MLMs: Taxes and Ownership

By:   Lynn M. Mckeel, Fall 2017 IAC Student Intern

With big claims of financial independence and owning your own business, it is actually quite difficult to figure out just what type of stake you have in the MLM. Most, if not all MLMs, are considered 1099 independent contracts. This means that you are not an employee of the company. You will be liable for your own tax liability, usually on a quarterly basis. Taxes for 1099 compensation can seem unusually high if you aren’t prepared. This is because a “normal” W2 employer absorbs some of the employee’s tax responsibility. A 1099 contractor (aka the new MLM recruit) does not receive that same benefit. Income generated from the MLM will be reported by the Company and the recruit will be held accountable for that earned income. It is imperative that you speak with a tax professional before enrolling in an MLM.

Another consideration is the amount and type of deductions an independent contractor may claim. Often MLM recruits work throughout the day and night, interweaving home and business responsibilities. Expenses may easily co-mingle with normal day-to-day expenses, especially essentials such as telephone, internet services, and transportation. Before writing off every dime spent, speak with a tax professional. 1099 contractors, including MLM recruits, may be surprised at the limits of the deductions. Alternatively, you don’t want to miss out of the opportunity to deduct a big expense if it qualifies. Keep immaculate records, save receipts, stay organized, speak with a tax professional, and don’t be afraid to get a second opinion.

Questions to Ask Before Joining an MLM

By:   Lynn M. McKeel, Fall 2017 IAC Student Intern

The allure of the MLM business model draws thousands of people a year. Before you begin, consider the following questions. If you don’t know the answers or the concepts are unclear, take some time to truly become familiar with the model. This could be a huge investment, not only a financial investment but an investment into a new lifestyle, one that may include long hours, new sales tactics, or even a marked difference in relationships with your closest friends and families.

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What is a Pyramid Scheme?

By:   Lynn M. McKeel, Fall 2017 IAC Student Intern

Knowing the difference between a legitimate MLM and a Pyramid Scheme could save you thousands of dollars. Vigilance will not only help you make sound business decisions but it could help save your reputation and relationships. Please use your best judgment and consult an attorney before signing any documents. When considering the factors described below, consider all conversations with recruiters, representatives, or consultants. An illegal business operation is not going to come out and introduce themselves as a pyramid scheme. In this dog eat dog world, you must look at all proposals with a critical eye and not be afraid to ask direct questions. Remember, although it may be difficult to ask such direct questions, it will be much harder to broach the subject after you’ve signed a contract and spent thousands of dollars in initial buy-in costs.

When discussing the following aspects with your recruiter/consultant it is always best to take notes for your own records.

In its most basic definition, a pyramid scheme relies exclusively on the recruitment of new consultants to make money. The documentary “Betting on Zero” describes the differences between a pyramid scheme and a legitimate MLM. Undercover video footage shows some of the tactics described below. If you are currently involved in a business model described below or you are considering buying into a model described below, please refer to FINRA, the SEC, the FTC, or an attorney for guidance moving forward.

A pyramid scheme will exhibit the following characteristics:

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What is a Multi-Level Marketing (MLM) Business?

By:   Lynn M. McKeel, Fall 2017 IAC Student Intern

You’ve seen them everywhere: a high school friend on Facebook posting about her amazing new wardrobe; a church member’s great new cookware; your neighbor’s quality makeup products; a gym partner’s healthy new shake. Everywhere you turn, acquaintances are turning relationships into a business opportunity. If you’ve been to a makeup party or sat through a Facebook Live “flash sale” you’ve seen a Multi-Level Marketing (MLM) business in action.

MLMs present themselves as an opportunity to make additional income by selling products and recruiting new distributors, referred to as your “downline”. Revenue is generated off sales commissions and usually the commission generated by the sales of your downline. This usually starts with a party, meeting, or live social media stream. A friendly acquaintance, family member, or neighbor has a new product for you to try. To give the MLMs some credit, these products are seemingly high quality and fresh. These new products are enticing for their uniqueness and also because someone you know is selling them. By the end of the party or presentation, the sales person has given you some kind of hint of their new lifestyle. At some point following the party, the seller has convinced a client to sign up as a distributor. This is how the “downline” begins. Now the original seller will earn commissions off his or her sales and also commissions off the new distributor’s sales. Similarly, the new distributor is encouraged to recruit his or her own downline.

Society has mixed feelings toward MLMs. On one hand you hear stories of total life transformations. Stories of stay at home moms becoming the primary earner of the family or a down on his luck bartender earning a six-figure salary. Enticing claims of being your own boss, setting your own schedule, and becoming financially independent and prosperous. In a capitalist society, where self-sufficiency and independent financial growth are king, this model is very alluring.

Unfortunately, reality rarely reflects the lush life styles. While exact numbers vary and consistent statistics are hard to come by a 2011 report by the Federal Trade Commission reported 99% of recruits lose money in MLM businesses. Some reports claim the average recruit only earns about $13  a week in commission. A tough pill to swallow when these recruits usually front $2,000-$10,000 just to buy into the opportunity.

In this series, I will help clarify the distinction between a MLM and a pyramid scheme, as well as tips for determining whether joining a “legitimate” MLM is the right decision for you and your family. I will also explain some of those complicated contract clauses that bind recruits to their MLM business as well as important tips and considerations future MLM founders should consider when starting an ethical, legal, and moral multi-level business.

Investor Advocacy Clinic Closed for Winter Break

The Georgia State University College of Law observes winter break from December 20 until January 3, 2018.  While we will continue to post to this blog, pursuant to University guidelines, our physical office will be closed and we will be unable to respond to inquiries during the break.  Please be aware that the passage of time can impact a potential claim.  If you have a legal concern while we are closed for the break, we urge you to contact another attorney.

HeLP Legal Services Clinic Celebrates 10 Years

In celebration of the HeLP Legal Services Clinic’s 10th Anniversary, the Georgia State University College of Law hosted a reception on September 14, 2017. HeLP Clinic alumni, along with College of Law students, faculty, staff, and other esteemed members of the bar and Atlanta community came together to celebrate a decade of service and inter-professional collaboration.

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