Definition of Profit Sharing

What does the term "profit sharing" mean? What is meant by the term "profit sharing"?

A "profit sharing" agreement is an agreement in which a business agrees to share some percentage of their profits with eligible individuals or businesses.

For instance - let's say that there is a iPhone application development company called iPhoneApp Inc. iPhoneApp Inc. has two principals and 10 employees.

iPhoneApp Inc. has wording in the contract of all of their employment contracts that says that the employees will get 15% of any of the profits generated from their applications. This money will be split based on seniority, and is on top of standard wages. This would be a "profit sharing" agreement.

The employees, as you may guess, would not be entitled to any money if the applications were losing money or breaking even.

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