How to Write a Cash Profit-Sharing Plan

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When developing a profit-sharing plan, get ready to spend some quality time with your calculator.
When developing a profit-sharing plan, get ready to spend some quality time with your calculator. (Image: Calculator image by Alhazm Salemi from <a href='http://www.fotolia.com'>Fotolia.com</a>)

While there are many ways to keep employees and investors happy, few are as effective as a cash profit-sharing plan. After all, who doesn’t like receiving a little additional money? A profit-sharing plan is also a good motivator, as it demonstrates your commitment to the people responsible for the success of the business. Once you’ve decided to implement this kind of idea, it’s a good idea to put all aspects of the plan into writing to help reduce the number of misunderstandings that might arise.

Decide how much profit you are willing to share. This is very important, as you do not want to make any promises you will later have to change. In addition to looking at the numbers for past and current year, consider your expected profits in the future. If you have a down year and have promised to share too much profit, you may regret creating the plan in the first place.

Examine other profit-sharing plans in order to get a general idea of the kind of information you will need to provide. For example, you should identify a trustee who is responsible for managing the assets of the profit-sharing plan. AXA Equitable points out that this will take some of the pressure off you, as this trustee will be responsible for generating the paperwork involved in your plan. Even better, those who are receiving a share of the profits will appreciate having the plan administered by an outside agent.

Divide the information you have compiled into the different sections that will make up your profit-sharing plan. The Business Owner’s Toolkit website advises you to include these sections and more: purpose and definitions, service credit and participations, and the right to amend.

Write each of your sections, one at a time. This can seem daunting, but if the work is done bit by bit, it’s not so bad. For example, begin with your first section: purpose and definitions. Simply explain why you are offering the profit-sharing plan. Then you can provide clear, legal-sounding definitions for each term that might confuse employees. Make plain, for example, who counts as an “eligible employee.”

Include an appendix with charts that contain all of the bare-bones information. You can include a financial statement disclosing how much profit and how many costs your company has incurred over the past five years. List some projections estimating the profits you’ll bring in for the next few years and how much you’ll disburse to each employee.

Tips & Warnings

  • Emphasize to your employees or investors that your plan is just that: a plan that can be altered if the need arises.
  • Show your profit-sharing plan to an accountant and/or an attorney to make sure you’re not making any mistakes.

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