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MLM Legality Test
by Gerald P. Nehra
There are many characteristics, or "red flags" that distinguish an illegal pyramid from a legitimate multi-level business opportunity, (often shortened to MLM.) They have been written about often in many publications and by necessity, often contain legal terms and industry jargon.

Also, danger signs of a few years ago may have been camouflaged or fixed by the newest drafters of plans, so one needs to be on guard for new and different twists.

Is there a simple, easy to apply, test one can give to a business opportunity, that addresses the pyramid law risk without all the pyramid law legal terminology? There is. What follows, addresses that need. It is the single-level test for the multi-level business opportunity.

It goes like this: Can one make some money SINGLE-LEVEL, that is, without sponsoring another business opportunity seeker? Note the specific use of the word "can", not the word "would".

It is usually a given that the business opportunity prospect is urged to sponsor, and that the business opportunity presenter will say or imply that the "real money" is in building a group.

But that is O.K., SO LONG AS - those who choose not to sponsor at all, CAN STILL MAKE MONEY. Note also the use of the word "MAKE". It's "MAKE MONEY" not "SPEND MONEY", meaning paying income taxes if the gross income exceeds expenses associated with producing the income.

Buying for personal use at distributor prices rather than customer prices, while a savings, does not generate INCOME upon which one is required to pay taxes.

Buying for personal use by itself is not an income opportunity. If the proposed business opportunity consists ONLY of buying for personal use and sponsoring more representatives, with no provision for sales to customers, it is flawed.

This simple test needs to be applied to two aspects of a business opportunity. The first aspect is the design. What do the company documents say about how one makes money? How does the compensation plan work?

Not all the fine details of every commission, bonus or reward need be understood, but simply, can one make SOME money without sponsoring.

Remember, one does not MAKE money when one buys any product or service for personal use. The application of this test should in no way imply that there is anything wrong or illegal about personal consumption.

It is just that it alone cannot be the sole basis for a business opportunity. The second aspect of the application of the test is the plan implementation.

Some plans are designed correctly but are flawed in the implementation. Can one make money, even without sponsoring, as the plan is being taught and implemented by the prospective sponsor and the distributors closely associated with him or her?

If there is no acknowledgment or support for the non-sponsoring participant in the business opportunity, something is wrong, maybe not in the design, but surely in the implementation.

Reputable and legally designed and implemented multi-level business opportunities provide a money making opportunity SINGLE LEVEL to those who choose not to sponsor.

Of course, if one sponsors others, then ADDITIONAL money making opportunities exist when those sponsored generate sales.

Apply this test to multi-level business opportunities. Look at the plan design, and look at the way the plan is being implemented by the prospective sponsor and associates.

If the ONLY WAY to make money is by sponsoring, STAY AWAY, the plan is fatally flawed.

Gerald P. Nehra is an MLM Specialist Private Practice Attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multi-level marketing issues. His 29 years of legal experience includes 9 years at Amway Corporation where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, MI 49441, 231-755-3800, 231-755-4700 FAX. Credentials and Billing Information are available through Fax-on-Demand at 803-548-3299, ext. 3088, and at his website http://mlmatty.com. His E-Mail Address is MLMAtty@aol.com. Permission is hereby granted to duplicate this article, AS LONG AS the biographical information above is included.

©1999 mlmatty.com

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