Key Takeaways

  • A revenue sharing agreement outlines how business income is divided among partners or stakeholders.
  • These agreements can be used in various industries, including affiliate marketing, franchising, SaaS, and joint ventures.
  • Revenue sharing differs from profit sharing by distributing gross revenue before expenses are deducted.
  • Legal considerations, including tax implications and intellectual property rights, should be addressed in the agreement.
  • Customization based on business models, contributions, and risk-sharing is essential to an effective agreement.
  • You can find a qualified attorney on UpCounsel to draft or review your revenue sharing agreement.

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.

Structuring the Agreement for Flexibility

Revenue sharing agreements should be built to accommodate evolving business relationships. Consider including:

  • Performance-Based Adjustments: Define conditions under which revenue splits may shift (e.g., based on hitting sales milestones or market expansion).
  • Tiered Models: Structure splits that change based on revenue thresholds (e.g., 20% on the first $100,000, then 30% above that).
  • Hybrid Approaches: Combine revenue and profit sharing for balanced risk-reward, especially in early-stage ventures.

Including flexibility allows the agreement to grow with the business, avoiding the need for constant renegotiation​​.

Legal and Financial Considerations

A well-drafted revenue sharing agreement should take into account several legal and financial implications, including:

  • Taxation: Revenue allocations may affect each party's tax liabilities differently. Understanding whether payments are classified as income, royalties, or service fees is essential.
  • Intellectual Property Rights: Define who owns the underlying product or content generating the revenue.
  • Compliance Requirements: Some industries (e.g., healthcare, finance) have regulations governing fee-splitting or shared revenue models.
  • Termination Clauses: Clearly define conditions for ending the agreement and how outstanding payments or revenue will be handled.
  • Audit Rights: Allowing partners to inspect financial records ensures transparency and trust.

Consulting with a legal or tax advisor can prevent future disputes or regulatory issues. UpCounsel provides access to experienced attorneys who can guide you through this process.

Revenue Sharing vs. Profit Sharing

While often confused, revenue sharing and profit sharing are fundamentally different:

  • Revenue Sharing is based on gross income before deducting expenses. Each party receives a fixed percentage of total sales or revenue.
  • Profit Sharing distributes income only after all operating and other expenses are deducted.

For example, in a SaaS revenue sharing model, a partner might receive 25% of subscription revenue regardless of profitability. In contrast, a profit-sharing arrangement would only allocate funds after accounting for costs like hosting, support, and salaries.

This distinction is vital when structuring agreements, especially when one party bears significant operating expenses or when scalability is a concern​.

Key Use Cases and Industry Applications

Revenue sharing agreements are widely used across different industries to align incentives between parties while enabling scalable growth. Here are some common applications:

  • Affiliate Marketing: Businesses compensate affiliates with a percentage of sales they generate. The split typically ranges from 10% to 30%, depending on margins and volume.
  • Software-as-a-Service (SaaS): SaaS companies often use revenue sharing with integration partners or resellers, offering splits from 20% to 50%.
  • Franchising: Franchisees pay franchisors an ongoing fee, usually 4%–8% of gross revenue, as part of the franchise agreement.
  • Licensing Models: When a company licenses its IP to another, the licensee pays a percentage of revenue generated from that IP.
  • Media and Content Platforms: Platforms like YouTube and Spotify use revenue sharing with creators, often following a 70/30 split in favor of the creator.

These examples show how revenue sharing models can be adapted across business structures to encourage performance, scale, and long-term collaboration​​.

Frequently Asked Questions

1. What is a revenue sharing agreement? A revenue sharing agreement outlines how income generated by a business or project is divided between parties, typically before expenses are deducted.

2. How is revenue sharing different from profit sharing? Revenue sharing distributes income before expenses are subtracted, while profit sharing allocates net income after expenses.

3. What is a typical revenue split? Splits vary by industry: affiliates (10–30%), SaaS partners (20–50%), joint ventures (often 50/50), and franchises (4–8% ongoing fees).

4. Can revenue sharing apply to intellectual property or software? Yes. Licensors often use revenue sharing to receive compensation from software resellers or content platforms using their IP.

5. Do I need a lawyer for a revenue sharing agreement? Yes. Due to legal, tax, and contractual implications, it's wise to consult an attorney. UpCounsel can help you connect with qualified legal experts.

If you need help with a revenue share partnership agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.