Free Profit Sharing Agreement Template
A profit sharing agreement defines how business profits are distributed among partners, investors or employees. Use our free UK template to establish clear allocation formulas, eligibility criteria and payment terms under English law.
Companies House No. 10223344
Signatory: James Whitfield
22 Elm Road, Manchester, M14 5QT
NI: AB 12 34 56 C
"Accounting Standard" means UK GAAP / FRS 102 as in force from time to time.
"Calculation Period" means 1 April 2026 to 31 March 2027.
"Company's Accountants" means the firm appointed from time to time to sign off the Company's statutory accounts.
"Profit" means the pre-tax profit (profit before corporation tax) of the Company for the Calculation Period, calculated in accordance with the Accounting Standard as certified by the Company's Accountants.
"Profit Share" means the payment calculated under Clause 4.
"Payment Date" means the date falling at the expiry of sixty (60) days after the end of each financial year.
(a) this Agreement does not, and is not intended to, constitute a partnership between them within the meaning of the Partnership Act 1890;
(b) section 2(3)(b) of the Partnership Act 1890 is expressly relied upon — the receipt by the Participant of a share of the profits of a business does not of itself make that person a partner in the business;
(c) the Participant has no authority to bind the Company, to incur obligations on its behalf, or to hold out as a partner in any way; and
(d) neither party shall owe the other the fiduciary duties of a partner under the Partnership Act 1890 (see Adam v Newbigging (1888) 13 App Cas 308; Cox v Hickman (1860) 8 HL Cas 268).
Formula: 5% of Profit (as defined below) exceeding the Threshold.
Payment Frequency: Annually, within sixty (60) days following the end of each financial year.
Calculation Period: 1 April 2026 to 31 March 2027.
Tax Treatment. Where the Participant is an employee or director, the Profit Share shall be treated as employment income under Part 2 ITEPA 2003, paid via PAYE and subject to income tax and National Insurance contributions (Class 1 primary and secondary). Where the Participant is a consultant or contractor, the Profit Share shall be paid against a valid VAT invoice (where the Participant is VAT-registered) and the Participant is responsible for their own income tax and National Insurance.
Deductions. The Company may deduct from any Profit Share payable: (a) income tax and National Insurance required by law; (b) any sums the Participant has authorised in writing; and (c) pursuant to section 13 Employment Rights Act 1996, any advance drawings under Clause 7 (where applicable).
Specific Deductions. The following items shall be deducted before arriving at the Profit figure: Director remuneration, capital expenditure, loan interest, restructuring and impairment charges.
Certification and Conclusive Evidence. The Company's Accountants' certificate of the Profit figure for each Calculation Period shall be conclusive save in the case of manifest error. The Participant shall have the right, on not less than 14 days' written notice, to inspect the relevant management accounts and working papers in the presence of a chartered accountant.
Adjustments. The Profit figure shall be adjusted (upwards or downwards) to reflect: (i) material prior-period errors corrected under FRS 102 Section 10; (ii) the reversal of extraordinary items (disposal gains, impairment reversals, restructuring gains); and (iii) any transfer-pricing adjustment required by HMRC.
Gross Misconduct. No Profit Share shall be payable in respect of the Calculation Period in which the Participant's engagement terminates for gross misconduct, fraud, or material breach of this Agreement or the underlying contract of employment.
Equality Act 2010. Notwithstanding the above, the Company shall not deny or reduce the Profit Share where such denial or reduction would amount to discrimination on a protected characteristic under Part 5 of the Equality Act 2010 (for example, absence on maternity, paternity, adoption or shared parental leave shall be treated as pensionable service and shall not reduce the Profit Share pro rata).
(a) engage or be interested in any business that competes with the business of the Company as conducted at termination, in any geographical area in which the Company is actively engaged;
(b) solicit or endeavour to entice away any employee, consultant or director of the Company with whom the Participant had material contact in the 12 months prior to termination; or
(c) solicit, canvass or accept business from any person who was, in the 12 months prior to termination, a customer or supplier of the Company with whom the Participant had material contact.
The Participant acknowledges that these restrictions are reasonable and necessary to protect the legitimate business interests of the Company, including the goodwill, trade connections and confidential information to which the Participant has access by virtue of the Profit Share arrangement (Herbert Morris Ltd v Saxelby [1916] 1 AC 688). Each restriction is severable.
(a) keep all such Confidential Information strictly confidential;
(b) use it solely for the purpose of verifying the Profit Share;
(c) not disclose it to any third party (including other employees, consultants or family members) without the Company's prior written consent, save to: (i) the Participant's professional advisers under equivalent confidentiality obligations; or (ii) as required by law, court order or a regulator with reasonable prior notice where permitted.
