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Legal MLM network marketing systems, also known as multi-level marketing, are sometimes difficult to distinguish from unethical and illegal pyramid schemes. Think of it in terms of the Parable of the Weeds. Good companies are out there but a lot of bad ones have grown up around them. Separating the good from the bad has become a difficult task. The problem became so severe that the U.S. Government reviewed the situation. So, those looking to venture into MLM business should step cautiously. In a typical MLM network marketing plan a parent company uses independent salespeople, or distributors, to market its product directly to customers. These distributors then work on building a customer base. Independent distributors can also recruit other independent distributors who work on building a customer base of their own. Each level in the system earns money off the sales of new distributors and their customer base, referred to as a downline. The organization begins to build from the base up like a pyramid with the parent company always sitting on top reaping the rewards from the efforts of those people below it.
Now, MLM network marketing systems have been very successful for some popular cleaning chemical suppliers, cosmetics, and many other companies. They are completely legal because commissions are earned only on product sales or services. The legality of the business comes into question when money is earned from recruiting new distributors alone or if money comes primarily from new the recruits. Pyramids are illegal because inevitably the supply of new distributors dries up and the pyramid collapses causing almost everybody involved to lose their money. Those at the top of the pyramid may survive with enough money to continue, but the many investors at the bottom usually don't. So it's easy to see why this type of networking business practice should be scrutinized before jumping headlong into one. Unfortunately, it's easy for an unscrupulous business person to disguise an illegal or unethical company into making it look completely legitimate. The entire pyramid system wobbles from the bottom up because it's not built on solid business or Biblical principles. Dishonest money earned by vanity and greed will always disappear. "Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase." (Proverbs 13:11) Potential investors must do the investigative ground work or they could part ways with their money.

The government can't tell anybody whether or not an MLM network marketing plan is illegal or not. It also says that joining a MLM group is a matter of personal choice. But the government has issued some guidelines for those who are looking to get into network marketing. First, as mentioned above, don't get involved in any scheme that includes commissions for recruiting. And don't enter into an agreement requiring the purchase of expensive inventory because these plans are at a high risk of collapsing. Be leery of claims that money will be made through continued growth of distributors. Claims of potentially enormous earnings through the sales of miracle products are a red flag. Don't sign any agreement or contract at an opportunity meeting or high-pressure situation. Finally take time to completely check out any plan being considered. Most legitimate MLM network marketing plans use generally accepted practices. One such practice restricts how much inventory a distributor may purchase. It's often referred to as the 70 percent rule which prevents "inventory loading". In theory this prevents distributors from qualifying for additional bonuses.

Once invested in a MLM network marketing plan a person can earn pay, commissions, and bonuses in a variety of ways. Some can be extremely complicated. Many networking systems have ranks within the downline which determines the amount of compensation to be paid out on sales. For example, a group director may have under him or her a manager, supervisor, and associate. A Stairstep-Breakaway method of compensation system actually combines two plans. The Stairstep part pays compensation on the total volume of a dirctor's group, which includes personal sales volume and the entire downline sales volume. Therefore, sales and the rank of people in the downline determine the amount of compensation earned. Each rank in the step earns a higher compensation for the director. In addition to his or her personal earnings, the director of a downline group might earn 10 percent commission from the manager, 20 percent from the supervisor, and 30 percent from the associate. When someone in a director's group steps up and eventually becomes a director, they are said to breakaway and form a first generation breakaway group. As a result, the director of the original group will earn commissions from this breakaway group. However, in some interpretations of the breakaway method of compensation, the splinter group becomes an autonomous entity, and the original director doesn't earn commissions from it. Interpreting the system this way doesn't provide much incentive to step up and build.

Another method of compensation within the MLM network marketing system is called Unilevel which actually means one level. But most Unilevel payment systems usually pay commissions several levels deep. Unilevel might be the least complicated method of payment. However, the Matrix plan can be quite complicated because of the different variations possible. Under the Matrix plan the number of direct distributors that can be sponsored gets limited to the depth and width of the Matrix. Once the matrix fills, a new one may have to be started. Binary plans are also used in MLM network marketing systems. Binary compensation methods are actually a variation of the Matrix system, and uses a point system to determine the amount of payment. Finally, the hybrid compensation plan is derived from combining methods from the various plans. All the plans are more complicated than outlined here. Further research should be conducted to fully understand each one.

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