Profit Sharing for Small Businesses

Profit sharing seems like something that businesses on Forbes and Fortune and other lists might think about doing. That is, profit sharing seems like something that companies with a very large margin of profit might do. However, profit sharing can be very beneficial for small businesses as well. Profit sharing, often thought of as an employee benefit, can actually be a great employer benefit come tax time. And, of course, it keeps your worker bees happy as well.

There are 2 main ways to structure profit sharing programs, for any size business. The first way is through bonus checks—dispensed monthly or annually. Yearly bonus checks that depend on the profitability of a company are a form of profit sharing. Bonuses could also be dispensed monthly, as a kind of communal commission program.

This kind of profit sharing makes one of the drawbacks of profit sharing more apparent. That is, equal sharing of profits can cause tension among higher and lower performers in your workforce. Similar to waiters and waitresses pooling their tips at a restaurant, it leaves little room for rewarding outstanding performers. However, profit sharing as an employee benefit should still help motivate your workforce. It should improve employee engagement in your small business, and hopefully encourage employees to stay with the company long-term.

It is also possible to give different people in the company a different cut of the profits. For example, a law firm might give partners a larger piece of the profits than the junior attorneys or administrative staff. It is also possible to use profit sharing as a bonus program to reward employees who have been especially loyal to the company.

The second type of profit sharing that could benefit your small business is a retirement contribution plan. Similar to a 401k match that you may already have set up as an employee benefit, profit sharing differs in that you can opt out of the contribution if your small business has a bad year. You would set up this type of profit sharing with your bank, and can discuss specific guidelines for your small business with your financial advisor.

This second type of profit sharing can also benefit your small business come tax time. Employer 401k contributions, which include profit sharing, are tax deductible. So, when you have a better-than-average year (congratulations!), you can contribute more to your employees’ retirement plans—this is a great employee benefit, and it will save you some cash!

What tips do you have for profit sharing for small businesses? Do you use profit sharing as an employee benefit? Spark a conversation below!

IMAGE: Courtesy of Flickr by Alan Cleaver