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The Profit Sharing Business Model Explained

The profit sharing business model is used as a tool to help employees be able to benefit from the hard work they put in every day. The goal is to provide a sense of financial security once an employee decides to retire. For small businesses that don’t have any retirement benefits in place, this business model can provide benefits to everyone involved.

Profit sharing gives the employer some flexibility in how the plan is designed. Not only can the contributions be determined every year, there is even an option to provide no contribution at all. When activated, this business model provides a business with some key benefits.

  • Profit sharing helps to attract and retain employees that have niche skills and expertise that are needed.
  • Every employee level within an organization benefits in some way from sharing the profits.
  • The profits that are shared can continue to grow through the numerous investment vehicles that are available today to everyone, including tax deferred options.
  • Benefits can be taken with employees should they need to leave the company for some reason.

The bottom line is this: establishing the profit sharing business model can make retirement planning a lot easier. It can also be more attractive than the standard 401k or similar plan.

Isn’t Profit Sharing Used In Other Ways As Well?

Profit sharing might be used primarily for retirement purposes, but a complete profit sharing business model also has some other unique attributes. One of them includes performance bonuses, downstream payments, and other incentives that help to pay the best people what they actually deserve.

Here’s how it works. After a certain amount of income is generated by an individual or a location, a certain percentage of income above that threshold is placed into a general fund. Let’s say the threshold level for a sales rep on a commission is $2,000. They’ll earn up to $2k on every sale guaranteed. Now let’s say the commission they earned on their last sale calculates out to $2,800. If there is a 50% profit sharing above the threshold, then the commission would be $2,400 and then $400 would go into the general fund.

Every rep is doing this within the company. The company is matching these funds with the profits that their reps are generating. At the end of the year, the top performers can actually earn 3x more than the amount that they put into the general fund based on their performance. That means a hefty bonus check.

Here’s the catch: everyone gets a piece of the pie. The best people just get the best piece. When combined with retirement profit sharing opportunities, the possibility to earn a huge stack of cash keeps the best people around and positions the business practicing this business model toward insulation from even difficult housing times.

Do All Employees Need To Participate?

In general, the profit sharing business model works best when everyone is an equal participant from the very start. This equality gives everyone the chance to succeed on their own terms. There are some rules in place, however, that allow for profit sharing to be excluded from some employees.

  • Any worker who is not above the age of 21 can generally be excluded from profit sharing.
  • There may be a requirement to work a minimum of 12-24 months before participation will be allowed.
  • Union workers may have a CBA in place that does not allow for participation.
  • Certain workers that are working legally, but not residents of the country, may also be excluded under certain circumstances.

There are also restriction in place in the United States for how much can be distributed through the profit sharing business model. In tax year 2015, for example, a maximum of $53,000 can be distributed to individual workers. In return, employers are allowed to deduct amounts that do not exceed 25% of the contributions to compensation that were made.

Can Profit Sharing Be Canceled?

Most profit sharing plans are designed to continue on indefinitely. Sometimes a business may need to change their operational model, so terminating profit sharing is possible. In order to do so, all of the assets within the plan must be fully distributed and employees must be notified in advance that the program is being altered.

When implemented properly, the profit sharing business model can be an easy way for small businesses to recruit the best employees in the market. Consider all options, implement this business model if it makes sense, and then work hard at what you do best. That’s the key to creating a successful business opportunity today.

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