Can Registered Reps Get Paid Directly into their Business Entities?

Understanding FINRA Rule 2040, Fleischer, and Why Compensation Structure Matters

One of the most common questions we receive from registered representatives and M&A advisors is whether they can receive transaction-based compensation (TBC) — meaning commissions, success fees, or concessions — through their personal services entity (PSE) rather than directly as an individual.

The short answer is: no, not directly — and trying to do so incorrectly can create both regulatory and tax risk.

This article explains:

• What FINRA Rule 2040 actually prohibits

• What the Tax Court said in Fleischer v. Commissioner

• How we structure compensation compliantly

• Why the recent SEC No-Action Letter does not change our approach

FINRA Rule 2040: Why Firms Cannot Pay Your Entity Directly

FINRA Rule 2040 generally prohibits a member firm from paying transaction-based compensation to any person or entity that is not:

• A registered broker-dealer, or

• A registered representative of the firm

In practical terms, this means a broker-dealer (such as Britehorn Securities) may only pay commissions, fees, or success-based compensation to the registered individual, not to that individual’s LLC, S-corp, or other business entity.

“But I Have an LLC” — The Common Misunderstanding

Many representatives assume that because they:

• Own 100% of their entity, and

• Perform services through that entity

…the broker-dealer can simply pay the entity directly.

Unfortunately, FINRA does not see it that way. From FINRA’s perspective:

• The registered person is the one licensed

• The registered person is the one subject to supervision

• The registered person must be the payee

At Britehorn Securities, registered representatives are paid directly as individuals in accordance with FINRA requirements. From there, in what is typically a tax-neutral event, the most representatives remit funds to their entities, and the entities issue the appropriate Form 1099 back to the individuals.

We also recommend that representatives execute an Employment & Commission-Assignment Agreement (sometimes referred to as a Fleischer Agreement), in coordination with guidance from their own accountants or tax attorneys, of course.

The Tax Overlay: Fleischer v. Commissioner (2016)

The tax side of this issue was squarely addressed in Fleischer v. Commissioner (2016), where the U.S. Tax Court analyzed whether a registered representative could treat commissions as income of his S-corporation rather than personal income.

The Court applied a two-part control test, focusing on:

1. Who controlled the earning of the income, and

2. Whether there was a contemporaneous, legally enforceable assignment of that income to the entity

The Court found that Mr. Fleischer failed because:

• His broker-dealer contracts were with him personally, not his entity

• There was no enforceable obligation requiring him to remit commissions to the entity

• The entity did not control the client relationship

As a result, the income needed to be taxed to Mr. Fleischer personally, regardless of how it was later transferred.

Britehorn’s Solution: The Commission-Assignment (“Fleischer”) Agreement

To address the tax issues raised in Fleischer, Britehorn help reps execute an Employment & Commission-Assignment Agreement between themselves and their personal services entity (PSE), acknowledged by Britehorn.

This agreement creates the contemporaneous documentation the Tax Court found missing in Fleischer by:

• Establishing a legally enforceable obligation for the rep to remit commissions to the entity

• Making it clear the rep acts as a conduit, not the ultimate economic recipient

Our reps' client engagement letters are also signed by the representatives' entities, reinforcing that the entities — not the individuals — are the operating businesses.

What About the SEC’s Recent No-Action Letter?

Yes — we are aware of the November 2025 No-Action Letter issued by the U.S. Securities and Exchange Commission addressing transaction-based compensation and personal services entities. However, we do not recommend relying on it, for several reasons.

The conditions of the letters are actually very narrow and essentially make it inapplicable to our reps — as well as most reps who own their own businesses and outsource compliance to an independent broker-dealer.

The biggest issue is that the No-Action Letter is limited to PSE's that are “solely for receiving transaction-based compensation” and not "engaged in soliciting, executing, or negotiating securities transactions, or engaged in any other activities that would reasonably cause the PSE to meet the definition of 'broker' or 'dealer' under... the Exchange Act." Essentially, this says that in this context, a PSE must be a shell/holding company through which the representative funnels business compensation and expenses. It cannot be the entity through which the representative actually signs service agreements or conducts business.

This essentially eliminates all of our registered representatives, who operate their own businesses and do not work full-time for Britehorn Securities. Basically, the No Action letter is really meant for financial advisors and wealth managers who work for large institutions and would rather get paid into their holding companies for tax purposes.

Even if our registered representatives decided to create a shell company just to simplify finances — there are additional conditions of the No-Action Letter that further complicate matters:

• Each owner of the PSE must be a registered person of the broker-dealer. However, in the case of many of the small firms that work with us, only some of the principals are FINRA-registered and working on securities-related business.

• The PSE’s location must be designated as a branch office of the broker-dealer, which not only imposes additional cost and regulatory obligations on the registered representative, but could significantly impact the broker-dealer by expanding its number of branch offices.

• The PSE must provide the broker-dealer with payment records as to how it distributes the funds it receives from the broker-dealer to its registered representatives in accordance with Exchange Act Rules 17a-3 and 17a-4. This is an extra level of record-keeping that we currently do not impose on our representatives.

• The SEC also suggests a separate contractor servicing agreement between the broker-dealer and the PSE — with additional compliance obligations.

Britehorn’s Philosophy: Clear Rules, Clean Structures

Our approach is simple:

• Follow FINRA rules as written

• Avoid gray areas that examiners scrutinize

• Solve tax issues without creating regulatory ones

Paying the registered representative directly, paired with a properly structured commission-assignment agreement, achieves that. Most importantly, it avoids putting our representatives — or the firm — in a position that requires explaining “creative” interpretations to regulators.

At Britehorn Securities, we are committed to helping our representatives operate professionally, defensibly, and compliantly — even when the answer is more conservative than the internet might suggest. Contact us to learn more or ask any questions today!

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This article is provided for general informational and educational purposes only and does not constitute legal, tax, or regulatory advice. The discussion herein is based on current interpretations of applicable laws, rules, regulations, and guidance, including FINRA rules, SEC guidance, and relevant judicial decisions, which are subject to change. Individual facts and circumstances may materially affect the analysis or outcome.

Registered representatives and associated persons should consult with their own legal, tax, and compliance advisors regarding the appropriateness of any compensation structure, personal services entity arrangement, or commission assignment agreement. Nothing in this article should be construed as a recommendation to rely on any specific regulatory interpretation, no-action letter, or legal structure without independent professional review.

Britehorn Securities does not provide legal or tax advice and reserves the right to require additional documentation, supervisory controls, or structural modifications to ensure compliance with applicable federal and state securities laws, FINRA rules, and internal supervisory procedures.