Also known as: profit sharing arrangement · profit-sharing arrangements · profit sharing arrangements · profit share arrangement · profit-sharing plan
Written by attorneys · grounded in primary & secondary sources — see below
An allocation mechanism by which earnings of a business or professional practice are distributed to participants according to agreed percentages or other criteria rather than fixed wages. The mechanism may form the basis for compensation or retirement benefits paid to nonlawyer employees of a law firm.
Ash Resource maintains a retirement plan for its environmental scientist and GIS technician. Annual payments under the plan equal a percentage of the firm's net profits from all matters. The plan vests after five years of service and makes no direct allocation from any single client's fees.
Mei, Carlos, and Dana form a partnership to run test-preparation courses. They agree that Mei will receive a double share of distributions because she created the course materials. The partners never address loss allocation. When the business incurs net losses, Mei bears half the shortfall while Carlos and Dana each bear one-quarter.
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No. A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan even when the plan is based in whole or in part on a profit-sharing arrangement. The exception applies when payments are framed as standard benefits available after a vesting period and are calculated on overall firm profitability rather than earmarked from individual matters.
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Losses are allocated in proportion to each partner's share of distributions unless the partners expressly agree otherwise. An agreement that gives one partner a larger profit share does not automatically impose a larger loss share on that partner.
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Each partner must contribute in proportion to the partner's right to receive distributions at the time the obligation arose. The contribution duty is measured by historic distribution rights, not by capital accounts or later adjustments.
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No. Absent an express agreement, partners are not entitled to remuneration for services rendered to the partnership. Partners receive compensation only through their share of profits, except for reasonable compensation during winding up.
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