By Cliff Ennico
“I have a small manufacturing business in the Midwest.
“For years, I have hired individuals to act as distributors for my products throughout the United States, similar to what the Avon cosmetics people do. They have assigned territories and cannot solicit business in a territory outside their own, but they can accept orders from anywhere.{mprestriction ids="1,3"}
“I train these people on how to sell my products, and I provide them with business cards that say they are ‘authorized distributors’ of my business, but there’s no exclusive relationship — they can represent any other products they want. I do not charge an upfront fee for a sales territory, the way franchises do, but I do impose minimum sales quotas on the distributors each month if they want to keep their territories.
“My attorney recently expressed concern that what I’ve been doing all these years may be viewed as a ‘business opportunity.’ Now, I know a little bit about those, and they’re usually raise-chinchillas-at-home-for-fun-and-profit programs that advertise in the back of comic books or through spam emails. I’m a thoroughly legitimate operation. Should I be concerned about this?”
The short answer is maybe.
First, you need to check out the Federal Trade Commission Business Opportunity Rule on the FTC website. Under this rule, which has been around since the 1970s, companies that sell business opportunities to consumers are required to provide them with a disclosure document containing very specific information about the opportunity and how it performs.
Like franchises, there is no requirement for business opportunities to register with the FTC before they sell. A number of states, however (including Connecticut and Florida), require business opportunities to file copies of their disclosure documents with a state agency (usually the state banking regulator) before they offer their program to state residents. For a list of states that regulate business opportunities, see https://www.franchiselawsolutions.com/faqs/business-transaction-faqs/business-opportunity-laws/ (there’s also an excellent article by my good friend and franchise attorney Tom Pitegoff at https://www.lexology.com/library/detail.aspx?g=6ab54f7d-8693-4ae1-a3f0-a1b977f877c2).
Until a few years ago, the FTC rule had only a limited impact on the world of business opportunities, focusing on businesses that give rise to the most fraud claims, such as vending machine programs (in which consumers buy vending machines and their contents and place them in local retail stores, splitting the proceeds with the store owner). Then, in 2012, the rule was broadened to include business opportunities where the seller promises to buy back goods or services from the consumer, such as through payment for services like stuffing envelopes from the purchaser’s home.
Under the rule, a business opportunity is defined as a commercial arrangement in which:
• A seller solicits a prospective purchaser to enter into a new business.
• The purchaser makes a required payment (which used to be $500 or more but now can be any amount).
• A seller expressly or implicitly represents that the seller or some other designated person will provide locations for the use or operation of equipment or displays; provide outlets, accounts or customers for the purchaser’s goods/services; buy back all goods the purchaser makes, produces, grows, etc.
Note that a seller will not be considered a business opportunity unless all three conditions apply.
Your minimum sales quota will have to be looked at more closely (it is this practice, I think, that gave your attorney some concern about business opportunity status). Many distributors allow their distributors to purchase merchandise themselves, out of their own pockets, in order to meet their minimum sales quotas. If that’s the case with your business, there’s a good chance the FTC would view that as a required payment, since, in effect, you are requiring your distributors to buy a minimum amount of product each month, quarter or year.
Even if that is the case, though, it does not appear that you are offering your distributors a guaranteed market for the products they purchase. That guarantee distinguishes a business opportunity from other businesses. While you offer training and education to your distributors (presumably including information about the customers likeliest to buy your products and where to find them), your distributors eat whatever they kill — you do not appear to be giving them lists of potential customers who have expressed interest in your products or offering to buy back any products that aren’t sold through to the ultimate customer.
The bottom line is that you will need to discuss your program with a local attorney who is familiar with franchises and business opportunities. To find such an attorney, go to https://lawyers.findlaw.com/lawyer/practice/franchising, or call your state bar association and ask for a list of franchise-law section members.
A bigger concern for you is that the IRS or another government agency might view your independent distributors as employees for tax purposes. Even though you allow your distributors to work for other people, it does appear you are giving them very specific instructions about how, when and where to sell your products, to the point where you may be directing and controlling their activities while they are selling your products. The IRS audits very heavily in this area, so make 100 percent sure your distributors are truly independent.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
COPYRIGHT 2019 CLIFFORD R. ENNICO
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