Paying Referral Fees Legal?

[softstor]

I am considering starting an online service. Members would join this service and pay a small monthly fee. It will probably be no more than $20 per month.

I plan to have a referral program. Referrals would receive a referral fee based on a percentage of their referral's membership fees. Think of it like receiving a commission. But instead of product sales, it would be membership sales.

I would like to offer referral commissions up to 3 levels deep.

Is this legal to do?

[Dan C. Rinnert]

It sounds like what you're wanting to do is a three-tier affiliate program.

I know two-tier affiliate programs are out there. I am not a lawyer, but I think a three-tier program would be legal, but it's probably going to depend a lot on how it is setup. I don't think there would be an issue with a straight affiliate program, even one that runs three levels deep, but if it is setup, or promoted, anything like a Ponzi or pyramid scheme, that could land you in trouble.

The best bet is to talk to a lawyer and have him/her help design the affiliate program to stay legal, and to also draft the terms and conditions agreement for the program.

If you're outside the U.S., all bets are off. I don't know what the laws of other countries are regarding something like this.

[Dan C. Rinnert]

Originally Posted by Cameron Jerrings

I have a similar question. Do you have to pay taxes on money that you make form referrals?

In the U.S., yes. It is income. If you earn over $600 from a payor, they will send you a 1099-MISC and report it to the IRS. Usually, when you signup, they'll get info from you through a W-9 or similar form, or not release a payment to you until you've filled it out.

That's also why you should keep track of your expenses for Internet marketing too. Webhosting, PPC, etc.

And, bear in mind I'm not a lawyer or an accountant, and you should definitely talk to your accountant about this.

[Sam Rodrigo]

S.

I’m not a lawyer, and as such cannot provide legal advice.

I can tell you that when you force people to pay to earn via multi-levels, you’ll get into trouble no matter where in the world you live.

IF you are very successful at it, you may even bring down a national economy!

But, keep in mind that everyone in the world participates in ponzi schemes whether they like it or not – I am forced to participate in Social Security (USA), which is the world’s largest ponzi scheme!

Here is the real problem you’ll run into: Most often people who join a tiered affiliate program focus on building “tiers” and not doing much work. In the end you’ll find one or two legit affiliates per 10,000 people.

The numbers will look great – Hey, I’ve got 100,000 affiliates! Great. Then the problem is that only 5 of them are doing “real” work.

There is no “work around” the above issue. Real work in the path to success is mandatory.

IMHO,
Sam

[Dan C. Rinnert]

Originally Posted by Sam Rodrigo

I can tell you that when you force people to pay to earn via multi-levels, you’ll get into trouble no matter where in the world you live.

My impression is that he is offering an online service and charging a membership fee. Then, he would have a referral program so people could earn money if they refer others to join the service. And that the service is a real service offering something of value and not just a "service" for trying to make money.

That was my impression, anyway, and that's how I based my response. But, I see also how you got your impression.

Which shows two things: (a) you shouldn't take legal advice from forums, because people may have different impressions of what you're trying to do so, even if people are correct in their answer, if their impression didn't match what you're really trying to do, you have the wrong answer and (b) you shouldn't take legal advice from forums.

And, I'm still not a lawyer.

[Sam Rodrigo]

Dan,

My answer was based on *reality*.

FYi, Sam.

[softstor]

Thanks for everyones suggestions.

The service is a url rotation service. You submit all of the urls to all of your websites. The site will automatically display a differnent website from your list whenever this url is used.

The affililate program is just an incentive to find new members for the program. It is not the purpose of the site.

It is still under development and wanted to hear some opinions. I welcome more on what I am considering doing on the affiliate program.

[Sam Rodrigo]

S.

To end my thoughts on a more positive note, and to make a contribution to help you, let me say that PAP PRO software – Post Affiliate Pro software can nicely manage what you want to do with affiliates, taking into account your affiliate payment structure.

Success,
Sam

[donaldclifton]

I use easymemberpro for my membership site. Easy to set up, easy to use. I would reccommend it.

Don Clifton

[softstor]

I already have the affiliate coding put into the site. I am not really looking for affiliate software.

I was just interested in hearing opinions from people if a 3-tier commission structure is legal for a service site such as this one. If not, I am have to make it a single tier.

[artwebster]

This is a great example of how NOT to seek help.

It is clear from the responses that everybody, myself included, has no real notion as to what is on offer here.

Starting an online service can mean anything.

A referal is generally accepted as an existing member naming a friend to the service provider as a potential additional member.

