Prerequisites
- Separate operating accounts per entity
- An executed management services agreement (MSA) specifying the fee and its mechanics
- Board and member consents authorizing the arrangement
- A bookkeeper who will record both sides
Why dentistry polices this so hard
The OCA litigation illustrates why bank-account authority matters in a corporate-practice analysis. Orthodontic Centers of America billed patients, hired non-dental staff, and controlled the operating bank account. The orthodontists could not withdraw their own funds. In OCA’s bankruptcy, the Fifth Circuit held the agreements void for illegality. The dentists “were essentially only left with control over diagnosing and treating their patients,” which the court found insufficient.1 Review account authority as one part of the full agreement stack. See DSO case law. Enforcement runs the same way. The New York Attorney General’s 2015 settlement with Aspen Dental Management required, among other terms, that the practices control their own revenue and bank accounts, and it barred percentage-of-profit fees.2 That settlement was the de facto national compliance checklist for a decade. See the DSO enforcement tracker. The discipline on this page is how you stay on the right side of both.The canonical monthly flow
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.Steps, the monthly fee
1
Calculate the fee per the MSA
Use the contractual method rather than choosing a preferred number after the fact. Percentage-of-revenue fees raise separate state-law questions in dentistry. See Set the management fee.
2
The DSO issues an actual invoice
Numbered, dated, stating the period, the calculation, and the services rendered. Not a journal entry. For a cost-plus fee, show the cost base and the markup.
3
The PC pays it from the PC's operating account
Initiated on the PC’s authority, after clinical payroll and direct expenses.
4
Both entities book it at identical amounts
Management fee expense in the PC; management fee revenue in the DSO.
5
File the invoice in both entities' records
This is the document a regulator, auditor, or acquirer will ask for.
6
Reconcile the intercompany balances
Monthly. They must be equal and opposite.
Intercompany loans, done properly
Typically DSO → PC, funding the credentialing ramp or a de novo buildout before revenue arrives.1
Write a promissory note before the money moves
Not afterward. Required elements:
- Principal amount, or a revolving facility with a stated maximum
- Maturity date
- Repayment schedule
- Interest rate
- Events of default
- Governing law
2
Set the rate at no less than the applicable federal rate
Charge no less than the IRS applicable federal rate (AFR) for the note’s term class, short-term (3 years or less), mid-term (over 3 up to 9), or long-term (over 9). The IRS publishes AFRs monthly.Below-AFR related-party loans trigger imputed interest under IRC § 7872 and invite arm’s-length recharacterization under IRC § 482.3See Intercompany loans between DSO and PC for an annotated interest clause.
3
Adopt board and manager consents on both sides
Each entity independently authorizing the loan.
4
Make actual payments matching the schedule
A note with a repayment schedule that is never followed is evidence the loan was never a loan.
5
Book it correctly on both sides
Loan payable / receivable, with interest expense and interest income recognized as it accrues.
What never to do
A standing automated sweep is not a management fee. Why it fails:- No invoice leaves no contemporaneous evidence of the price charged for services. That may look like profit extraction and raise a fee-splitting concern.
- Automation can create evidence of control. A DSO that can pull PC funds without the PC acting has withdrawal authority over the practice’s receipts, a fact the In re OCA court considered.1
- The amount may differ from the contractual fee. A sweep takes the available balance, which may not match the MSA’s calculation.
- It’s unauditable, cash leaving the PC with no supporting document
- Pay one entity’s expense from the other’s account without recording an intercompany entry the same day
- Characterize a PC→DSO transfer as a “distribution.” The DSO is not the PC’s shareholder. That label may suggest the parties treat the PC as though the DSO owns it.
- Let a management fee accrue indefinitely without payment. A perpetual balance may suggest the PC could never support the fee, and buyers may treat it as a diligence adjustment.
- Reprice past periods retroactively, the classic red flag
When the PC can’t pay in full
Common during the ramp, when the hygiene book is still building and payer credentialing is incomplete. Two legitimate options: Defer part of the fee, in writing, with a stated payment expectation. Lend the PC the money, on a proper note at no less than the AFR. What you must not do is skip it silently, or have the DSO pay the PC’s bills directly with no intercompany entry.Verify it worked
- Every PC→DSO transfer has a matching invoice
- Fee amount matches the MSA’s stated calculation
- Fee paid in cash, from the PC’s account, on the PC’s authority
- Paid after clinical payroll and direct expenses
- Both entities booked identical amounts
- Invoices filed in both entities’ records
- Intercompany balances reconciled monthly and equal-and-opposite
- Every loan has a written note, an AFR-or-better rate, and board consents
- Loan payments actually made per schedule
- No standing sweep or DSO withdrawal authority
Common failure modes
Sources
- In re OCA, Inc., 552 F.3d 413 (5th Cir. 2008). Opinion. Annotated in DSO case law.
- NY AG, settlement with Aspen Dental Management (June 18, 2015). Full terms in the DSO enforcement tracker.
- IRC § 7872 (below-market loans); IRC § 482 (allocation among related taxpayers). IRS, Applicable Federal Rates, published monthly. Confirm current rates and treatment with a CPA.