Compensation Plan Audit

The Most Important Legal Shield for Every MLM Company

For every MLM company and direct selling company, the compensation plan is not just a business tool — it is a legal document. Under Indian law, authorities do not judge an MLM company by its marketing, products, or motivation speeches. They judge it by one thing: the compensation plan.

A legally wrong compensation plan can turn even a genuine direct selling company into an illegal pyramid scheme overnight. That is why a Compensation Plan Audit is the most important legal step before launching or scaling any MLM company.

What Is a Compensation Plan Audit?

A Compensation Plan Audit is a detailed legal review of how money flows inside an MLM company. It checks whether commissions paid to direct sellers are based on product sales or on recruitment and joining activity.

Under the Direct Selling Rules, 2021, a direct selling company is allowed to reward a direct seller only for selling products to real consumers. If the plan directly or indirectly rewards recruiting people, buying starter kits, or activating IDs, the MLM company becomes illegal. This audit ensures your plan survives scrutiny by CCPA, police, banks, and courts.

Why Authorities Focus on Compensation Plans

When a complaint is filed against a direct selling company, authorities immediately demand:

• Compensation plan
• Commission structure
• Distributor payout records
• Joining and activation rules

If these show that money flows mainly from new direct sellers instead of customers, the MLM company is classified as a pyramid scheme — regardless of how good the products are. That is why most MLM shutdowns happen because of compensation plans, not products.

What Is Checked in a Compensation Plan Audit

A legal audit examines:

• Whether joining is free
• Whether purchases are optional
• Whether commissions depend on retail sales
• Whether income is possible without recruitment
• Whether refunds and buy-back exist
• Whether payout structure violates Direct Selling Rules

If any of these fail, the direct selling company becomes high-risk.

Why Software-Based Plans Are Dangerous

Many MLM companies use software-generated compensation plans without legal vetting. These plans may look professional but often violate Indian law. A direct selling company cannot rely on foreign templates or network marketing logic. Indian law has its own standards, and only a legal audit can ensure compliance.

What Happens Without an Audit

Without a Compensation Plan Audit, an MLM company risks:

• Bank account freeze
• CCPA investigation
• Police FIR
• Distributor panic
• Permanent business shutdown

Every direct seller also loses income when this happens.