Profit Sharing Agreement: What is it & How to Create it?


When you get into a partnership with someone, the hope is that you will always work well together as a team. However, conflicts are inevitable in any relationship, including your business partnership.

So, you need something that will help you plan ahead for the good and bad times. Simply put, if you don’t want to get into trouble with your business partner in the future, you need to create a profit-sharing agreement.

Honestly speaking, a profit-sharing agreement is one of the most important things you can work on before you start investing your time and money in a partnership.

And, in this blog, we will walk you through the nitty-gritty of this agreement. We are also going to introduce you to a platform that will help you create a rock-solid profit-sharing agreement in no time.

 

Umm…What is a Profit Sharing Agreement?

In very simple words, a profit-sharing agreement is a contract that outlines the ratio you will use to distribute the profits and losses with the other partners involved.

This ratio can be determined on the basis of the investment made by each partner or you can have an agreement that only divides the profits, leaving you to deal with the losses.

Whatever the scenario is, all the partners need to sign the profit-sharing agreement before entering into a partnership. This agreement sets out the rules and duties of everyone involved!

 

So, When Exactly Do I Need to Create a Profit Sharing Agreement?

Let’s consider a scenario.

A makeup brand wants to grow its customer base, and they have decided to enlist the services of a popular Instagram influencer to promote their products on the platform.

Both the parties have agreed to share the profits, with the makeup brand getting 75% and the celebrity getting 25%. This split needs to be documented in the profit-sharing agreement.

In a nutshell, a profit-sharing agreement is created when two or more entities work together for the same project for a particular time period.

See, all the parties involved bring different skills and capabilities to the project. So, the division of profits shows the split in responsibilities and risk between all the parties.

Once the parties come to a consensus on the ratio of profit sharing, it is important to document it, aka create a profit-sharing agreement.

A profit-sharing agreement can help you avoid confusion and conflicts down the road. Moreover, if any partner violates the terms of the agreement, you can sue them.

Read more: Operating Agreement: What is it & How to Draft One for your LLC?

 

Okay, But What Clauses Should I Include in My Profit Sharing Agreement?

If you want your profit-sharing agreement to be rock solid, here are a few clauses that you must include in it.

1. Profit Sharing 

Clearly mention the ratio/percentage in which you will be dividing the profits. Apart from that, mention how you will calculate the profits and the time frame in which you will share the profits.

2. Termination

Here, you will list down the clauses that outline the circumstances under which either party can terminate the profit-sharing agreement, along with the rules of termination.

3. Dispute Resolution

If there is any conflict between the parties involved in the agreement, this clause can be really helpful. It will bring both parties together to discuss the issue and ensure that both parties act in good faith.

4. Confidentiality

This clause states that both the parties will keep the profit-sharing agreement and its terms confidential. If you want to keep the agreement confidential even after it is terminated, mention it.

5. Obligations

Outline the roles and responsibilities of each party involved. Clearly list down what the other party is going to provide as a part of the collaboration. It will save you from a lot of chaos in the future.

6. Intellectual Property

In collaborations, parties often share their intellectual property or allow the other party to use it. This clause will specify who owns the intellectual property and what happens to the IP that is created during the project.

7. Indemnities and Liabilities 

The indemnities clause guarantees the other party a predetermined amount of money in case you breach the profit-sharing agreement. As simple as that.

If you’ve made it this far, you are already at an advantage. Before embarking on a partnership, it is best to create a profit-sharing agreement, and you know that by now.

However, creating a full-proof profit-sharing agreement can get a little tricky. Fortunately, there’s a magical platform out there that’ll solve all your agreement creation woes – Bit.ai!

Read more: Shareholder’s Agreement: What is it & How to Create it?

 

Wow! Tell Me More About Bit.ai.

Bit.ai is a robust, new-age document collaboration platform that will help you create, edit, organize, manage, and share not just your profit-sharing agreement, but every other document under one roof.

With its intuitive and integrated tools, Bit makes creating documents super easy. Want to know a few more reasons why you should use Bit for creating your profit-sharing agreements? Let’s find out!

1. Real-Time Collaboration: When you’re creating a profit-sharing agreement, you need all the parties involved to review it and agree upon it. You might also need to get it verified by a legal counselor. After all, it is an important document, and you certainly can’t afford to miss out on any important clause.

Luckily, using Bit, you can collaborate with others on your profit-sharing agreement document in real-time. No matter where your partner or attorney is located, you can keep everyone on the same page by co-editing, making inline comments, chatting via document chat, @mentions, and much more.

2. Smart Workspaces: If you are collaborating with different partners on different projects, you need to create a different profit-sharing agreement for each project. Organizing and handling all these agreements and information can be a pain, but Bit.ai is here to take it away.

Using this nifty platform, you can create as many workspaces as you want around different projects and partners, invite attorneys into the workspace, and manage everything much more efficiently. The result? No more shoulder-tapping and wasting time finding things in different places.

3. Interactive Documents: What if you want to include the company policy handbook in your profit-sharing agreement? What if you want to insert an excel file about the profit breakdown? What if you want to add testimonials from your previous partner?

All of it is possible using Bit! Yes, Bit lets you add PDFs, social media files, surveys/polls, cloud files, charts, and almost every other rich media you can think of in your document. There are currently over 100+ rich media embed integrations on Bit!

4. Smart Editor: Creating a profit-sharing agreement requires all your concentration and attention. Even a tiny mistake might end up in a huge legal battle, and that’s why Bit offers a minimalistic, powerful, and distraction-free editor. You can simply select any text to make it bold, italic, turn it into a heading, quote, list, hyperlink text, interlink docs, and much more.

5. Guest Access: You can use Bit’s Guest Access to invite an attorney to review your profit-sharing agreement and ensure that it meets your state and country standards. The ‘guests’, aka your attorney, can get two types of access to the documents: comment-only and read-only.

With the comment-only access, they can @mention people in the workspace and give their suggestions, while the read-only access only allows them to read the agreement you have shared with them.

Over to You

If you are partnering up with someone, having a profit-sharing agreement is always a good idea.

All the obligations and other details are clearly stated and specified in the agreement, which helps you avoid any confusion and minimizes all the legal risks.

Yes, there are a lot of things that you need to work on to put together a great profit-sharing agreement, but hopefully, this guide and Bit.ai will set you off on the right foot.

If you’ve got any queries or suggestions, tweet us @bit_docs. We would happy to help you!

Further reads: 

Vendor Agreement: What is it and How to Create it?

Consulting Agreement or Contract: What is it & How to Create it?

Founders’ Agreement: What is it & How to Create it?

Sales Contract (Agreement of Sales): What is it & How to Create One?

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