How to Tell the Difference Between a Pyramid Scheme & a Legit Business

By the end of 2019, around 35% of the American workforce was earning money via freelance careers—aka, they were taking part in the gig economy. With COVID-19 and the resulting economic fallout causing millions to be temporarily out of work in 2020 and beyond, more people are looking at these options.

A young blond woman on a cellphone clutches a colorful notebook to her chest.

Whether you’re looking to replace your full-time job or you want a side hustle to help pay the bills, it’s important to know how to find legitimate opportunities. Otherwise, you could fall prey to a pyramid scheme.

What Is a Pyramid Scheme?

The Federal Trade Commission comes right out and says it: “Pyramid schemes are scams.” They might look like they’re built around legitimate products, but the goal is usually just to get as many people enrolled as possible.

Each person who enrolls—including you—is required to “buy in.” Often, the buy-in involves purchasing a certain number of products that the pyramid scheme is based around. Everyone above you in the pyramid gets a cut of that money. And you get a cut of the money from everyone below you. The more people you enroll, the more you make. The more people those people enroll, the more you make.

The point of the system is never about selling the products. It’s simply about enrolling increasing numbers of people, all of whom are required to buy products. In some schemes, you might be pushed to continue buying products even if you haven’t sold the products you already have.

Most of the time, people involved in pyramid schemes do not make a profit. Typically, only the people at the top of the pyramid—those running the scam—will make money.

Why Do People Get Caught Up in Pyramid Schemes?

Unfortunately, these types of scams sometimes prey on people who need income quickly. For example, if you lost your job and are having a hard time finding a new job, you might be more willing to look into an opportunity that offers a fast return. But avoid the temptation to overlook the feeling that something is too good to be true.

Instead, take a moment to calm yourself so you can make a legitimate plan after losing your job. Go over your budget—or create one for the first time—so you can manage your money in the best way possible while you try to increase your income.

What Is a Legitimate MLM Business?

MLM stands for multi-level marketing. Some opportunities that present themselves as an MLM business are actually pyramid schemes. However, some MLM companies are legitimate. That means how much you can make depends on how much product you can sell in addition to how many people you can recruit to your downline.

Some examples of MLM businesses that are legitimate and have been around for a while include Avon, Mary Kay, Tupperware, Doterra, and Paparazzi jewelry. All of these companies provide a product you can sell to others at a profit, and there’s a possibility to make money even if you don’t recruit others.

That being said, the Federal Trade Commission says to ask yourself some questions before you determine whether an MLM opportunity is right for you:

  • Are you a good salesperson and do you want to be a salesperson?
  • Do you have a marketing and sales plan outside of selling items to friends and family?
  • Do you have time and money to risk on this business because success is never guaranteed?
  • Have you looked into the opportunity, including reading reviews, checking for complaints with the Better Business Bureau or Consumer Financial Protection Bureau, and talking to existing reps?

Answering these questions and doing your research can help you understand if a particular MLM opportunity might be right for you. Remember that many people who invest in MLMs don’t make much money because the market is often saturated and your friends and family can only buy so much product.

How to Spot a Pyramid Scheme

Pyramid schemes and MLM sound a bit alike, don’t they? Here are some signs of a pyramid scheme, provided by the US Securities and Exchange Commission, to help you understand whether you’re considering a scam or a legitimate MLM opportunity:

  • You’re not selling something real. Legitimate MLMs sell tangible goods—many times there’s a ready-made market for them.
  • Get-rich-quick promises. If you’re being offered overnight success, get-rich-quick guarantees, or passive income promises, it’s probably too good to be true. People who make money with legitimate MLMs put a lot of time and effort into their businesses.
  • The company can’t prove it generates retail income. If the business can’t show you financial statements that demonstrate income from the sale of product, it could be generating all its income from recruiting people into the pyramid.
  • Strange or unnecessarily complex commission processes. Legitimate MLMs have easy-to-understand, product-based commissions.
  • Everything’s about recruiting. Legitimate MLM companies might offer incentives for recruitment, but they don’t force you to do this, and there is the opportunity to make commission-based money even if you don’t.

Alternatives to MLM for Creating a New Income Stream

MLM businesses are only one of the many options for making money outside of traditional employment. Here are some other options to consider.

You Might Also Like

A father and teenage son sit out on a porch with a laptop discussing how to add rent and utilities to your credit report.
Find out if your rent and utility payments are reported on your c... Read More

April 11, 2023


A father and son smile at each other
Becoming an authorized user is a common tip for individuals tryin... Read More

September 13, 2021


A woman shakes the hand of the man who interviewed her.
Long-term unemployment can really hurt—and not just financially... Read More

August 4, 2021