A profit sharing agreement template is a document used by many companies to enter into an agreement with various individuals and provide considerations to them. A profit sharing agreement is required to develop a professional relationship between you and the other party.
Table of Contents
- 1 What is profit sharing agreement?
- 2 When do you require a profit sharing agreement?
- 3 A typical profit sharing percentage:
- 4 How to split profit sharing?
- 5 How to draft a profit sharing agreement?
- 6 What to include in a profit sharing agreement?
- 7 Important provisions to include in profit sharing agreement:
- 8 Conclusion:
- 9 Faqs (Frequently Asked Questions)
- 10 Differentiate between revenue sharing and profit sharing?
- 11 How to terminate a 50/50 partnership?
- 12 How to structure a profit sharing agreement?
What is profit sharing agreement?
Likewise a retirement plan, a profit sharing agreement gives employees of a company a share of the profits. Under this agreement, the employees will get a percentage of your company’s profits depending on its earnings. This agreement gives your employees a sense of ownership in your company. However, there are also some limitations that how and when an employee can withdraw funds without incurring penalties.
It is the responsibility of the employer to set up the agreement and decide how much you will assign to each of the employees. Commonly, companies can also make adjustments in their agreements as required. You should also establish a formula for the allocation of profits for the years when you will make contributions.
When do you require a profit sharing agreement?
For companies, the best way to make their employees satisfied and happy is to provide them as many perks as the company can afford. You should also offer them a profit sharing agreement along with the regular salaries and bonuses. This helps you in retaining your employees. So, you should make a profit sharing agreement that will explain the terms and conditions of the agreement. To make this agreement legal, affix the signatures of you and your employee. You can also make this agreement between business partners and businesses.
Moreover, you should create a formula in order to share a specific percentage of your profits with your employees. This formula helps you to decide the amount. Also, clearly state that there will not be profit sharing if the company doesn’t make any profit at all. All this information is included in this agreement.
It is also important for the company to determine who will receive profits. Companies typically choose deserving employees to share profits with them. All these terms and conditions are applied to business partners who will enter into the same agreement. You should also specify the ratio to use in dividing any losses or profits on the basis of how much you and your business partner have invested.
After making the agreement, to prevent any confusion or conflicts that might arise in the future, you should record the details right away. The employer should draft an agreement with precision and clarity. Before affixing the signature to the agreement, all parties must first agree on the ratios.
A typical profit sharing percentage:
Profit sharing is considered as a basic kind of bonus program. Before offering employees an employee profit sharing agreement, companies should set a pre-determined amount. Generally, this percentage can range between 2.5% – 7.5% of the payroll. However, this can go as high as 15% on top of the base salary.
The amount of percentage is based on the profits of your company. There are also different situations where you may give profits across the board. You can also provide more percentages the more an employee makes. The main purpose of this agreement is to motivate employees to identify how their work affects the company’s performance so that it can improve its profitability. Moreover, it is important for employees to learn how your company earns money and how their employment helps it.
With the help of yearly reports and other official statements, employees can get an idea of how your company performs. This will also indicate that they are showing a genuine interest in your company’s performance.
How to split profit sharing?
It’s important to ensure that everybody will agree on the structure of the business before starting a business agreement with one or more partners. This can have a huge on the profit sharing agreement. The time and resources that each partner will contribute to the partnership, it will also affect them. There is no wrong or right way to divide partnership profits.
We know that it is legally needed for one partner to obtain the approval of the other on any matters related to the business for a 50-50 partnership. When all the partners know how the profits will get divided, it’s time to create it official by putting the agreement in writing.
Furthermore, meet with an accountant is also important for all partners to ensure that everybody understands the tax ramifications of every decision you make.
How to draft a profit sharing agreement?
There are two common methods that you can use to make your profit sharing agreement;
Retirement Plan Deferrals
Retirement Plan Deferrals is also referred as Profit Sharing Plan. According to this plan, employees’ profits’ percentages go into a retirement account or a qualified tax-deferred retirement account. When the employees leave a company, they get their share.
Profit Sharing as Base Compensation
According to this method, before the distribution of the profit, employees can’t take their share with them when they leave the company. You must include important details in your profit sharing agreement template and before entering into the agreement, discuss it with your employee.
What to include in a profit sharing agreement?
Your profit sharing agreement should contain all the important details of the involved parties. These may include the following;
- The complete names
- Business addresses
- In the case of an employee profit sharing agreement, roles in your company
- Contact details
- Other relevant details
In addition, the agreement also contains how you will calculate the profits for each person and how you will share these. Profits can come in the form of stock, bonds, or cash but it depends on every company. It is also important to add a clause in the agreement. Let us discuss below what to include in a profit sharing agreement;
- The basic information of all parties involved in the agreement.
- The profit-sharing formula.
- Additional information about how to calculate the profits.
- The timing of profit sharing.
- The time period; the time required for calculating profit and companies commonly do this yearly.
- Other important clauses.
- Details about exceptional cases.
- Information regarding taxes.
- Information regarding any important conditions that might apply.
Important provisions to include in profit sharing agreement:
The profit sharing agreement should include the following important clauses;
This clause states the profit calculation and the timeline in which profit will be shared. It also specifies how and when the profit will be received.
In this clause, the conditions regarding the termination of profit-sharing agreement are included.
This clause brings together the parties in case there is a dispute between them. The clause helps in chewing over the matter before making any claim.
All information should be kept confidential as per this clause.
Indemnities and liabilities
Indemnity and liability clauses state which extent each party will be liable in case there are any issues in the agreement.
In conclusion, a profit sharing agreement template is an important tool in order to motivate employees that how their work can influence company’s performance. This can improve the company’s profitability. The agreement should clearly state the terms and conditions for all parties.
Faqs (Frequently Asked Questions)
Differentiate between revenue sharing and profit sharing?
Revenue sharing is the distribution of the total amount of income between the shareholders and the company that they get by the sale of goods/services. While, profit sharing refers to the profits of the company that are shared.
How to terminate a 50/50 partnership?
You can terminate a 50-50 partnership by sending your dissolution notice.
How to structure a profit sharing agreement?
To structure a profit sharing agreement includes the relevant parties, termination effects, responsibilities of representatives, allocation (amounts) of shared profits, terms and conditions, and costs.