Profit Sharing Contract: What is it? What to Include

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What is a Profit Sharing Contract?

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:

• Businesses
• Individual business partners
• Employers and employees
• Investors
• Co-owners of an asset

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.

What’s Included in a Profit Sharing Contract?

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:

• An introduction of businesses: The legal names of the entities and operating parties should all be introduced at the contract's start.
• The purpose of the contract: The contract should set an agreement to share profits generated from a specific campaign or project with a specific start and end date.
• Description and scope of the project: You can use the profit sharing agreement to describe the type and scope of the project you are undertaking with your partner(s).
• Timeframe: Set a time period for the profit-sharing arrangements to stay in effect. This will be the period of time that makes up the length of the final contract.
• Confidentiality clause : This provision ensures that the details of the project collaboration agreement and project venture stay between the parties.
• Non-compete clause : Either or both parties may want a non-competition agreement to prevent their partner from entering into another venture with a competitor.
• Responsibilities: Each party will have responsibilities to uphold as a part of the partnership. This agreement can outline both shared and individual responsibilities of each party.
• Disclaimers : Both parties may wish to clarify that this collaborative project represents a partnership, but it does not form a new company or entitle the other party to profits a company earns beyond this project's scope.
• Dispute resolution : Lay out what steps the parties agree to take to resolve potential disputes.
• Termination rights: What rights do the parties reserve to terminate their agreement, and under what circumstances? Furthermore, what consequences will there be if a party breaches part or all of the agreement? Again, the terms should be clearly defined.
• Division of profits: The contract should describe how profits will be distributed among parties. The final dollar amount may not be known when drawing the contract. In that case, a percentage of total profits earned between the agreement’s time period should be included.

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.