The MSO-PC structure is the standard approach for non-physician founders building healthcare companies. But while the concept is well established, the execution is where things go wrong. We see the same mistakes repeated across hundreds of healthcare startups, and the consequences range from failed fundraising rounds to regulatory enforcement actions.

Here are the seven most common MSO-PC formation mistakes and how to avoid them.

1. Using a Generic MSA Instead of a Healthcare-Specific One

The Management Services Agreement is the linchpin of the MSO-PC relationship. Too many founders use a generic services agreement template, or worse, adapt a non-healthcare MSA they found online. These templates almost always fail to address the critical healthcare-specific provisions that regulators and investors expect to see.

A compliant MSA must explicitly:

An MSA that does not explicitly protect clinical independence is not just a compliance risk — it is evidence that the MSO is practicing medicine through the PC.

2. Choosing the Wrong Entity Type for Your State

Not every state uses the same entity structure for professional practices. Some states require a Professional Corporation (PC), others allow a Professional Limited Liability Company (PLLC), and a few permit either. Using the wrong entity type for your state can result in rejected filings, invalid corporate structures, or inadvertent CPOM violations.

Before forming your clinical entity, research the specific requirements in your state. California, for example, requires a professional corporation, while states like New York may allow a PLLC for certain types of licensed professionals. Each state's secretary of state website and medical board provide guidance on acceptable entity types.

3. Structuring MSA Fees That Look Like Fee-Splitting

Fee-splitting — where a non-physician receives a share of revenue generated from medical services — is prohibited in most states. The way your MSA fees are structured can easily cross this line if you are not careful.

The riskiest approach is a pure percentage-of-revenue model, where the MSO takes a fixed percentage of the PC's clinical revenue. While some states allow percentage-based fees if they meet certain conditions, others prohibit them outright. Safer alternatives include:

4. Having a Figurehead Physician Owner

One of the fastest ways to invalidate your MSO-PC structure is to have a physician owner who has no real involvement in the PC. If the physician simply signs documents once a year and collects a check, regulators will see through the arrangement. The physician must have genuine authority over clinical operations, including:

5. Failing to Address Physician Succession

What happens if your friendly PC physician decides to leave, retires, loses their license, or passes away? Without a clear succession plan, your entire clinical operation can grind to a halt. Many founders skip this planning step in the rush to launch, only to face a crisis later.

Your formation documents should include:

  1. Put/call options that allow the MSO to trigger a transfer of PC ownership to a replacement physician
  2. A backup physician identified and ready to step in
  3. Transition provisions that keep the PC operational during the changeover
  4. Non-compete and non-solicitation provisions to protect the practice

6. Ignoring State-Specific CPOM Requirements

Founders who operate in multiple states often make the mistake of using a single corporate structure everywhere. But CPOM requirements, entity formation rules, and fee-splitting laws vary significantly across states. What works in Texas may not work in California or New York.

Each state where you operate may require its own PC, its own physician owner licensed in that state, and its own MSA adapted to local law. A one-size-fits-all approach is one of the most common and most dangerous shortcuts in multi-state healthcare compliance.

7. Not Setting Up Ongoing Compliance Monitoring

Formation is just the beginning. Many startups invest heavily in getting the structure set up correctly, then fail to monitor it on an ongoing basis. Compliance is not a one-time event. It requires continuous attention to:

Without ongoing monitoring, even a perfectly structured MSO-PC arrangement can drift out of compliance over time. Establish systems and processes for regular compliance checks from the start, or work with a compliance partner who can handle it for you.

Avoiding these seven mistakes will not make healthcare compliance easy, but it will prevent the most common pitfalls that derail healthcare startups. Take the time to get your formation right, and you will build a foundation that supports growth rather than undermining it.