Understanding and using a management services agreement

There can be many benefits to hiring an outside management company for your business. To help ensure things go smoothly, such an arrangement should be formalized with a management services agreement. This also may be called an administrative services agreement.

Using Outside Management Services

Many businesses hire an outside company to perform various management and administrative functions. The hired manager may be a corporation, limited liability company (LLC), partnership, or other type of business entity, or an individual operating as a sole proprietorship.

Compared with using in-house employees for management functions, contracting with an outside manager has the potential to reduce costs and increase efficiency. In addition to saving the costs associated with employees, your company also may be able to avoid the costs of equipment and office space associated with such employees.

A management services agreement can include many responsibilities, such as handling your employee payroll, developing and managing employee benefit programs, bookkeeping and accounting, maintaining company records, processing accounts payable and receivable, securing insurance for the company, and providing advice and consulting services for any number of needs.

If the management company is only hired for a specific project, the document may be called a project management consultancy agreement, or something similar.

Independent contractor vs. employee status

An important issue that arises with hiring any outside party is assuring the status of the outside party as an independent contractor. The Internal Revenue Service (IRS) has complex rules for determining whether someone will be classified as an employee or as an independent contractor. This also can be an issue under state law.

The management services agreement should be carefully written to establish, as clearly as possible, independent contractor status for the manager and its employees. IRS rules and state laws for determining independent contractor status are too complex for a comprehensive discussion here. However, consideration will be given to the degree of control the company has over the manager, and the degree of control the manager has over the company. A company may hire an independent contractor to do a certain job, but if the company gets too involved in dictating how the job is done, the relationship may be determined to be that of employer-employee.

Content of a management services agreement

A management services agreement is typically prepared by the management company. It will include provisions common to all business contracts, such as the names of the parties, the effective date and duration of the contract, choice of law, arbitration of disputes, remedies for breach of the agreement, liability for attorney fees, prohibiting oral modification of the agreement, etc. It also may contain provisions covering various other matters, such as:

• The services or products to be provided
• The compensation the manager will be paid for the services, and the manner of payment
• Where the services will be performed; for example, this could be at your company's place of business or at the offices of the management company
• The circumstances under which either party may cancel the agreement
• Limitation of liability, and indemnity requirements, for either or both parties
• Confidentiality

Specific to confidentiality, very often the management company will need to have access to information about your company that you don't want disclosed to competitors or the public. This will require a confidentiality and nondisclosure provision in the agreement.

Because a management services agreement is usually a complex and lengthy document, you may want to consider having an attorney assist with preparing the agreement, to be sure that all the details and responsibilities are clearly set out in the document.