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Profit Sharing Agreement: What is it and When Do I Need One?

Profit Sharing Agreement: What is it and When Do I Need One?

Do you need a profit sharing agreement? Our article will take you through what this agreement is and when it should be used.

31st August 2021
Reading Time: 3 minutes

Thinking about engaging another company in some project or venture? You may need a profit sharing agreement. This type of agreement is the perfect way to facilitate any joint ventures your business wishes to engage in. Let’s dive into what this agreement is, when it is needed, and the common clauses that make up this type of agreement.

What is a Profit Sharing Agreement?

A profit sharing agreement is a legally binding document. This type of agreement is between two or more businesses. This agreement outlines the distribution of profits and losses from a business venture or project. In general, the parties to the agreement will be seperate businesses or companies. Usually, the distribution of profits and losses is dependant on each businesses duties and obligations under the agreement. For instance, a business with more intensive duties may enjoy a high profit margin under the agreement.

Is this the same as a Partnership Agreement?

Now, a profit sharing agreement is distinct from a partnership agreement. A partnership agreement refers to a legal relationship between two or more people, with the view of carrying on a business together. In general, partnerships will last for the foreseeable future or until the partnership is dissolved. However, a profit sharing agreement facilities two businesses wishing to carrying on a business objective or project together. This agreement will usually last for the duration of a specific project or goal. It is not uncommon for a profit sharing agreement to take the form of an unincorporated joint venture agreement.

When is a Profit Sharing Agreement needed?

If your business is partnering up with another business, it’s great legal practice to implement a profit sharing agreement. Having this agreement in place is also a great way to avoid any future legal disputes regarding separating and sharing of profits gained from the collaboration or project.

What is included in a Profit Sharing Agreement?

This agreement can contain a variety of different clauses and provisions. The following headings outline the most common provisions.

Objectives, duties and liabilities

This provision should outline what each business desires from the agreement, as well as their duties and obligations in fulfilling the agreement. It is always best to expressly state what these duties are. This ensures each business remains properly informed. Entering into this type of agreement means that each business will be placing a high level of reliance on other businesses to the agreement. Consequently, this means that high commercial and legal risks are at stake. Therefore, outlining each businesses liabilities is an integral part of your agreement.

Profit sharing

This may be one of the most provisions of your agreement. After all, the distribution of profits is one of the underlying objectives for entering into this type of agreement. This provision specifies how the projects profits should be divided. It is common for the profit sharing provision to be dependant on the duties and obligations each business undertakes. You can express the sharing of profits however you like. Most agreements opt to state the percentages each business will receive.

Dispute resolution

If a dispute does arise, it is always best to outline the dispute resolution procedures that will follow. For instance, negotiation and mediation are a great first step in attempting to resolve any possible disputes.

Termination

A termination provision should outline the situation and circumstances in which either party can terminate the agreement. For instance, when all objectives and profit distributions are complete, the agreement may come to an end. The termination clause may also relate to how a party can terminate the agreement prematurely.

Key Takeaways

If your business is looking to form a joint venture or project alongside other business, you may want to implement a profit sharing agreement. This agreement, also known as a joint venture agreement, is distinct from a partnership agreement. In general, a profit sharing agreement is entered into when two or more businesses work together to meet some common objective. This agreement should outline each businesses duties and obligations. As well as the distribution of profits or losses among the parties.

Don’t know where to start?
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Author
Mai Sarkissian

Mai is a Digital Marketing Coordinator at Lawpath, working as part of the Content Team. She is in her final year of a Bachelor of Laws degree at the University of Wollongong. She is interested in Business Law and Employment Law.