Amway, Tupperware, Mary Kay Cosmetics and Herbalife all offer different product lines, but they have one thing in common—they all use the multi-level marketing (MLM) business model.
Regarding business opportunities, terms such as “pyramid scheme” and “MLMs” may be used interchangeably. But there are some critical differences. Knowing those differences is understanding the difference between legal and illegal.
Product vs. recruitment
In an MLM, the company sells their products through a distribution network. The distributors earn commissions from the sales they generate and the sales made by their recruited team members. The key characteristics of a MLM include:
- A primary focus on selling products and services to customers
- Income is generated through the sale of the products, with additional earnings from team sales
- They operate legally as long as they focus on product sales rather than recruitment. In other words, you still make money whether or not you recruit new distributors.
On the other hand, a pyramid scheme recruits members by promising payments for recruiting others into the scheme rather than the sale of products. A pyramid scheme typically wants you to make an investment and promises high returns. However, in order to do so, you need to recruit others who pay to invest, and so on.
This is an unsustainable model as there are no real products generating revenue, and it collapses once recruitment slows down. In the United States, pyramid schemes are illegal due to their fraudulent nature and potential to cause financial harm.
There is often a fine line between an MLM and a pyramid scheme. Several well-known brands have settled lawsuits after being accused of illegal activity.
Anyone accused of running a pyramid scheme needs to take immediate action. Collecting all documentation, such as contracts, marketing materials, financial records and communications, is crucial. You will want to work with someone who can provide guidance tailored to your situation. You can analyze your business model, identify areas that may have led to the charges, and use that information to build a strong defense.
