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A profit sharing contract is a legal agreement that parties use to establish how profits from a joint project, business venture, or investment will be divided. The agreement will outline a formula on how profits will be earned and split, as well as address the parties’ roles, contributions, performance, and other important terms.
These agreements may be used for relationships between:
Profit sharing contracts are important because they create transparency and expectations for the parties involved, so there are no questions about roles, operations, or profit distributions. These agreements have important terms which we will address next in this article.
A profit sharing contract covers all the details relating to a collaborative partnership. Details and contents of each contract will vary, which is why many businesses choose to work with a business attorney to draft their profit-sharing agreement.
At the most basic level, all profit sharing contracts must include:
Here is an article you can reference to review the elements typical of this type of agreement. However, suppose you do use this document. In that case, we suggest consulting with an attorney to review the details before signing to ensure you have a full understanding.
Meet some lawyers on our platformUsing a profit sharing contract is best when you collaborate on a joint project with another company or individual.
Most importantly, you should use a profit sharing contract to ensure that everyone involved is paid fairly.
Profit-sharing entitles each person to a fair percentage of the money their efforts produce. For example, suppose you will work with a company on a shared project. In that case, this contract can establish rules, guidelines, and payment terms easily.
This will negate the possibility of miscommunication in terms of payment and also define what is expected from everyone involved.
Profit sharing contracts can accompany other typical documents in business ventures, such as non-compete agreements, collaboration agreements, and nondisclosure agreements.
Here is an article with tips for drafting a profit sharing contract.
Image via Pexels by Andrea Piacquadio
You can structure a profit sharing contract by using a profit sharing agreement template. You can also work with a lawyer well-versed in joint ventures and business. They can draft a profit sharing contract for you that reflects the unique needs of your partnership.
If you use a contract template, make sure that you include the following:
If there are any terms you are unsure of, a lawyer is the best resource. They can assure that all of the necessary legal terms are in place to prevent future lawsuits or a void contract.
All parties must negotiate the terms of the agreement before signing. Therefore, consideration is a major factor that influences revenue sharing.
In law, consideration is something that parties bargain for and receive. In the case of profit sharing agreements, this could be the amount of capital in exchange for a percentage of the total gross revenue a project generates.
What matters most is that you and all partners are in unanimous agreement about the terms and conditions of your partnership.
Here is an article where you can learn more about what makes a contract legal.
Profit sharing allows companies to earn more money by collaborating and sharing their resources.
You can also gain access to new markets more easily by leveraging your partners’ existing audiences. Even when part of a time-limited agreement, businesses can gain serious advantages through access to another company’s resources.
Profit sharing also allows companies to enter formal collaborations with less risk. Because they are not forming a new company, each partner can still operate independently and faces less liability.
For small businesses, collaborating with larger partners can result in substantial growth. So even if you agree to a smaller percentage of profits, the results of your partnership can create long-standing benefits.
Here is an article that looks closely at business collaboration and its benefits.
Profit sharing percentages can vary greatly by company and even by project. In addition, individual shareholders may earn more depending on their share amount, voting rights, and contribution level.
The average profit share percentage is between 2% and 10%. Each company will determine the fairest amount for stakeholders.
Here are some additional factors that influence profit share percentages:
Here is an article about how revenue sharing works and the average amount most partners receive.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
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