A friendly PC is the professional corporation that still legally owns the medical practice after a private equity deal. It is owned by a licensed physician chosen by the platform, often a physician leader who has agreed to follow the MSO's business direction and to transfer the shares to another designated physician if asked. It holds the licenses, the payer contracts in some states, and the employment of clinicians. It has almost no economic value of its own because the management fee moves most of the profit to the MSO.
" - q: "If the PC owns the practice, who owns the PC after we sell?" a: "Usually one physician designated by the platform, not the selling physicians as a group. A stock transfer restriction agreement, sometimes called a succession agreement, lets the MSO require that physician to sell the shares to a replacement of the MSO's choosing for a nominal amount. That is how the MSO controls an entity it is not allowed to own.
" - q: "What is the management fee and how is it set?" a: "The management fee is what the MSO charges the PC for running the business: staff, billing, real estate, technology, and administration. It is paid before physicians are paid. It may be a flat amount, a percentage of collections, or the PC's remaining profit after physician compensation. The Commonwealth Fund's April 2026 review found rising management fees and opaque accounting were leading sources of physician dissatisfaction, so how the fee is defined and whether you can audit it matters.
" - q: "Is my rollover equity in the PC or in the MSO?" a: "In the MSO's holding company. The PC has little value on its own, so nobody rolls into it. Your rollover is a minority interest in the company that owns the MSO, alongside the private equity fund and physicians from other practices. See our rollover equity page for how that interest is valued and paid out.
" - q: "Does the MSO structure change how my sale is taxed?" a: "It sets where the tax happens. Your PC sells its non-clinical assets and goodwill to the MSO, usually through an F-reorganization for an S corporation, so the sale is an asset sale at the PC level with the allocation rules described on how a practice sale is taxed. The rollover is a contribution to the MSO holding company under Section 721 or 351, deferred with carryover basis. Whether that holding company is a partnership or a corporation decides whether you receive K-1 income you did not get in cash.
" - q: "Which states are strict about corporate practice of medicine?" a: "California, New York, and Texas are strict. California's rule is in Business and Professions Code 2400 and 2052. New York limits professional corporations and PLLCs to licensed owners and scrutinizes fee splitting. Texas developed its rule through court decisions and allows exceptions for certified nonprofit health organizations and physician-owned entities. Florida has no corporate practice doctrine, but its clinic licensing and patient brokering laws create similar hurdles.
" - q: "What did California's SB 351 change on January 1, 2026?" a: "It bars private equity groups and hedge funds involved with physician or dental practices from interfering with professional judgment on diagnostic tests, referrals, patient care, schedules, records, clinical hiring and firing, payer contracting, coding and billing, and equipment. It also voids any non-compete or non-disparagement clause in a management contract for a physician or dental practice. Sale-of-business non-competes under Business and Professions Code 16601 remain valid, and the Attorney General can seek an injunction.
" - q: "Do I have to tell the state before I sell?" a: "In 14 states, someone does. California requires notice to the Office of Health Care Affordability at least 90 days before closing for entities above $25 million in revenue or assets, and a separate 2026 law, AB 1415, requires private equity groups and MSOs to notify independently. New York requires 30 days' notice to the Department of Health for material transactions above a $25 million threshold. Oregon's SB 951, effective January 1, 2026, is the most restrictive MSO law in the country. Texas has no notice law.
" - q: "Can the MSO structure be challenged after the fact?" a: "Yes, and that is a risk to the platform and therefore to your rollover. If a state regulator or a court decides the MSO exercises control that the law reserves to physicians, the management agreement can be reformed or voided and payers can dispute claims. California's SB 351 gives the Attorney General a direct tool for this. A well-drafted structure keeps clinical control with the PC in substance, not only in the recitals.
" llms_summary: "Explains the management services organization and friendly PC structure used in private equity physician practice deals. Corporate practice of medicine laws in California (B&P 2400 and 2052), New York, and Texas bar non-physician ownership, so the private equity fund owns an MSO that buys non-clinical assets and charges a management fee to a physician-owned PC controlled through a stock transfer restriction agreement. The physician's rollover equity sits in the MSO holding company, while the taxable asset sale happens at the PC level, usually through an F-reorganization. Covers California SB 351 and AB 1415 (effective January 1, 2026), the OHCA 90-day material change notice, Oregon SB 951, Florida's non-transferable clinic license exemption and 60-day change-of-ownership filing, New York's 30-day notice law, the 14 states with transaction notice laws, and what to look for in the management services agreement." ---In most states it is illegal for anyone but a licensed physician to own a medical practice. This rule is called the corporate practice of medicine doctrine, usually shortened to CPOM. The idea behind it is old: a business owner who answers to shareholders should not be in a position to tell a physician how to treat patients. California writes the rule into its Business and Professions Code at sections 2400 and 2052. New York limits ownership of professional corporations and PLLCs to licensed professionals and polices fee splitting closely. Texas developed its rule through court decisions rather than a statute, with exceptions for certified nonprofit health organizations, federally qualified health centers, hospital districts, and physician-owned professional associations.
