Partnership

Partnership Profit-Sharing Agreements

by Linda Ray, Demand Media

Put the details are in writing before starting a partnership.

Prior to entering a partnership, you should create written contracts that cover your agreements. A profit-sharing agreement generally expresses the ratio you’ll use to distribute profits as well as how you’ll divide any losses. Ratios may be determined by the amount of investment each partner put into the business or you may have an agreement that only divides profits, leaving you to take the hit for losses. A partnership doesn’t exist, however, if you don’t share profits.

Ratios

You can divide the profits and losses in any way you want. The important issue is that all the partners agree on the ratios and sign a contract stating so. The only important detail to keep in mind is that when added together, all the portions equal 1. For example, if you have three partners, you each can’t take one-half of the profits. Split evenly, you’d each take 33.3 percent. Perhaps you invested the most and plan to run the company; you might split profits so you get 50 percent and each partner takes 25 percent.

Rules

Your profit-sharing agreement should spell out sweat-equity payments if you are going to run the business. For example, you might agree to a base salary and compute profits after that is paid. Other rules of the profit-sharing agreement should be written out and could include a section that precludes any single partner from making loans out of the profits or making other expenditures without full agreement of all the partners. Terms that spell out the dissolution of the partnership also should be included in the profit-sharing agreement.

References

A profit-sharing agreement should reference all parties involved by name and address at the top of the contract. You should write the name of the business you’re forming in the beginning of the agreement as well as the purpose of the business. Include references as to the date the...