This obligation is grounded in the common-law duty of confidence (Coco v A. N. Clark (Engineers) Ltd [1968] FSR 415) and the Trade Secrets (Enforcement, etc.) Regulations 2018, and shall survive termination of this Agreement without limit in time in respect of trade secrets and for a period of three (3) years in respect of other Confidential Information.
Variation. No variation of this Agreement shall be effective unless in writing and signed by or on behalf of both parties.
No Assignment. The Participant may not assign, charge or declare in trust any right under this Agreement without the Company's prior written consent.
Severability. If any provision is held invalid or unenforceable, the remaining provisions shall continue in full force.
Third-Party Rights. A person who is not a party to this Agreement shall have no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms.
Notices. All notices shall be in writing and delivered to the addresses set out above, or to such other address as a party may notify in writing.
Bribery. Neither party shall commit any act that would breach the Bribery Act 2010 or any equivalent legislation; the Profit Share is paid solely in respect of bona fide commercial performance.
What Is a Profit Sharing Agreement?
A profit sharing agreement is a legally binding contract that sets out how the profits of a business or venture are to be divided among specified parties. It defines the calculation of distributable profits, the allocation formula, eligibility requirements and the timing of payments.
In England and Wales, profit sharing arrangements are governed by the general law of contract and, where applicable, partnership law under the Partnership Act 1890. The agreement must be sufficiently certain in its terms to be enforceable and should clearly distinguish between gross revenue, net profit and distributable profit.
UK profit sharing agreements are used in a wide range of contexts, including British business partnerships, joint ventures, employee incentive schemes and investor arrangements. They are a powerful tool for aligning the interests of multiple stakeholders in a United Kingdom business.
What's Covered in This Template
This template provides a comprehensive framework for profit sharing arrangements.
Party Details
Full legal names and details of all parties entitled to a share of profits.
Profit Definition
Clear definition of how profits are calculated, including deductions, expenses and accounting standards.
Allocation Formula
The percentage or formula by which profits are divided among the parties.
Eligibility Criteria
Conditions that must be met for a party to qualify for profit sharing, including minimum service periods.
Vesting Schedule
Provisions for gradual vesting of profit sharing entitlements over a defined period.
Payment Terms
Frequency of distributions, payment methods and any minimum thresholds for payment.
Accounting and Reporting
Requirements for maintaining accounts, audit rights and reporting obligations to profit-sharing participants.
Tax Provisions
Allocation of tax responsibilities and acknowledgement of each party’s personal tax obligations.
Amendment and Termination
Procedures for amending the profit sharing terms and circumstances in which the arrangement terminates.
Dispute Resolution
Mechanisms for resolving disagreements over profit calculations or distributions.
How to Create a Profit Sharing Agreement
Follow these steps to set up a clear and enforceable profit sharing arrangement.
- 1
Identify the Parties
Enter the details of all individuals or entities who will participate in the profit sharing arrangement.
- 2
Define Distributable Profit
Specify how profit is calculated, what deductions are permitted and which accounting standards apply.
- 3
Set the Allocation Formula
Determine the percentage or formula for dividing profits, including any tiered or performance-based components.
- 4
Establish Payment Terms
Agree on the frequency of distributions, payment methods and any vesting or eligibility requirements.
- 5
Review and Download
Check all terms for accuracy, preview the agreement and download it as a PDF for signature.
Legal Considerations
Profit sharing arrangements raise several important legal issues under English law.
This template is for informational purposes only and does not constitute legal advice. Consult a qualified solicitor for advice specific to your situation.
Reviewed for England & Wales law
Partnership Risk
Under Section 2 of the UK Partnership Act 1890, the sharing of gross returns does not of itself create a British partnership, but the sharing of net profits may be evidence of a partnership. If a profit sharing arrangement in England and Wales is deemed to create a partnership, the parties may become jointly liable for business debts. The agreement should include clear language to negate partnership status where this is not intended.
Tax Implications
UK profit sharing payments may be taxable as trading income, employment income or miscellaneous income depending on the nature of the arrangement. HMRC will look at the substance of the British arrangement rather than its form. Each UK participant should seek independent tax advice to understand their obligations.
Employment Law Considerations
If UK profit sharing is offered to British employees, it may form part of their contractual terms and conditions. Under the UK Employment Rights Act 1996, any changes to contractual entitlements require the employee’s agreement in England and Wales. British employers should also consider the implications for holiday pay calculations following the Harpur Trust v Brazel [2022] ruling.
Unfair Prejudice
In UK companies, minority shareholders may challenge profit distribution decisions as unfairly prejudicial under Section 994 of the UK Companies Act 2006. British profit sharing agreements should be carefully drafted to avoid arrangements that could be challenged as oppressive to minority interests under English law.
Frequently Asked Questions
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