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

# Intercompany money movement

> The arm's-length principle behind the management fee, why sweeps need invoices, the difference between fees, loans, and distributions, and what diligence reconstructs from your bank data.

**Intercompany money movement** is any transfer between the PC and dental support organization (DSO). Because they are separate legal entities, each transfer needs a documented basis, such as payment for services, loan funding, or repayment. Unexplained transfers create accounting, tax, governance, and corporate-practice problems.

## The arm's-length principle

Apply the same discipline the entities would use with an unrelated counterparty.

Ask whether an unrelated practice would pay the fee for these services, whether an unrelated lender would make the loan on these terms, and whether an unrelated party would accept the documentation.

The principle applies in three legal frames:

| Frame                    | The question                                                               |
| ------------------------ | -------------------------------------------------------------------------- |
| **CPOD / fee-splitting** | Is the fee a price for services, or a division of professional fees?       |
| **Tax (IRC § 482)**      | Are related-party transactions priced at arm's length, or shifting income? |
| **Diligence / audit**    | Can a third party reconstruct what happened and why?                       |

Document each frame so a reviewer can reconstruct the transfer and its basis.

## The three characterizations

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

### 1. Management fee, payment for services

The primary flow. PC → DSO, monthly, for services rendered under the management services agreement (MSA).

**Requirements:**

* Calculated per the MSA's stated method
* An **actual invoice** from the DSO, 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 DSO, at identical amounts
* Filed in both entities' records

### 2. Loan, funding with an obligation to repay

Typically DSO → 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.<sup>1</sup>
* **Actual payments matching the schedule**
* Booked as loan payable/receivable, with interest expense and income recognized

See [Intercompany loans between DSO and PC](/reference/legal/intercompany-loan-note) for the required elements and an annotated interest clause.

### 3. Distribution, return of capital to an owner

PC → its dentist shareholder, or DSO → its members. **Not** between the two entities, because neither owns the other.

**A "distribution" from the PC to the DSO is a category error with consequences.** The DSO 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 DSO owns it, which is the corporate-practice-of-dentistry (CPOD) allegation.

## Why a sweep is not a fee

The most common defect: an automated transfer moving PC cash to the DSO 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 can create control.** A DSO that can pull PC funds without action by the PC has withdrawal authority over the practice's receipts. That was one of the facts in the OCA decisions. The Fifth Circuit voided OCA's service agreements after considering, among other controls, that the company ran collections and barred dentists from withdrawing funds directly. Once the contracts were void, *Packard* held that OCA could not recover its money through restitution.<sup>2</sup>
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 DSO issues an invoice; the PC pays it. The money can move on the same day it always did.

### In percentage-fee-ban states, the invoice basis is the defense

Dentistry adds formula-specific rules. Nevada, New Jersey, New York, and North Carolina expressly restrict specified revenue-dependent dental support compensation; Maryland's permitted-support pathway uses a separate predetermined-fixed-compensation rule. The New York and California Aspen Dental settlements add party-specific enforcement facts. See [Fee-splitting rules](/concepts/model/fee-splitting).

A sweep that takes "whatever is there" can track collections even when the MSA states another formula. A reproducible invoice and lawful approval help show what was charged for which services, but paper alone does not make the amount, formula, control rights, or actual services compliant.

## The monthly sequence

```mermaid theme={null}
graph TB
    A[Payer EFTs, patient payments,<br/>membership autopay<br/>→ PC operating account] --> B[PC pays clinical payroll<br/>dentists and hygienists]
    B --> C[PC pays its direct expenses<br/>malpractice, lab fees]
    C --> D[DSO issues management fee invoice]
    D --> E[PC pays the invoice<br/>from the PC account]
    E --> F[PC repays any scheduled<br/>loan principal and interest]
    F --> G[DSO pays all non-clinical costs<br/>from DSO operating]
```

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

## 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.

Do not quietly skip the transfer or let the DSO pay PC expenses without an intercompany entry. Commingling often starts as an end-of-week convenience rather than deliberate misconduct.

**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](/concepts/finance/where-the-profit-lives).

## 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:

| Test                                                 | What failing it signals                                                             |
| ---------------------------------------------------- | ----------------------------------------------------------------------------------- |
| Does every PC→DSO transfer have a matching invoice?  | Undocumented profit extraction                                                      |
| Does the fee match the MSA's stated calculation?     | The MSA doesn't describe reality                                                    |
| Does the fee track collections month to month?       | It may function as a revenue-linked fee, which is prohibited in the four ban states |
| Was the fee **paid in cash**, or only accrued?       | The fee may be fictional                                                            |
| Are intercompany balances equal and opposite?        | Books don't tie                                                                     |
| Do loans have notes, rates, and actual payments?     | Disguised equity or a sweep in disguise                                             |
| Are there transfers with no characterization at all? | Commingling                                                                         |
| Did the PC pay DSO expenses, or vice versa?          | Commingling                                                                         |
| Was the fee ever repriced retroactively?             | Earnings management                                                                 |
| Does the PC retain enough to operate?                | The fee isn't commercially reasonable                                               |

**Clean intercompany hygiene raises valuation**, and it does so through a specific mechanism: quality-of-earnings adjustments. A DSO whose fee income is fully documented, invoiced, and cash-collected has EBITDA a buyer can underwrite. A DSO whose fee income includes years of accrued-but-unpaid amounts has EBITDA a buyer will discount. See [How investors read DSO financials](/concepts/finance/how-investors-read-dso-financials).

## 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** so they remain 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 a reviewer will ask for

## 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](https://www.irs.gov/applicable-federal-rates). Confirm current rates and treatment with a CPA.
2. *In re OCA, Inc.*, 552 F.3d 413 (5th Cir. 2008): [opinion](https://caselaw.findlaw.com/us-5th-circuit/1452605.html); *Packard v. OCA, Inc.*, 624 F.3d 726 (5th Cir. 2010): [opinion](https://caselaw.findlaw.com/court/us-5th-circuit/1542656.html). See [DSO case law](/reference/legal/dso-case-law).