Ed (not his real name) recently sat down with me to discuss the importance of creating some business structure around his MLM business. Ed, like many MLM distributors, was never given a lot of insight on how to run his business. The MLM owners are mostly interested in getting as many distributors into their company as possible, so they focus their energy on brand buy-in and sales training. Unfortunately, this often leads to poorly developed businesses and huge potential liability for guys like Ed.
This is where other advisors need to step in and help. From tax structuring and liability protection, Ed is putting his personal assets at risk by selling products on behalf of these MLMs. Why? Because selling a product is a business, a business that if Ed does not properly run, becomes a PERSONAL liability. Ed and I worked through a few of these issues and came up with a couple of things to work on:
- Form an LLC, or other business entity. Selling an MLM product is a business. Most people, including Ed, operate their MLM business as “sole-proprietors” and therefore personally assume all the risk. What risk? How about slips and falls? Slander? Car accidents? Fraudulent misrepresentation? We’ll just stop there for brevity sake. The LLC is a separate entity from Ed, so in theory (and practice) it will help limit a plaintiff’s right to recover from Ed personally.
- Treat your business like a business. That's right, more work. Creating an LLC is a step in the right direction, but to effectively run the LLC as a business it is important to follow through. Separate business banking accounts, letterhead, business promo materials, and the such. Otherwise, Ed is holding himself out to the public as “Ed” and not a business.
- Co-Mingling Funds. While Ed has made great strides in building his presence in the marketplace, Ed has all his earnings deposited into his personal checking account. This would likely be considered co-mingling of business and personal accounts, by a court (hint, this is not a good thing for Ed). When a plaintiff sues a business, there is always a desire to “pierce the corporate veil” and go after the business owner(s) personal assets. Co-mingling of funds is a great way to help a plaintiff out in this regard.
- Business Tax Advantages. When first starting out, an LLC may be taxed as a sole-proprietor, or partnership, so all income is taxed directly to the owner(s). (learn more here) While Ed grows his business, he can maximize his tax deductions (a good accountant comes handy here); and once he is generating sufficient revenue, he can elect to have his LLC taxed as an S-Corp which creates even greater tax benefits.
- Building an Advisory Team. Accountants, coaches, lawyers, financial advisors and insurance advisors, all play an important part in building a successful business. While Ed may not bring on his full team from the outset, he can start assembling the pieces and have other advisors who can help him grow his business and his advisory team. He may also minimize some of this cost through various subscription plans some of these service providers offer.
Next time Ed is driving to a networking event, a house party, or a sales meeting for his MLM company, he will be doing so with a lot more confidence that if something goes wrong, he is protected. Good job Ed!