Being in the MLM law business for over 30 years, we’ve been asked this question countless times. Direct selling business owners – especially MLM startup company owners – want to know which compensation plan structure will be the most supportive in the eyes of federal regulators. The answer is somewhat simpler than you’d imagine.
Whether your compensation plan is binary, matrix or an Australia 2-Up, and regardless whether your products are financial services, educational, health products, or vitamins, the answer is: The same legal principals apply no matter what your compensation plan is and no matter what your product is.
The questions you should be asking are “What is it that people are paying” and “Why are they paying it?” If you’re selling a quality product at a fair price to consumers then you are likely operating legitimately. If you’re running a program in which you are merely moving money or are selling overly-priced products to distributors who are buying into the compensation plan only to quality, then you probably have an illegitimate compensation plan structure.
State agencies and the FTC took a look at compensation plans and products in various spectrums. On a spectrum of compensation plans, a party plan that is retail-oriented is at the favorable end of the spectrum. As we move across the spectrum, binary plans, particularly binary plans that have distributors buy multiple business centers moves to the far end of the spectrum, nearer to the territory of being a pyramid.
Companies that are marketing different types of products are looked at differently in terms of “Live and Let Live.” At the conservative end of the spectrum, products that are used for daily household use, telecom, dietary supplements and vitamins – even if there is substantial personal use – state agencies understand that the product is being used and there is little to lose. At the other end of the spectrum, and one that involves intense scrutiny, are products that are high-ticket items, like financial seminars, financial education programs, consumer benefit programs, and particularly, things that are intangible; states look at these and they ask the question “Who is buying it and why?”
If you think you can operate a legal business selling prayers or wishes you’re dead wrong.
States want to know that retail sales are making it to the end-consumer (not just the distributor).
For more information on compensation plans, check out the article “How to Analyze Compensation Plans.”
Expert MLM Attorney, Jeff Babener, has put together a lot helpful videos on compensation plans. Here are just a few. Visit our main website, mlmlegal.com, for more information on all aspects of running a legitimate direct selling business.
How Do I Create a Compensation Plan That Guarantees That I Am Legal?
What Compensation Plans Do Distributors Generally Prefer?
Role of Compensation Plan in a Successful Direct Selling Company
Is the Compensation Plan the Driving Force of Success?