It can be daunting to prepare documents for various business needs, especially if you are inclined to doing things yourself. However, you do not have to worry. You can find a wide range of contract samples, including a profit-sharing agreement template for free online. The best part is that these templates are editable, which means you can edit them directly online. You can also append your signature digitally without printing it on a single piece of paper.
What is a Profit Sharing Agreement?
When a business is registered and established; it is critical to create written contracts covering agreements on different aspects of the business. The interests of individuals in the business must be adequately covered and one of such interests is in the area of profit sharing. A profit-sharing agreement enumerates the specific ratio that the partners will use in distributing the profits of the business.
Additionally, it will also highlight the system that will be used in dividing the losses that the business may accrue in the course of doing business. The ratios for the revenue share agreement can be determined by a variety of factors. For instance, it may be determined by the value of the investment made by each partner into the business.
The partners may also agree that every partner will only share in the profit and leave the losses to the principal partner. If this is the case, the ratio of the profit-sharing for the principal partner will likely be more significant than the others. One thing you must bear in mind is that there cannot be a partnership business without the sharing of profits.
Who Need a Profit Sharing Agreement?
If you are going into a partnership business with anyone or a group of people, you need to have a profit-sharing agreement. This applies to all LLC partnership businesses and focuses on the distribution of profits as well as the financial payouts accrued in the business.
If you are running a sole proprietorship business, you do not need to share your profits or losses with anyone. You take the risks alone and take all the profits, or the losses, all alone. A simple revenue-sharing agreement spells out investment-based equity payments for all partners.
For instance, the partners may agree that everyone will earn a base salary, and afterward, the profits will be computed and paid out to individual partners. It is critical to lay out the rules that apply to the profit-sharing agreement.
The agreement should include the section that rules out a situation where a single partner can take out loans from the profits of the business. It should also preclude partners from making expenditures from the earnings of the business without the consent of all partners. With this, all partners are assured that their interests are well-protected.
How Does a Profit Sharing Agreement Work?
The way that a profit-sharing agreement works depends on the partners. They have the freewill to divide the profits and losses any way they want. However, all partners must agree on the specific ratios that are set out in the revenue sharing agreement template. Additionally, they must append their signature on the contract to make it a legally binding document.
When creating the profit-sharing ratios, the critical point that you must have in mind is that the different portions must add up to 100 percent of the profits. For instance, if there are four partners in a business, you may agree to share the profits equally with each partner getting 25% of the profits. Another popular option is to share the profits based on the ratio of investments made by each partner.
For example, if a partner invests 50% and two partners invest 20% each while the other invests 10%. It makes sense to share the profits in the same ratio. An active partner may also earn more profits than others, especially if they are the brain behind the business. You can find a well-detailed revenue sharing agreement template that you can use at a reputable online website.
Benefits of Profit Sharing Agreement Template
When it comes to starting a business, there are a lot of things to sort out. You will have many documents and contracts to draft and share with your partners, company staff, and even some government agencies. One option is to pay an attorney and spend a tiny fortune to get the documents drafted and notarized.
However, you can choose to use a sample revenue-sharing agreement to guide you in drafting your agreement. Some templates are comprehensive enough for your use. All you would need to do is fit in the details of the partners and the business. Here are some benefits of using profit-sharing agreement templates:
- They are easy to use as all you have to do is fix your business’ details and the details of the partners.
- It is cost-effective. The fact is that you do not even need to pay to get it. You will find free profit-sharing agreement doc online in editable formats.
- You do not have to print the agreement. You can complete the forms online and have all partners append their signatures digitally without an exchange of papers.
It is important to agree on different aspects of the business upfront, especially on profit sharing before you start your business. With this, each partner knows what to expect when it comes to the sharing of the profits. Ensure that the agreement clearly states the ratios for sharing profits and losses. If there are active partners that will be involved in the day-to-day running of the business, it should also be agreed if they will earn salaries. If they will, the specific amount they will earn should be spelled out in the profit-sharing agreement.