I’ve never participated in MLM, but know a little about it. This thread concerns legal multi level marketing/network marketing systems such as Amway and Avon, not ponzi schemes. This thread is also not intended for debating strategies for making money with MLM or debating whether or not MLM is a viable money making opportunity for the average Joe.
Now, my understanding is that a lot of people can get involved in MLM very informally, selling things and recruiting other people on the side/over lunch break, and overall put forth a modest effort while pursuing another career.
Do people who join MLM generally follow the legal steps that other small business owners follow? Does a newly minted “Avon Lady” go down to the local courthouse to file for a sole proprietorship business license and sales tax certificate, and then start collecting and remitting sales tax according to the procedures followed by mom and pop stores, then when the year is up, file a business tax return? Are there many people who set up other legally recognized business types (e.g. partnerships, LLC’s, C corporations, or S corporations) for their Amway Distributorships or whatnot? Is this not commonly required under a certain business income level, or if the person is not following it as their primary source of income?
I don’t know the answer but I have a related question.
I know it probably varies from state to state but in general, when is a business license required?
I was self employed for a few years back in New Zealand doing software development and consulting. I never needed any sort of license and never gave any thought to such a thing. When I came to the US, I was surprised to find that you need a license to be in business but I’ve never really looked into what the definition of “business” is.
If I decide to make a web site for a friend, he pays me and I declare it to the IRS, do I need a business license for that?
I’m guessing that it’s related to tax. In New Zealand it’s all just personal income so it made no difference to the the tax rate whether I was self employed or employed by someone else. The US tax code is horrendously more complicated.
Most states don’t require any sort of business license for a sole proprietorship. The only thing you might need would be a DBA so you can accept checks made out to the business instead of just you. That’s not necessary if you don’t plan to open a bank account in the name of the business. The DBA is all that’s required – the bank will happily accept your SSN instead of you business ID number.
I can only speak for New York, but you would have to contact the state about collecting sales tax and make estimated tax payments if your sales is over a certain level. As long as you send them the sales tax money, they’re happy. (I don’t think it’s a matter of licensing, just sending them the money).
For income tax, you just fill out a Schedule C for the Federal return and file it with your state return, reporting all income. You are allowed to make deductions on the Schedule C for your legitimate expenses.
Technically, this is the same as for a store or other business.
As to the sales tax, it is generally collected from the buyer at the time of sale and the company pays it for the salesperson. I’ve worked for two different companies - with one, I sent the whole sales proceeds with tax to the company, and got a weekly commission check. For the other, I bought the product at wholesale + tax, then sold the items at market + tax. In both cases, the company sent the sales tax to my state directly.
That’s because business licenses are generally issued by cities or counties. As a sole proprietor there is no particular license the state of California issues, other than my resale permit, but I have to apply and pay for a business license in various cities where I am physically performing work. Most are only nominal fees. There are also business taxes, some of which are based on gross sales within the city, others are flat rate.
ETA: WRT to Amway and Avon and other companies with actual corporate presences, you will find they will almost universally require their resellers to obtain a resale permit, which obligates the permit holder to collect and remit the appropriate tax back to the taxing jurisdiction. This is because state laws will generally penalize the seller of goods who does not collect sales tax and force them to pay the sales tax plus a penalty and interest.