Mary Kay, It Works!, Pampered Chef, Younique and other network marketing companies have been empowering women in business for years. The flexibility and additional income have allowed many individuals to become their own bosses while benefiting from the structure that has already been put into place by a well-known, established company.
But if you belong to this category of entrepreneur, should you start your own LLC? This is an important question that many MLM entrepreneurs never consider — but there are several reasons why an LLC can be beneficial to your operations.
What Is an MLM?
First, what exactly is an MLM? MLM stands for multi-level marketing, which describes a company that employs existing distributors to recruit new distributors. These are sometimes known as network marketing companies.
The incentive to sign up is that new recruits will return a percentage of their sales back to the distributor who encouraged them to join the company. These new recruits are then encouraged to find other people to sell the products, so they can get a percentage of those new members' profits (and so on and so forth). All distributors also make money through selling the products to regular customers.
These types of companies vary from traditional companies because distributors become an independent face and voice of the company. Instead of employing store space and investing in traditional marketing avenues, the business relies on word-of-mouth sales and personal interactions.
Why Do People Join MLMs?
There are many reasons why people join an MLM rather than starting their own personal company:
1. It's Less Expensive Than Starting a Company From Scratch
Most MLMs cost only a few hundred dollars (or less) to get product kits to start selling. For a traditional company, some experts say it can cost an average of $30,000 (depending on your business) to start a company of your own when you consider producing and stocking product, hiring employees, renting a store front, paying for insurance, etc.
Clearly, getting started with an MLM can be a much less expensive route to business ownership. Many entrepreneurs even choose to start distributing while working another full-time job, since the initial investment is low enough that their side gig can pay for itself.
2. They Believe in the Product
It's difficult to sell others on something you don't like, and most people who join network marketing companies love the products that are being offered. There are approximately 1,400 multi-level marketing companies in the U.S. that cater to almost any special interest that you may have.
Check out websites like Business for Home or MLMCompanies.org to determine what your options are and which companies are legitimate. The many possibilities include cooking utensils, health and fitness supplements, fashionable clothing and jewelry, makeup lines and even scents and essential oils. There is something for just about everyone to love.
3. They Love the Company's Goals and Sense of Community
There are a lot of MLMs to choose from, and often a company's mission can be as big of a draw as the products they offer. Moreover, there is a clear advantage to working alongside people who have the same goals as you.
Mary Kay, the giant makeup company and one of the first MLMs summarizes this concept perfectly on their website: "Mary Kay Ash always said, 'You’re in business for yourself but not by yourself,' and that’s still true for Independent Beauty Consultants. As an entrepreneur, you will have the flexibility to set your schedule and earn amazing rewards. Plus, you’ll be part of a confidence-boosting sisterhood of millions of Independent Beauty Consultants worldwide. You’ll also have the support of your Independent Sales Director and the Company."
Do I Need an LLC for an MLM?
One of the biggest benefits of joining an MLM is that it is already an established business. If you sign up, you'll probably be sent all the product you need to get started, as well as marketing materials and ideas to increase your sales. So do you really need to start your own Limited Liability Company (LLC) if you're joining someone else's company?
Yes, and here's why: No one really knows what the future holds, and it's always better to be safe than sorry. For example, let's say you're selling a variety of health and body products. Imagine one of your customers sues you for a terrible rash she acquired after applying your lotion. There could be a product liability issue (maybe the lotions were part of a tainted batch), and you as the re-seller can get dragged into a possible legal battle.
When you start working to sell your products, you automatically become a sole proprietor. The problem is that if you end up in a lawsuit, your personal property is not protected — a sole proprietorship is not a separate legal structure from you as an individual. If you lose your case, that means you could also lose your home, car and other assets. However, if you file for an LLC before any legal matters arise, the assets attributed to your business could be seized, but your personal assets remain protected.
But Aren't I Protected as Part of the Company?
MLM distributors are independent contractors who are essentially small business owners. While this is great in theory since you get to be your own boss, the downside is that your assets aren't protected under the umbrella of the MLM company. The Federal Trade Commission (FTC) recommends: "If you decide to buy into the program and promote the products, you must be sure your marketing materials are truthful and that there's solid evidence to back up the claims you make about the products. Before you repeat any claims the company has made, verify that there’s competent and reliable research to back them up. That’s the standard the FTC uses when evaluating advertising claims."
The bottom line is this: With an MLM, you are an independent consultant who is accountable for anything you say to market the product, regardless of whether you were given incorrect information. Even though you're working for a big company, legally you're 100% separate.
It is extremely important that you check your company's policies before you enter into any agreement. For example, Mary Kay provides a "Direct Selling Association Code of Ethics" that addresses the rights of their distributors and customers. Knowing if your MLM company offers liability protection as part of their business structure should be a necessary step in your decision-making process (because not all of them do).
How Do I File for an LLC?
Creating an LLC for your MLM business is simple and inexpensive to do, especially if you contact Incfile. Incfile has gathered all of the relevant resources into one place so you can get started forming your company today.
Legal documents can be confusing to complete, so we prepare and file these forms for you. Our business formation packages include a lifetime of customer support, online access to your incorporation documents and your first year of registered agent service for free — starting at just $0 + state fee.