Overview
In a typical multi-level marketing or network marketing arrangement, individuals associate with a parent company as an independent contractor or franchisee and are compensated based on their sales of products or service, as well as the sales achieved by those they bring into the business. This is like many franchise companies where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager.

In a legitimate MLM company, commissions are earned only on sales of the company's products or services. No money may be earned from recruiting alone ("sign-up fees"). One must analyze the compensation plan to determine whether participants are paid from actual sales to customers and not from money received from new recruits. If participants are paid primarily from money received from new recruits, then the company is an illegal pyramid or Ponzi scheme.

Some less legitimate companies produce revenues primarily by attracting new participants with the hope of reward and selling them products or services of dubious value at inflated prices, as opposed to selling products or services consumers would purchase at the given price without regard to the opportunity attached. One must evaluate the products or services and determine if a significant percentage of consumers would continue to purchase them if the participants do not make money from the underlying opportunity. If the products or services have dubious value or if the participants must purchase excessive quantities without reasonable intent to use or resell said items, then the company is likely a thinly veiled illegal pyramid scheme.

Multi-level marketing has a recognized image problem due to the fact that it is often difficult to distinguish legitimate MLMs from illegal scams such as pyramid or Ponzi schemes. MLM businesses operate legitimately in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

History
The 1980s saw a major shift as companies began managing the stocking and distribution of products as well as commission payments to their members. This allowed members to focus on selling. Today, most MLM companies act as logistics companies that take orders, ship products and calculate and pay commissions.

With the arrival of the Internet, MLM companies have started to go online. Many established MLM companies began to use the Internet to promote their products. At the same time, many other new MLM companies started their businesses using the Internet, which is generally called online MLM.

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