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Profit Share Agreements
What you need to know about dividing profits and crafting a profit share agreement.
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When you go into business another party, one of the key factors to consider is how you'll share any profits you make. This guide will take you through what you need to know about drafting a Profit Share Agreement, as well as how to find legal support and templates matched to your needs.
What's in this guide?
What is a Profit Share Agreement?
A Profit Share Agreement is used when two businesses work together and have the same strategic goals. It's a legally-binding contract which sets out how the income from the agreement is distributed. A Profit Share Agreement will give businesses a defined end to their project and allows them to remain separate entities outside of the agreement.
The main objective of a Profit Share Agreement is to cover every possible scenario and avoid disputes, ensure your business dealings operate smoothly in any event.
When should I use a Profit Share Agreement?
A Profit Share Agreement should be used if you business wants to achieve a particular goal, project or product with another. Essentially, this happens when parties come together to bring different things to the table.
Profit Share Agreement vs Equity Share Agreement
Profit Sharing Agreement details the share of the profits and losses made by a company. Meanwhile an Equity Share Agreement will cover stock, stock options, membership shares and other equity drivers.
Profit share is time-specific, whereas equity shares are not. Equity is not directly affected by accounting periods, unlike profit shares but it is affected by other financial activities like dividend payments, the retirement of stocks and capital expenditures.
What does a Profit Share Agreement include and not include?
Although every Profit Sharing Agreement is unique to the parties included, they should all cover a similar range of topics and clauses.
Included
Here are some of the things that are typically included in a Profit Share Agreement:
- Roles and responsibilities of both parties
- Management of the profit share
- Timeframe
- Intellectual property guidelines
- Dispute resolution procedures
- Share of liability
- Termination agreement.
Not included
- Vague language
- Clauses not previously disclosed
- Clauses that could be misconstrued.
How effective is a Profit Share Agreement?
Partners in a business must figure out a way of sharing business profits and losses. By writing up an effective Profit Share Agreement you can set up how these profits and losses are shared, minimising any future conflict. An agreement should also anticipate any scenario and detail the ways which the profits and losses will be shared should this scenario occur.
Do I need a lawyer for a Profit Share Agreement?
When you're entering a Profit Share Agreement, you're taking on a lot of commercial and legal risk, especially as you are relying on another party. It may be a good idea to invest in a lawyer to assist in the drafting or checking of a Profit Share Agreement.
By having a legal professional look over the document it can help to prevent disputes, misunderstanding and long-term problems in the future.
Get access to customisable Profit Share Agreement templates online
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How do I write a Profit Share Agreement?
Before writing a Profit Share Agreement you should agree on the ratios. When added together all portions should equal 100%. A Profit Sharing Agreement needs to reference all parties involved, including names, addresses and the purpose of the business. Include the date the agreement is established, as well as how long the agreement is expected to last.
The Profit Share Agreement should disclose sweat equity payments, for example, base salaries and compute profits. The agreement should be written before a single partner makes loans from the profits or makes other expenditures without the full agreement of the partners. It's important to include terms that specify the terms of the dissolution of the partnership.
Include restrictions as to what each partner can do with the company resources. You will also need to specify steps to take in the event a partner leaves or dies. Alternatively, you may wish to include restrictions on how the remaining partner or partners liquidates the business and distributes any profits.
Where to get free legal documents and templates like a Profit Share Agreement
Profit Share Agreements can be long and complicated documents, which is why using a legal template can be extremely useful. It'll make sure that nothing is left unwritten and you and your profits are covered for many years to come.
Here's a selection of websites that allow you to view or download a Profit Share Agreement template for free.
- Lawpath. Lawpath is an online legal resource aimed at providing small businesses and entrepreneurs with legal templates. Users can browse a range of free samples on its website but must sign-up to access customisation options.
- LawDepot. LawDepot offers a wide range of free online documents to help your business. Fill the documents in online before downloading them to your desktop.
- Legal Zebra. Free PDF samples can be downloaded if you sign-up to Legal Zebra's marketing emails. To access customisable Profit Share Agreement templates, you may need to pay a small fee.
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