Also sometimes called network marketing companies, a multilevel marketing company (MLM), offers income opportunities to folks who want to set their own schedule and work at their own pace—without having to build a business from the ground up. Many people who want the flexibility of being their own boss have chosen careers working as agents for MLM companies, so I regularly field questions from these entrepreneurs about what legal structure will be optimal.
MLM entrepreneurs are considered independent contractors. Sometimes they are also referred to as independent consultants, independent distributors, independent agents, independent representatives, or something similar. Regardless of the synonym used, an MLM program is comprised of independent contractors who are not employees of the network marketing company.
By default, an MLM’s independent contractors are also considered sole proprietors. But is this the right business entity for an MLM consultant? To get you started on your path to learning more about the potential advantages of forming an MLM LLC or incorporating your network marketing business, let’s explore some of the basics that will give you a fundamental understanding.
An Overview of MLM Companies
For those of you who might not be familiar with MLMs, even though you may not have heard the term before, you are probably familiar with MLM companies.
A few examples of MLM companies include:
- It Works!
- Jamberry Nails
- Mary Kay
- Nu Skin
- Pampered Chef
- Plexus Worldwide
- Rodan and Fields
- Team Beachbody
- Young Living
And the list goes on!
MLM agents are paid through the network marketing company’s compensation plan rather than directly from the business’s customers. The compensation plans vary from one MLM to the next.
While MLM agents are considered independent business owners, they don’t operate a business in the traditional sense. They do not hold any tangible business assets nor do they have the right to sell the MLM business at their sole discretion.
MLM companies usually do not require that consultants register to become a formal business entity. However, that doesn’t mean doing so wouldn’t be advantageous to the independent representative.
Benefits of Forming an LLC or Corporation
Protection from Personal Liability
Don’t assume that, as an MLM representative, you will be covered by the liability insurance or other protections that the MLM company has in place to protect its own assets. Carefully check the policies and agreement, because you may find that you need to seek ways to protect yourself in the event someone sues you as a result of harm that came from using a product or some other reason.
If an MLM independent rep doesn’t form a Limited Liability Company (LLC) or C Corporation for the business, that individual and the business will be considered one legal and tax-paying entity. In other words, there’s no separation between the individual and the business, so the owner’s personal assets could be at stake if something goes awry.
When a business is registered as an LLC or a corporation, however, it is a separate and distinct legal entity. As such, in most circumstances, the owner will not be personally responsible if the business cannot pay its debts or if it runs into legal issues.
Potential Income Tax Savings
By default, a single-member LLC is considered a “disregarded entity” and is taxed the same as a sole proprietorship, with business profit and loss passing through the owner’s individual tax returns. In this situation, all of an LLC’s profits are subject to both income tax (at the tax rates for individuals) and self-employment taxes (Medicare and Social Security). Alternately, an LLC may elect to have S Corporation tax treatment, which can help minimize the owner’s self-employment tax burden because only money paid to the LLC owner as wages or salaries gets hit with self-employment taxes; any money paid to the owner as distributions will not be subject to that 15.3 percent tax obligation.
C Corporations are considered their own tax-paying entity, so they must file their own tax returns and pay income tax at the applicable corporate tax rate. Depending on where a business is registered, the corporate income tax rate might be lower than the individual tax rate applied to sole proprietors and LLCs operating as disregarded entities, and business owners (considered “shareholders”) pay self-employment tax only on their salaries and wages. Also, a C Corporation may be eligible for tax deductions that a sole proprietor or LLC cannot claim.
How to Incorporate Your MLM Business
Before moving forward, make sure you have talked with an attorney and an accountant (or tax advisor) to discuss whether doing either will benefit you in your situation. Also, review your MLM company’s consultant agreement to determine if they have any specific rules regarding ownership by a formal business entity or transferring ownership to a legal business entity.
The requirements vary from one state to the next, but I’ve listed the basic steps below:
- File formation paperwork with the state – For an LLC, the paperwork is called Articles of Organization. For a corporation, the document is called Articles of Incorporation. When an MLM LLC or C Corporation wants an S Corporation election, it must file IRS Form 2553. Note that incorporating as a C Corporation comes with various other requirements, which might include assigning officers, forming a board of directors, establishing bylaws, and carrying out other formalities.
- Obtain an EIN – Employee Identification Numbers (EINs), also called Federal Tax ID Numbers are free from the IRS. They are nine-digit numbers used for tax filing and other reporting purposes. Often, they are required before you can open a business bank account or obtain business licenses.
- Designate a registered agent – LLCs and corporations must have a registered agent to accept the service of process. A registered agent is a person or company that a business gives authority to receive important documentation, such as government notices and legal paperwork, on their behalf. The registered agent must have a physical location within the state where the business is registered.
- Obtain the required business licenses and permits – Depending on the business activities and location of an MLM business, it may have to have business licenses or permits to operate legally in the state, county, or local jurisdiction. Independent agents often run their MLM businesses from their home and some of the standard licenses and permits that apply to home-based businesses include a general business license, construction permits, home occupation permit, trade license, sign permit, sales tax permit, or a health and safety permit.
- Open a business bank account – For entrepreneurs to avoid piercing the corporate veil that protects them from personal liability, it’s essential (and required!) that they keep their business financial activity separate from their personal finances. LLCs and corporations must have business bank accounts used solely for business purposes; this will prevent the lines between personal and business from becoming blurred.
- Prepare to maintain accurate records – Home-based independent contractors should have a system for keeping track of costs related to conducting business in their home. Examples of possible tax-deductible expenses include home office furniture and equipment, home office supplies, and allowable home expenses like utilities or mortgages may be deducted on a percentage basis. I advise working closely with a tax advisor or accountant when determining legitimate tax deductions and how to best handle home office deductions.
- Stay on top of your ongoing compliance requirements – Both the LLC and corporation business structures come with the responsibility to maintain certain formalities and keep various documentation up to date. I recommend getting a grasp on these from the start so that nothing falls through the cracks and puts the LLC or corporation in jeopardy of losing its good standing with the state. Businesses that fail to comply with the rules can risk facing lawsuits, fines, and even a suspension or forced closing of their business operations.
Review your state’s rules and contact the Secretary of State (or whichever state office presides over business formation) to ensure you understand all of your obligations.
Resources to Help You Along the Way
If it seems like there’s a lot to consider when thinking about establishing a formal business entity, you’re correct! However, the decision-making and effort are well worth the peace of mind of knowing you’ve explored your options and have an understanding of what you must do.
Some helpful resources to tap into as you work through the process include:
- An attorney
- An accountant or tax advisor
- SBA website
- IRS website
- Your state’s Secretary of State office
- Your county and local government offices
To elaborate on how CorpNet can help you, I’ve listed some of the services we provide to MLM agents:
- Conduct business name searches and file fictitious name registrations (DBAs)
- Prepare and file Articles of Organization and Articles of Incorporation.
- Serve as your registered agent.
- Prepare and file initial reports and annual reports to the state.
- Obtain an EIN.
- Apply for business licenses and permits.
- Keep track of compliance requirement deadlines.
Our filing experts can help with much more, too, to help you successfully launch and run your MLM business!