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Profit Sharing Agreement Template

A Guide to Dividing Profits Fairly and Motivating Your Team

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What is a profit sharing agreement?

A profit sharing agreement is a contract that a company distributes a portion of its profits among eligible employees. It is the terms regarding who qualifies, how profits are calculated and distributed, the timing of payments, any conditions or restrictions, communication methods, and legal and tax issues. It is designed to motivate employees, align their interests with those of the company, and encourage teamwork. If no profit is made, then there are no profits added into the profit sharing plan.

When would I need a profit sharing agreement?

You usually need a profit-sharing agreement when you would like to distribute a portion of your company’s profits among eligible employees. It is especially useful when:

Establishing a Profit-Sharing Program: A profit-sharing program for the first time requires a written agreement that outlines the terms, conditions, and expectations for both the company and the employees.

Updating or Modifying Existing Terms: When changing the structure or terms of an existing profit-sharing program, a new agreement will ensure all parties understand the new terms and what those changes will mean.

Adding New Participants: In case you will be expanding the eligibility criteria to include new employees or new departments to the profit-sharing program, a written agreement will ensure consistency and fairness in profit distribution.

Addressing Legal and Compliance Issues: Profit-sharing agreements may be required in order to comply with legal or tax requirements related to profit distributions in order to ensure transparency and compliance with the pertinent law.

When making clear expectations and responsibilities: A profit-sharing agreement will help settle the expectations and responsibilities of the company and the participating employees to avoid misunderstandings or disputes.

In short, there must be a profit-sharing agreement when one would like to implement, update, or modify profit-sharing arrangements to ensure clarity, fairness, compliance, and aligning the interests of the company and its employees.

Why would I need a profit sharing agreement?

There must be a profit sharing agreement when:

  • Prevent partners from disputing
  • Define the ratio of profit sharing
  • Protect the interests
  • Ensure fairness
  • Statutory requirements are complied with
  • A tax return preparation is made possible
  • It prevents misunderstandings and goes on without much friction.
  • You believe you need a profit sharing agreement?

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