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Multi-level marketing (MLM) companies sell products or services through networks of participants. A participant may earn from sales to customers and may also receive commissions or bonuses tied to activity in their recruited network, called a downline. The details depend on the company’s compensation plan; the label “MLM” alone does not establish whether a particular business is lawful or whether participants are likely to make a profit.
How does an MLM work?
A participant joins under a company’s terms, sells its goods or services, and may recruit other participants. Those recruits—and later recruits—form the participant’s downline. Depending on the plan, the participant may earn commissions on personal sales, bonuses tied to downline activity, or both.
Joining costs and purchase requirements vary. There is no single enrollment fee or universal inventory rule. A plan may include fees, product purchases, or conditions for qualifying for particular rewards, so the written terms matter.
How money moves
- Join: The participant accepts the company’s terms and may pay fees or buy products.
- Sell: The participant offers the company’s products or services to customers. In a retail-oriented model, sales to customers who are not participants can generate revenue or commissions.
- Recruit: The participant may invite others to join. Their activity can affect commissions or bonuses under the plan’s rules.
- Subtract costs: Product purchases, samples, shipping, training, travel, marketing, sales tools, and other business expenses can reduce or exceed receipts.
A commission or company payment is not the same as profit. To understand the economics, compare all receipts with all costs rather than treating sales volume or a bonus as take-home income.
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How is an MLM different from a pyramid scheme?
Multiple levels and the existence of a product do not, by themselves, determine whether a business is a pyramid scheme. The Federal Trade Commission (FTC) says the assessment of an MLM’s compensation structure is fact-specific and depends on how the plan operates in practice. Relevant questions include what the plan rewards, how the opportunity is marketed, what participants buy and sell, what expenses they incur, and whether incentives favor recruiting over sales to customers outside the network.
A commonly cited concern is rewards for recruiting that are not connected to sales to ultimate users. The practical question is whether participants can earn through genuine sales to customers outside the network, or whether the structure and its real-world incentives place greater emphasis on recruitment and purchases by participants. These are factors for scrutiny, not a do-it-yourself legal verdict about a company.
The FTC’s consumer guidance puts the retail-sales distinction this way: “If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors.” The agency also cautions in its business guidance that “The assessment of an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation.”
What are warning signs to examine?
The FTC identifies several warning signs. Any one should prompt closer examination of the compensation plan, costs, and claims; it does not alone establish a legal conclusion.
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- Pressure to join quickly instead of taking time to review the terms.
- Pressure to buy more inventory than you want or can resell, particularly to stay active or qualify for rewards.
- Required fees, purchases, training, or qualification rules that could leave you spending more than you earn.
What do MLM income disclosures show—and leave out?
FTC staff reviewed 70 MLM income disclosure statements that were publicly available in February 2023. In a 2024 report announcement, the FTC said many statements omitted participants with low or no earnings and did not account for expenses, which could outstrip income. The agency’s report announcement describes the review.
The FTC’s 2024 consumer summary reported that most participants in the MLMs reviewed made $1,000 or less per year, and that in at least 17 of those MLMs, most participants made no money. The $1,000-or-less figure may not account for expenses. It describes the companies and participants reviewed; it is not a universal estimate for every MLM or a measure of net profit. See the FTC’s consumer summary.
An income disclosure can give an incomplete picture if it highlights higher earners, leaves out people with zero or low earnings, uses confusing groups or time periods, or reports payments without subtracting costs. When reading one, check:
- Who is counted, including whether inactive participants and people with no earnings are included.
- What period the figures cover and whether they show an average or a distribution.
- Whether amounts are gross company payments or profit after expenses.
- Which costs participants typically incur and whether those costs are included.
FTC guidance says earnings claims should be supported by reliable evidence and reflect what a typical person is likely to achieve. A “results not typical” disclaimer alone does not fix an overall misleading impression.
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Can you make money in an MLM?
It is possible for participants to receive commissions or other payments, but those payments do not establish that a typical participant earns a profit. The FTC findings above are limited to the reviewed companies, and gross earnings can be reduced or wiped out by business costs. A recruiter’s personal earnings story is not a substitute for understanding the plan, the number of participants earning little or nothing, and the expenses required to pursue the opportunity.
How to evaluate an MLM before joining
- Get the documents: Obtain the current compensation plan and all enrollment, purchase, refund, and cancellation terms in writing.
- Trace each reward: Ask how commissions arise from sales to customers outside the participant network, and what purchase, recruitment, rank, or activity conditions apply to each bonus.
- Interrogate the income disclosure: Identify the share earning nothing or little, the population and time period counted, and whether the figures are gross payments or net profit after expenses.
- Estimate total costs: Include enrollment, recurring purchases, samples, shipping, travel or events, training, sales tools, marketing, and applicable taxes or other business costs. Compare the total with plausible customer demand and likely sales.
- Get an independent review: Research the company and its products separately, and ask a trusted person with no connection to the company to review the paperwork. Do not let a rushed decision or recruiter’s income story replace that review.
These are general consumer checks, not personalized financial or legal advice. The analysis here is based on US federal guidance; laws and enforcement standards can differ in other countries.
What is the status of the FTC’s proposed earnings-claim rule?
On January 13, 2025, the FTC announced a proposed Earnings Claim Rule Regarding Multi-Level Marketing, including proposed prohibitions on misleading or unsubstantiated earnings claims. The announcement describes a proposal, not a final rule. Its present legal status should be checked against current FTC or Federal Register information before relying on it as law.
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