An affiliate is someone who finds new potential members in return for a share of the membership fee.

Before anybody can answer this question they need to know how genuine and valuable the service being provided is. If it is a genuine and valid service then an affiliate programme would not be deemed to be of questionable legality.

The fact that product sales are specifically excluded is not a good sign.

[Josh Anderson]

"Referral Sales" are prohibited in one way or another in all 50 states.

It ranges from misdemeanor to felony.

However, what defines a referral sale will vary by law. I am not commenting on your business plan only on the term "referral sale" and how it is generally defined in the law.

This is a basic example of referral sale prohibition under Iowa state law:

Iowa Code Section 714.16 (2)(b) which makes it unlawful to sell . . . "any merchandise at a price or with a rebate or payment or other consideration to the purchaser which is contingent upon the procurement of prospective customers provided by the purchaser . . . or the procurement of sales . . . to persons suggested by the purchaser."

Again to my knowledge this is illegal in all 50 states and in some states it is considered a felony so be careful.

I researched referral sales law extensively over the years and have interviewed Attorneys and even a Federal expert witness on the issue.

Whether or not this applies to your plans I have no clue but you should consult an attorney if you have any questions regarding the legality of your plan.

[softstor]

Thanks for the info on the referral laws. I may be using the word referral when it may actually be considered affiliate sales. Since the site development is almost complete, this may be a good time to look for legal advice.

I would find it suprising if this was illegal. I have seen many hosting sites do this all of the time. Have an affiliate program that pays a percentage of the hosting fees every month.

Are there any attorneys online that may be familiar with this type of industry?

[Josh Anderson]

I may be using the word referral when it may actually be considered affiliate sales.

You should search out and contact attorneys specializing in network marketing/multi level marketing law as well as franchise law because of the structures you are considering.

[softstor]

Thanks Josh. I did some research and spoke to an attorney today. It seems that it is illegal to have an affiliate program where it is required to be a paying member in the program. But you can have an affiliate program if it is not required to be a paying member. I already had plans for a free member option in the service. So I need to do some minor changes to my site design.

Instead of running the affilate program inside my site, I think it may be best to install an existing affiliate script on my site in where members that wish to participate in the affiliate program need to signup on the affiliate side.

Does anyone have any good suggestions on website affiliate scripts that allow the following:

Pay members by Paypal, AlertPay and SolidTrustPay
Support a 2 or 3 tier system

[Tsnyder]

Originally Posted by softstor

Thanks Josh. I did some research and spoke to an attorney today. It seems that it is illegal to have an affiliate program where it is required to be a paying member in the program. But you can have an affiliate program if it is not required to be a paying member. I already had plans for a free member option in the service. So I need to do some minor changes to my site design.

Instead of running the affilate program inside my site, I think it may be best to install an existing affiliate script on my site in where members that wish to participate in the affiliate program need to signup on the affiliate side.

Does anyone have any good suggestions on website affiliate scripts that allow the following:

Pay members by Paypal, AlertPay and SolidTrustPay
Support a 2 or 3 tier system

Okay... you just put a stop to the whole thing. Pay Pal will not allow this.

Tsnyder

[Josh Anderson]

Pay members by Paypal, AlertPay and SolidTrustPay
Support a 2 or 3 tier system

As mentioned paypal will freeze your account the minute they catch wind of you using them as either a payment processor or a way to pay your affiliates.

Their TOS prohibits anything more than one tier.

The attorney you spoke with gave you good advice...

However, if you are going to create more than two tier affiliate structure you are likely entering into another body of law.

Network marketing companies are federally required to report/disclose distributor earnings and also there are many other legal precedents that will govern how you manage your business.

You will next want to speak to an attorney who can advise you on whether the three tier structure will effect you in this way. Or you may want to consider limiting it to two tiers and avoiding paypal.

[askloz]

Well, if ya check the rules, Income should only be taxable on Corporations. not individual people... it's been forced for people to pay tax by scaring the living daylights out of them by threatening to take people to court over it and putting them in prison...

Truth is, paying tax is nothing but a huge hoax, praying on those not in the know how or the funds to find the proper taxation lawyer...

I've done quite a bit of research on this, even my lawyer says tax is illegal for normal folks such as u and I, even Ron Paul admits tax is illegal when interviewed by Alex Jones of Infowars - but due to the amount of force put on by the ABC's (I call them the alphabet soup - Government), that people just give up.

