Profit share agreements are employee incentive programs offered by many companies. They are arrangements between employers and employees where some of the company's profits are given to employees through stocks, bonds or cash.
A profit share agreement is made between an employer and employee stating how the employer plans to share profits with the employee. They are typically calculated using a formula and are usually tax-deferred until the employee withdraws the money.
Employers use profit share programs as incentives for the employees of the company. It is also a way for a company to distribute some of its profits and avoid paying steep taxes on the income.
Many profit sharing agreements hold stipulations such as no funds are distributed unless the company earns a certain amount or more in profits. They may also state that when that amount is reached, a specific percentage of profits over that amount is dispersed between employees. This agreement also states which employees are eligible for disbursements through this program.
Profit sharing agreements are also used in limited liability companies (LLCs) to state how profits of the LLC are shared. Each member's name is included on the agreement along with the percentage amount.