Worried That Your Next SEC Audit Will End in Fines? TAKE THE ASSESSMENT

S-Corp Fails to Shield Financial Adviser

Dive into the case study of how an S-Corp structure might not always protect financial advisers in legal situations.

LPL Financial Services (“LPL”) registered representative Ryan M. Fleischer has to pay over $40,000 in back taxes because he improperly attributed income to his S corporation.


For a corporation, and not its employee, to be the one receiving the income, (1) the individual providing the services must be an employee of the corporation whom the corporation can direct and control in a meaningful sense and (2) there must exist between the corporation and the person using the services a contract recognizing the corporation’s controlling position.


Mr. Fleischer entered into a representative agreement with LPL whereby Mr. Fleischer would act as an independent contractor and signed the agreement in his personal capacity. Five days later, Mr. Fleischer incorporated Fleischer Wealth Plan (“FWP”) and elected for S corporation status. Twenty-six days after Mr. Fleischer entered into the agreement with LPL, he entered into an employment agreement with FWP and was paid an annual salary for acting as a financial adviser. The agreement included standard language found in employment agreements but did not include a provision requiring him to remit any commissions or fees from LPL or any other third party to FWP.

Two years later, Mr. Fleischer entered into a broker contract with MassMutual Financial Group (“MassMutual”). Again, he signed the contract as an independent contractor and in his personal capacity. No mention was made of FWP. There were no addendums or amendments to either the LPL agreement or the MassMutual contract requiring those entities to begin paying FWP or recognizing FWP in an capacity.

The IRS issued a notice of deficiency to Mr. Fleischer determining that the gross receipts or sales FWP reported on its Form 1120S should have been properly reported as self-employment income on Schedule C attached to Form 1040.


The court found that there was no indication that LPL was aware FWP controlled Mr. Fleischer and FWP was not mentioned in his agreement with MassMutual. Because Mr. Fleischer was unable to prove the second element, the court found that he individually, and not FWP, should have reported income earned.

So What Does This Mean?

Based on this case, take these steps:

  1. Enter into contracts in the name of your S corporation, where possible, and consider amending contracts that were entered prior to the formation of your S corporation.
  2. Prepare a written employment agreement between you and your S corporation.
  3. Make sure your agreements include a provision requiring any fees or commissions, where possible, to be remitted to your S corporation and not to you personally.
  4. Make sure your agreements acknowledge your employee status with your S corporation.

Note of Caution

Mr. Fleischer argued that it was impossible for FWP to enter into contracts with LPL and MassMutual because FWP was not registered to purchase or sell securities and registering FWP would be prohibitively expensive. The Court rejected this argument noting that nothing in relevant securities laws prohibited FWP from becoming properly registered.

You may be unable to remit some of your income to your S corporation because doing so would require that your S corporation be registered as a broker or dealer. Talk to your accountant to ensure that this income is appropriately reported.

Do you have additional questions about how this case applies to you? Contact us today to review your contracts and draft an employment agreement between you and your S corporation.

Worried you may need to amend your taxes? We work with a network of trusted accountants who can review your filings and can make amendments as needed.

Contact Us Today!

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

LinkedIn | State Bar Association | Avvo | Google