What Is A Profit Sharing Agreement?

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Profit Sharing Agreements are used when two businesses work together towards the same strategic goals. They are similar to an unincorporated Joint Venture.

The parties usually record the details of their relationship under the Profit Sharing Agreement, which is a legally binding contract setting out how the income from the profit share arrangement is distributed.

Do I Need A Business Profit Sharing Agreement?

If you are partnering with another business to achieve a particular goal, product or project, it’s often a good idea to have a simple Profit Sharing Agreement in place. This type of arrangement is normally most appropriate where each party brings something different to the table.

Although the project may be long-term, there is often a defined end and the parties want to remain separate entities outside the profit share arrangement.

Profit Sharing Agreement Between Employer And Employee

It is possible for some businesses to have a Profit Sharing Agreement between an employer and their employee/s. Like a standard agreement, it will need to set out who gets what percentage and there should be space for negotiation.

This may prove a little difficult given the relationship and imbalance of powers between employers and employees. So, you may wish to consult a lawyer when drafting a Profit Sharing Agreement in this specific situation.

How Do I Use A Profit Sharing Agreement?

Normally, a Profit Sharing Agreement will need to be negotiated between the parties. It is important that everyone understands what their roles and responsibilities are under the agreement, and how the revenue will be distributed. Once you have come to an agreement, it is a good idea to have the contract formally drafted by a lawyer and signed by all parties involved. This ensures everyone is clear about terms of the Profit Sharing Agreement, minimising the legal and commercial risks.

Example Of Profit Sharing Agreement

AJ is a jewellery designer and Caitlin runs an online store selling Australian accessories. AJ and Caitlin realise they are both passionate about using ethically sourced materials, and decide to launch a new product line on Caitlin’s store together. AJ will make the jewellery, and Caitlin will sell it. They will split the profits of the new jewellery line 75% to AJ and 25% to Caitlin since it is more costly for AJ to source the material and make the jewellery than it is for Caitlin to market and sell it.

They take their idea to a lawyer who helps them draft a Profit Sharing Agreement encapsulating the terms they have agreed on, before they invest time and money in the new project.

What’s In A Profit Sharing Agreement?

Here are the sorts of issues that are typically covered in a Profit Sharing Agreement.

Roles and Responsibilities – What is each party contributing?
Management – How will the profit share arrangement be managed between the parties?
Cost and Profit Share – How are profits and expenses shared between the parties?
Timeframe – How long will the profit share last?
Intellectual Property – Normally parties want to protect and retain ownership of the IP they created prior to entering the profit share arrangement. Who owns the IP created during the course of the arrangement? Is it shared between the parties?
Dispute Resolution – What happens if there is a dispute? Is there a process that needs to be followed before the dispute is taken to court (eg mediation)?
Liability – How is liability shared between the parties?
Termination – What happens if someone wants to get out of the profit share arrangement?

Need Help With A Profit Sharing Agreement?

When you’re entering a profit sharing arrangement, you’re normally taking on a lot of commercial and legal risk because you have to rely on another party. It’s a good idea to invest in a lawyer to assist you with putting together the Profit Sharing Agreement, as this one-off cost can help prevent disputes, misunderstandings and save you from problems and headaches in the long run – as well as helping you get a good deal for your business.

At Sprintlaw, we have a team of experienced lawyers who can assist with your Profit Sharing Agreement and other legals your business may need help with. Get in contact with one of our consultants for a no-obligation chat about how we can help.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.