A private equity fund is not a physician. So it cannot buy your professional corporation, and it cannot own the entity that bills for medical services. The industry's answer is to split the practice into two companies. One is allowed to own everything the law does not reserve to physicians. The other keeps what the law does reserve. The first is the MSO. The second is the friendly PC.
A management services organization is the company the private equity fund actually owns. It buys your practice's non-clinical assets, meaning equipment, leases, technology, trade names, and the non-clinical goodwill of the business. It hires your front desk, billers, and administrators. It signs a long-term management services agreement, often running for decades, with the professional corporation that still holds the medical practice. Under that agreement the MSO handles staffing, billing, purchasing, real estate, marketing, payer contracting in many cases, and everything else that can be called business rather than medicine. In return it charges the PC a management fee.
The platform you hear about in the news, with a brand name and dozens of offices, is an MSO or its parent holding company. When someone says a private equity firm "bought" a dermatology group, what happened is that the MSO bought the group's assets and signed a management agreement with a PC that employs the group's dermatologists.
The friendly PC is a professional corporation (or professional association, or PLLC, depending on the state) owned by a licensed physician. It holds the medical licenses, employs the clinicians, and is the legal provider of medical services. On paper, it makes every clinical decision.
The word friendly describes the owner. The PC is owned by a physician the platform selects, often a physician leader who has agreed to run the PC in line with the MSO's business direction. That physician signs a stock transfer restriction agreement, sometimes called a succession agreement or continuity agreement. It says the physician cannot sell or pledge the PC's shares without the MSO's consent, and it requires the physician to transfer the shares to another physician of the MSO's choosing, for a nominal amount, if the MSO asks, or on death, disability, loss of license, or leaving the platform. That agreement is how the MSO controls an entity it is not allowed to own.
This is the part most selling physicians find strange. You may have owned your PC for 25 years. After closing, you usually do not own it at all. It is owned by the platform's designated physician, and you are one of its employees.
The management fee is the payment from the PC to the MSO for running the business. It is paid before physicians are paid, so it comes off the top. There are three common ways to set it. Some agreements charge a fixed amount plus reimbursement of costs. Some charge a percentage of collections. Many, in practice, are structured so that whatever the PC has left after paying clinicians flows to the MSO as the fee, which is what makes the PC nearly worthless on its own and puts all of the economic value in the MSO.
The fee is the mechanism behind the pay cut. Your practice's profit used to be your income. Now a share of it, typically 20 to 30 percent (Commonwealth Fund, April 2026), leaves the PC as the management fee and becomes the EBITDA the private equity fund bought. Our page on what happens to your salary works through the numbers. The Commonwealth Fund review found that opaque accounting and rising management fees were among the leading complaints of physicians inside these structures, which is why the fee definition and your audit rights deserve attention before you sign.
You own two things, and neither is your old practice.
First, you own rollover equity. It is not in the PC, which has little value, and it is usually not in the MSO itself. It is in the holding company above the MSO, alongside the private equity fund's shares and the rollover of physicians from every other practice the platform bought. Your stake is a minority. It comes behind the platform's lenders and behind any preferred return owed to the fund's investors. It is illiquid until the platform is sold. Our rollover equity page covers the waterfall and the terms that decide what it is worth.
Second, you own an employment agreement with the PC, which sets your salary, production pay, term, and non-compete. Your relationship to the platform runs through those two documents, plus whatever information and voting rights your rollover carries.
| Entity | Owned by | Holds | Your connection |
|---|---|---|---|
| Holding company | Private equity fund, management, rollover physicians | The MSO; the equity value of the platform | Your rollover units or shares |
| MSO | Holding company | Non-clinical assets, staff, leases, management agreements, the management fee | None directly |
| Friendly PC | A physician designated by the platform | Licenses, clinician employment, patient relationships, clinical decisions | Your employment agreement |
The two-entity structure decides where each part of your tax bill lands. The sale happens at the PC level. Your PC sells its non-clinical assets and goodwill to the MSO, most often through an F-reorganization when the PC is an S corporation, so that the buyer gets a stepped-up basis while your retained piece is deferred. That makes the transaction an asset sale for tax purposes, and the purchase price allocation across goodwill, non-compete, receivables, and equipment is what sets the split between 20 percent capital gain and 37 percent ordinary income. The tax pillar and the F-reorganization page go through this in order.
The rollover happens at the holding company level. You contribute part of your practice interest to the MSO's holding company and receive equity in exchange. If the holding company is a partnership or LLC taxed as a partnership, the contribution is tax-free under Section 721. If it is a corporation and the contributing group ends up with 80 percent control, it is tax-free under Section 351. Either way the deferral comes with carryover basis, so the gain is postponed to the second bite rather than forgiven.
The holding company's tax form also shapes your life afterward. A partnership holding company sends you a K-1 each year, and it may allocate taxable income to you that was never paid out in cash, often called phantom income. A corporate holding company sends nothing until it is sold, and the gain on its stock is always investment income subject to the 3.8 percent net investment income tax. Whether a corporate holding company could ever qualify for the qualified small business stock exclusion is unsettled; the PC itself never qualifies because Section 1202 excludes health services businesses. Ask which form the holding company takes before you sign the LOI, not after.
