A revenue share partnership agreement, also known as a profit-sharing agreement, is a document signed by all partners in a partnership that outlines the criteria to be followed when distributing business profits or losses. The agreement may be made as part of, or as an attachment to, a partnership agreement.

The Need for a Revenue-Sharing Agreement

Partners in a business must figure out a way of sharing business profits and losses. Partners without a written agreement that sets out how they will share any profits or losses in the years to come are bound to have conflicts. Prudent businesspeople insist on having a detailed partnership profit and loss share agreement. The partners should try to anticipate every scenario and use the agreement to explain the ways in which profits and losses will be shared in such scenarios.

Common Criteria Used to Share Profits and Losses

Federal and state laws do not dictate how losses and profits should be shared in partnership businesses. It is up to the partners to agree on the criteria for sharing revenue. Profits and losses in a partnership may be shared using any of the following methods:

  • Capital contribution: Businesses that use this model of profit and loss sharing distribute profits and losses depending on how much (or how little) a person contributed in terms of capital when starting the business. This model may reward people who invested more when the business was being launched.
  • Management contribution: In this type of agreement, partners who have an active management role are favored when distributing profits compared to inactive partners. This kind of agreement is common in businesses that need specialty skills to run.
  • Custom criteria: Some partnerships make agreements in which the share of profits or losses varies depending on factors like business performance and the amount of profit and losses. In some agreements, select partners may be entitled to shares of the business profits but not the losses.

What Should Be Included in a Revenue Share Agreement for Partnerships?

Although a profit-sharing agreement should be simple, it should include all the details needed to avoid potential conflicts. A business lawyer in your area can help you draw up a balanced partnership revenue share agreement or partnership agreement. Some of the details that can be included in the agreement are:

  • The partners: A good revenue-sharing agreement should mention all the parties to the agreement. The names and addresses of all the partners should be started at the top of the agreement.
  • Signatures: The agreement should be validated by the signatures of all the partners.
  • The business name: The agreement should mention the name and address of the business for which the agreement has been made.
  • Bank accounts: The agreement should mention the accounts where the profits and payments of the profits will be deposited.
  • Sweat equity payments: Some partnership revenue share agreements explain how sweat equity payments will be handled. A managing partner may draw a salary from the business while inactive partners can't. In this case, the partners may agree that part of the managing partner's salary counts toward the profits and such a salary is deducted from his share of the business profits.
  • Profit and loss share ratios: Agreements should be clear on how profits and losses can be shared. The shares can be in the form of percentages (which should add up to 100 percent), ratios, or fractions (which should add up to one). Examples can be used to demonstrate important ideas.
  • Restrictions: Profit-sharing agreements usually restrict partners from incurring expenses without the consent of all the partners. The agreement may also prohibit any partner from giving away the using the company's profits without getting the full backing of all the partners. Revenue-sharing agreements usually mention specific restrictions that apply to all or some of the partners. Such restrictions may include the fact that partners cannot misuse the company's resources.
  • Partnership continuity: The agreement may explain what happens to a partner's share in case she dies. Some agreements pass on the partner's share to his legal heir or give the remaining partners the first chance to buy the shares. The agreements may also touch on other issues that could happen if some of the partners wish to leave the business.

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