The term Profit Sharing is one that speaks for itself. In its simplest terms it means the sharing of profits amongst individuals or entities to whom the business belongs. Profit Sharing is based upon the premise that once a profit is made in a business venture, it will be shared up in accordance with the percentage holdings, or stake, that each person has in the entity. This can be in any ratio depending on the number of individuals involved and their level of input. A Profit Sharing Plan would outline who gets what amount of the profit that was made.
An example of how Profit Sharing can be applied is as follows: The Mill Mex Mills is owned by 3 partners namely Joe, Moe, and Loe. The company had a startup capital of 1 million dollars. Joe invested $400,000, Moe invested $500,000, and Loe invested $100,000. The ratio of ownership would then be 4:5:1, with Moe having the largest share followed by Joe and then Loe. This means that if Mill Mex Mills makes a profit of $2,000,000:
Joe would get – ($2,000,000 x 4)/10 = $800,000
Moe would get – ($2,000,000 x 5)/10 = $1,000,000
Low would get – ($2,000,000 x 1)/10 = $200,000
So the profit would be shared according to their level of controlling interest in the company.
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