By Terrel Transtrum and David Taylor, Co-founders LaunchSmart™

It’s a fact of life: business is regulated. But with the basics in place, a business can confidently launch. Successful start-ups keep abreast of MLM legal issues and regulatory demands as they navigate the challenging waters of early years.

The law can actually be a protective wall for your business, and you should diligently close holes and gaps in the wall as they appear. By its nature, the MLM law both protects your company, its distributors and customers, and at the same time it protects consumers by defining and enforcing unsavory and illegal practices.

Taking the right steps at the right time in your network marketing company’s development, you can feel more assured that the protections will work in your favor. At the earliest stages of your new party plan business, you must be sure to set in place the important fundamentals listed below:

A. Distributor / Consultant Policies & Procedures
B. Distributor / Consultant Agreement
C. State Registrations
D. Legal Review of Your Company’s Compensation Plan
E. Legal Review of Labels and Ingredients
F. Legal Review of Literature and Promotional Materials

Several excellent law firms specialize in the unique areas of direct selling. Over time, you will want to develop a relationship with a legal services team. These teams can provide services ranging from start-up support through the complex issues related to regulatory actions, distributor litigation, and compliance with federal and state laws.

Many new companies do what they can to get started on their limited budgets. And that’s okay, too. But when it comes to legal reviews of compensation plans, ingredients, labels, and literature, for example, we strongly encourage the involvement of an MLM legal services team.

To help you better understand some of the important MLM legal elements of your direct-selling business that you will encounter during growth phases in the business lifecycle, including Party Plan concerns, consider this following general MLM legal checklist for planning your approach to meeting your company’s legal needs:

• Define MLM Legal Needs
  • Start-up Services
  • Entity Selection and Formation
  • Product Packaging & Labeling Review
  • Literature / Copy Review
  • Business Kit Review
  • Intellectual Property Protections
• MLM Legal Filings, Reviews & Registrations
  • General Business, Local, Warehousing, Zoning
  • Importer
  • State Tax ID Number(s)
  • Federal Tax ID Number(s)
  • Non-Prescription Drug Applications
  • Hazardous Product Submittals
  • Surety Bonds
  • Sales Tax & Voluntary Compliance
  • Intellectual Property Filings & Registrations
  • Corporate Registrations
  • Business Opportunity Registrations
  • Anti-Pyramid Registrations
  • Direct Selling Registrations
  • Employment Planning and Compliance
• Distributor Forms & Agreements
  • Application & Field Rep Agreement
  • Autoship Authorization Provision / Form
  • FTC "Cooling Off" Documentation
  • Compensation Plan Review
  • Policies & Procedures
  • Contracts and Lease Requirements
  • Parcel Delivery Services
  • Customs Brokerage Services
  • Equipment & Facility Leases / Purchases

In this article we cover the following MLM legal planning elements in more detail:

• Policies & Procedures
• Distributor Agreement
• State Registrations

Policies & Procedures

Field policies & procedures set the rules of the game for distributors, consultants, associates, independent business owners, or whatever special designation you use for your independent representatives in the field. Some feel that a “cut & paste” approach to policies & procedures is sufficient, particularly if they borrow from well-established companies. Without question, the great companies have invested much by way of legal fees and experience in crafting policies and procedures that support and protect both business and distributors, and much can be learned by evaluating their MLM legal forms.

The start-up company faces three options for creating policies and procedures:

1. Hire an MLM legal services firm to draft policies & procedures
2. Write their own, using a “cut & paste” approach
3. Use forms that have been specially prepared to guide the process

This section will give you the checklist for guiding the design of your company’s network marketing and party plan field policies & procedures.

Policies & Procedures Checklist & Key Considerations

• Definition of Terms
• Distributor ID Number
• Development of Customers
• Development of Distributors
• Product and Income Claims
• Products / Services
• Multiple Distributorships
• Trademarks and Copyrights
• Transfer / Sale / Assignment / Succession
• Countries of Operation
• Methods for Enrolling
• Benefits for Distributors
• Renewals
• Advertising and Internet
• Literature, Sales Aids, Promotional Materials, Internet web pages
• Media and Media Inquiries
• Spamming
• Business Entities
• Changes
• Commercial Sales
• Conflicts of Interest
• Cross-Sponsoring
• Excess Inventory
• Taxes
• Insurance
• International Marketing / Sponsoring
• Bonuses & Commissions
• Product Guarantees / Returns / Inventory Repurchase
• Dispute Resolution
• Ordering
• Payment & Shipping
• Inactivity / Cancellation

Distributor Agreement

The pivotal document in the relationship between a network marketing company and its field rep is the distributor agreement. Whether your plan calls for a signed original in your files or an electronic signature that supports the web-based enrollment, the terms of the party plan or network marketing agreement are essential to your company’s safety and long-term viability. This essential tool must survive scrutiny in all the states in which your company conducts business; it must withstand the attacks of disgruntled or wayward field reps; and it must still invite individuals who would come and be leaders in your company, without scaring them away.

This section will give you the checklist and basic outline for designing and analyzing your company’s agreement with independent field representatives in a network marketing company or party plan company.

Distributor Agreement Checklist & Key Considerations

• Application Information
• Co-Applicant Information
• Sponsor / Enroller Information
• Application Clause and triggers / Web-based enrollment considerations
• Acknowledgment Clause
• Rights & Obligations of Distributor
• Independent Contractor Relationship
• Assignment / Transfer
• Ability to Amend
• Continuation of Distributor Agreement
• Termination
• Breach of Agreement / Policies
• Anti-Waiver Clause
• Integration Clause
• Unenforceability Clause
• Dispute Resolution

Terrel Transtrum is the founder of ServiceQuest® and co-founder of LaunchSmart™. As a network marketing consultant he also specializes in startup consulting for party plan companies, multilevel marketing, MLM and network marketing. He is an experienced advisor in MLM software, network marketing legal, party plan business, distributor recruiting and retention, operations and fulfillment and MLM legal.

(The content of this article is extracted from ServiceQuest® RetentionSmarts™ Modules. For more information on RetentionSmarts™ training and mentoring systems, contact a member of the LaunchSmart Team.)