Want to spark a heated debate? Just ask this question: “Are you a small business owner if you’re part of an MLM?”
MLM — which stands for Multi-Level Marketing — is a type of business where sellers are encouraged to recruit other sellers to be part of their downline. These sellers make money off products ranging from colorful leggings to protein shakes, but a good deal of the business model’s profits come from recruiting as many sellers as possible.
MLMs have been in hot water lately , but there doesn’t seem to be an end in sight with their popularity, especially among moms and folks who want to work from home.
So what are the facts here? Are you a small business owner if you’re part of an MLM, or is it all just a scam? I did a little digging into both sides to find out!
You have no control over the product.
One of the most pivotal parts of running a small business involves choosing the products you want to sell. Unfortunately, this choice is taken out of your hands if you work for an MLM, as you have no control over what products you can sell.
For example, a common complaint with LuLaRoe is that sellers are required to carry inventory, but they have no control over what products are in that inventory. LulaRoe ships leggings to the seller, but the seller doesn’t know what’s in the shipment until they open the box.
This can be an incredibly frustrating experience, especially if your MLM company keeps sending you products that your customers don’t want to buy. After all, how are you supposed to make money if you can’t order more of the products that your customers actually want?
You’re legally considered an independent contractor.
In the eyes of the government, if you’re part of an MLM, you’re considered an independent contractor. While this doesn’t make you a traditional employee, it doesn’t make you a traditional business owner either, as your company will send you a Form 1099 (Miscellaneous Income) if you make over $600 in a calendar year.
The problem is, a lot of people who work in MLMs don’t actually reach that $600 benchmark. A 2018 Washington Post survey cited dismal research that showed that most MLMers make less than 70 cents an hour (before deducting business expenses), with nearly 60 percent of respondents indicating they earned less than $500 over the past five years.
The business model depends on recruitment.
If you’re part of an MLM, you’re not just encouraged to sell product — there’s just as much pressure to recruit others to join your downline.
Plenty of former MLMers say that they were told they could join and sell, only to have more emphasis placed on recruiting others. It makes sense; after all, a percentage of your sales goes to your upline. It’s reasonable to conclude that the business model seems designed to support recruitment over actual product sales.
You’ll rarely make money.
Remember that Washington Post survey I cited earlier? It turns out that the research gets a lot worse.
The Federal Trade Commission recently reported that 99% of MLM sellers end up losing money over the course of doing business. That means just 1% of sellers make a profit, and the FTC clearly pointed out that the 1% usually comprises the top recruiters who joined the MLM early.
To help put this into context, the FTC estimates that just 39% of traditional small businesses turn a profit.
You may need to have home-based business insurance.
Even if you’re considered an independent contractor, you still may need to carry business insurance, especially if you’re storing product at your home or having clients visiting you. Business insurance can help protect you against claims and lawsuits, for instance if:
A customer trips and falls over your living room rug Your inventory gets ruined when the roof leaks in your garage You’re accused of false advertising on your business’s Facebook page
Important note: Homeowners insurance won’t cut it here, as this policy won’t cover you if something happens while you’re doing business, even if it’s out of your own home.
While every business is different, I usually recommend that MLMers check out general liability insurance (which may cover your inventory), as well as self-employed business insurance.
You have to manage your own day-to-day admin work.
People who claim that MLMers aren’t small business owners should try running one for a day. Even if you’re part of an MLM, you’re still running it like a small business. That means taking care of your admin work, posting advertisements on your social media pages, arranging parties, shipping products, and doing everything else that’s needed to make your business a success.
You’re responsible for your own expenses.
Like a traditional small business owner, you’re responsible for paying, tracking, and deducting your own business expenses. Many MLMers have their own accountants, bookkeepers, and tax attorneys, as the expenses can be just as much as they would be with any other type of small business.
You have to find your own customers.
Your MLM company isn’t going to find customers for you, and that’s where the small business experience really comes into play. Once you have the product in hand, it’s up to you to find customers to sell those products to. So where do you side on the debate? Can you be part of an MLM and be considered a small business owner? Or do you get irritated when MLMers say they’re running a small business?
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I love writing about the small business experience because I happen to be a small business owner - I've had a freelance copywriting business for over 10 years. In addition to that, I also head up the content strategy here at Simply Business. Reach out if you have a great idea for an article or just want to say hi!
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
28 November 2018 • 6-minute read
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