When ever there was an article put up on a article directory, it was asked to be removed by the Feds or of sorts, videos on YouTube were deleted, and various other places stopped him from having / expressing his voice when he was up for election as president, since, stepped down cos he couldn't get a word in edge wise to prove the fact that paying tax is illegal. And to prove that the government are also committing a crime / being hypercritical, when they don't pay it themselves - ever time you submit your taxation papers, they are supposed to return you a receipt along with what they have paid as well, but never do.

Originally Posted by Dan C. Rinnert

In the U.S., yes. It is income..

[askloz]

it would be perfectly fine if they word their terms and conditions that if they do become an affiliate, they're actually working for them, and assigned a job title, of which they are in control of those under them. It gets a bit fiddly, but there is a way around it.

But end of the day, there's MLM programs out there, that run legally. For as long as there is a product and or a service provided for every subscription.

It's fine to offer a commission. It's not a rebate, a rebate is when you give person A a "refund" of X %. When in fact in MLM programs, you're paying a commission, these people act as advertisers, whom of which you pay a percentage out of the funds you received from the entire subscriptionship.

They are precurring a position as a Network Advertiser of which you pay, whom is responsible to talk to those in their Network to help them grow their online business as an advertiser.

Originally Posted by Josh Anderson

"Referral Sales" are prohibited in one way or another in all 50 states.

It ranges from misdemeanor to felony.

However, what defines a referral sale will vary by law. I am not commenting on your business plan only on the term "referral sale" and how it is generally defined in the law.

This is a basic example of referral sale prohibition under Iowa state law:

Iowa Code Section 714.16 (2)(b) which makes it unlawful to sell . . . "any merchandise at a price or with a rebate or payment or other consideration to the purchaser which is contingent upon the procurement of prospective customers provided by the purchaser . . . or the procurement of sales . . . to persons suggested by the purchaser."

Again to my knowledge this is illegal in all 50 states and in some states it is considered a felony so be careful.

I researched referral sales law extensively over the years and have interviewed Attorneys and even a Federal expert witness on the issue.

Whether or not this applies to your plans I have no clue but you should consult an attorney if you have any questions regarding the legality of your plan.

[askloz]

Set up a corporation in Nevada, and you're not libable to pay Corporation taxes, just federal taxes. Place the funds in an Offshore bank account. Simply wire the funds from your bank account to your offshore one. Then, pay yourself a sum of money that's under the tax bracket, or one that is the lowest.

Then use any of the funds in the offshore bank account and write that off as business expenses on anything you purchase over $200.00

Job done!

Next step you could do, is set up a foundation, which has even more benefits.

Originally Posted by Cameron Jerrings

I have a similar question. Do you have to pay taxes on money that you make form referrals?

[softstor]

Is a 2-tier system considered network marketing?

[Travis Millward]

Originally Posted by Sam Rodrigo

But, keep in mind that everyone in the world participates in ponzi schemes whether they like it or not – I am forced to participate in Social Security (USA), which is the world’s largest ponzi scheme!

Excellent point Sam. It's sad but true.

[softstor]

I put this project on the back burner and I am now looking at it again.

To my understanding, when maintaining a referral program you must offer it to free members. I would like some opinions.

Can free members get paid at one rate while paid members are paid a different rate? For example, can free members earn 20% commissions on sales while paid members are paid 30% commissions on sales?

[Tsnyder]

Originally Posted by softstor

I put this project on the back burner and I am now looking at it again.

To my understanding, when maintaining a referral program you must offer it to free members. I would like some opinions.

Can free members get paid at one rate while paid members are paid a different rate? For example, can free members earn 20% commissions on sales while paid members are paid 30% commissions on sales?

You're getting into an area that's much too complicated to be
seeking advice on internet forums. You need to contact one of the
handful of lawyers who specialize in multi-level marketing laws and
regs.

I've been in that business for more than 3 decades and I can tell you... FOR SURE...
that it's no place to be if you don't know what you're doing as the owner.

Here are links (not affiliate) to two of the most prominent MLM attorneys in the U.S

MLM Lawyer Grimes & Reese PLLC - Attorney Specializing in MLM Startup and Multilevel Marketing Law

MLM Lawyer Jeff Babener presents MLM Legal, a resource of multi-level marketing law issues and direct sales law library.

Tsnyder

[cardinal61]

Iam starting a forum the cost will be $20.00 and $14.00 will go to a member as a referral. Only way to join is thru a refferral.
Is this legal.
do you believe i can use paypal.
there are no tiers.
anyone caN HELP