California is the strictest large state and the one that changed most in 2026. Two laws signed in October 2025 took effect on January 1, 2026. SB 351 bars private equity groups and hedge funds involved with physician or dental practices from interfering with professional judgment. The statute lists what that means: decisions about diagnostic tests, referrals, patient care, schedules, medical records, hiring and firing based on clinical competency, payer contracting, coding and billing, and equipment. It also voids any non-compete or non-disparagement clause in a management contract for a physician or dental practice. Traditional sale-of-business non-competes under Business and Professions Code 16601 remain valid, so the non-compete you sign when you sell your practice still binds you. The Attorney General can seek an injunction.
The second law, AB 1415, requires private equity groups, hedge funds, and MSOs to notify the Office of Health Care Affordability, or OHCA, of covered transactions on their own, separate from any notice the practice gives. OHCA released proposed regulations on May 22, 2026. The underlying OHCA rule requires a material change notice at least 90 calendar days before closing when a health care entity has annual revenue or California assets of $25 million or more, or $10 million or more when transacting with a $25 million entity. A physician organization is a health care entity only at 25 or more physicians, so a smaller group is exempt from filing itself, but the buyer often is not. OHCA can open a cost and market impact review that delays closing well past 90 days. Our California page covers the tax side.
New York is strict on ownership and adds a notice law. Public Health Law Article 45-A, effective August 1, 2023, requires health care entities, including physician practices and MSOs, to give the Department of Health written notice at least 30 days before closing, with an exemption for transactions under a $25 million increase in in-state revenue over a 12-month lookback. It is notice only; the state has no approval right. The Governor's proposals to expand it failed in the two most recent state budgets, the latest enacted May 28, 2026, so the 30-day and $25 million rules stand. See the New York page.
Texas is strict by court decision and permits the MSO and friendly professional association structure as long as physicians keep clinical control. There is no transaction notice law; a 2025 bill died in committee, and the Legislature does not meet again in regular session until January 2027. Texas did pass SB 1318, effective September 1, 2025, which caps physician employment non-competes at one year and five miles with a buyout no larger than one year's salary, but it does not address sale-of-business covenants. See the Texas page.
Florida has no corporate practice of medicine doctrine, so a private equity buyer can own a practice directly. The catch is the Health Care Clinic Act in Chapter 400, Part X of the Florida Statutes. Any entity that bills for health services must hold a clinic license from the Agency for Health Care Administration unless it is wholly owned by licensed practitioners or their immediate family and holds a certificate of exemption. That exemption is not transferable under Rule 59A-33.006. It lapses the moment ownership moves outside the practitioner-family circle, and AHCA has said an MSO or private equity transaction can void it. A change-of-ownership application must be filed at least 60 days before closing under section 408.803(5), the licensed clinic must appoint a physician medical director under 400.9935(1), and AHCA has 60 days to act. Many Florida deals still use an MSO and PC structure to keep the exemption intact. The Florida page has more.
Oregon's SB 951, effective January 1, 2026, is the most restrictive MSO law in the country, limiting how much control a management company can hold over a professional entity. Transaction notice laws are in force in 14 states as of 2026: California, Washington, Oregon, Nevada, Hawaii, New Mexico, Colorado, Minnesota, Illinois, Indiana, New York, Connecticut, Massachusetts, and Vermont. Maine's law takes effect January 1, 2027. Several federal bills were introduced in 2026, and the FTC created a Healthcare Task Force on March 20, 2026, but no federal law governing these structures has been enacted.
You will probably not be a party to the management services agreement; the PC and the MSO sign it. But it governs the business you will work inside for the length of your employment term, and your rollover depends on it holding up. Ask your attorney to walk you through these points.
If you are retiring at or shortly after closing and will not sign an employment agreement, the management services agreement and the friendly PC arrangement will govern other people's working lives, not yours. Your concerns are the purchase price allocation, tail coverage, and whatever rollover you hold. If you are in Florida and the buyer intends to hold a clinic license directly rather than use an MSO, the CPOM discussion does not apply, though the licensing timeline does. And if you are selling to a hospital system rather than a private equity platform, the structure is usually a direct employment arrangement with a nonprofit or a hospital-affiliated group and none of this applies.
Before signing a letter of intent, ask the buyer for a diagram showing the holding company, the MSO, the PC, and where your rollover would sit. If the buyer cannot produce one quickly, that tells you something.
Partnership or corporation. It decides whether you will receive K-1 phantom income, how the second bite is taxed, and what estate planning tools are available. Then read rollover equity with that answer in mind.
A California deal above the OHCA threshold needs 90 days plus review time. A Florida deal needs a change-of-ownership filing 60 days out. Build these into the timeline so exclusivity does not run out while you wait.
The fee definition, clinical control language, and termination terms are where your working life and the value of your rollover are decided.