentists ask about QBI. Here is the reality, if the DSO and practice share common ownership and the DSO primarily serves that practice, the IRS treats it as an SSTB. High-income dentists should not expect QBI.

Instead, the real value comes from:

EBITDA Shift

Shifting profit from the clinical entity to the DSO builds EBITDA where investors assign higher value. This directly improves your exit multiple.

Depreciation Advantage

If the DSO owns equipment, it may take:

• Bonus depreciation

• Section 179 expensing

Both can generate significant, legitimate tax savings.

Rollover Equity

Most private equity recapitalizations require rolling over 20–40% of equity. Under Section 721, this rollover may be tax-deferred if your DSO and MSA are structured properly.

Documentation Is Your Shield

IRS cases like Elick and Aspro show that the government focuses on whether services were actually performed.

To protect your deduction:

• Maintain itemized monthly invoices

• Keep logs of DSO services performed

• Hold quarterly meetings with minutes

• Update FMV annually

• Document cost allocations

• Segregate duties between entities

If you can’t prove the work was done, the deduction is at risk.

Final Thoughts

A well-designed DSO MSA is more than a legal document. It is a business strategy and the foundation of a scalable dental organization. When structured and followed correctly, your MSA:

• Protects clinical autonomy

• Maintains CPOD compliance

• Reduces taxes under Section 162

• Builds EBITDA in the DSO

• Strengthens your private equity readiness

• Increases your DSO valuation

If you are building, or scaling a DSO, the MSA is where your financial structure begins.

Disclaimer: This post should not be taken as tax or legal advice, check with your CPA and counsel.

From your New Jersey Dental CPAs, New York Dental CPAs, & Amerca's Dental CPAs