How Does the Profit Sharing Work Among Partners in A Pvt Ltd Company?

Narendra Kumar

21 Dec, 2020

There is no concept of profit sharing in a Pvt Ltd company, you cannot share profit in a profit sharing ratio in a private company.

The concept of sharing of profit arises only in case of Partnership Firms.

Before understanding the concept of profit sharing among partners you need to understand these things:

• In case of companies, there is no concept of partners.
• As well as there is no concept of profit sharing.
• The company can declare dividends to the shareholders, but this will be as per the shareholding ratio. Again this dividend will attract dividend distribution tax.

In companies, profit is distributed in the name of Dividends based on the percentage of Shares held by them.

To share profits means sharing dividend. It will be decided based on the % of the shareholding each of you holds.

If it is seen technically then it can be said that whole profit accruing to the company belongs to the shareholders of the Pvt ltd company and if the shareholders want they can declare a dividend as the distribution of profit subject to the legal compliances.

Private Limited Company an entity and it has to follow stipulated rules and regulations, starting with the registration of the firm. As a firm needs to establish and continue, there should be initial investment from the shareholders, and the people involved in its operations could be paid salaries, which will protect the firm and the investors as well. In due course of time if there is sufficient profit then in that case dividend could be paid to shareholders of the company, and that dividend shall be based on the number of shares they hold. This dividend shall be declared after setting aside the needed share of profit for the firm’s growth and expansion.

How much should be the initial investment of the Private Limited company is usually decided prior to the company’s registration, although it may also be revised based upon the suggestions as agreed upon in the Meetings of the Board and the Members.

Profit sharing can be done in many forms and the percentage of profit that shall be given to members/shareholders is mostly in a written form/agreement between the stakeholders in return for their respective contribution to the Pvt Ltd company.

1. Public Ltd company

• If the companies are a public limited company. Having shares in the market, the board decides upon the dividend being shared amongst the shareholders,
• Also, there are priority shareholders / Investor’s that receive the dividend regardless of the performance of the firm.
• Stakeholders obviously get their cut along with the bonuses of the top executives.
• Remaining budget of the profit may also be used as a capital.

2. Private Limited company

• It just has to pay the stakeholders/ investors and the employees of the company.
• Employees of the company are very bad at bargaining as they get nothing as promised in a written agreement and the same is used by the company to their advantage.

In case of companies, sharing of profit is not a regular feature. In Companies, profit sharing is done in the form of dividend as recommended by Board of Directors and approved by the members (Shareholders).  Shareholders may or may not increase the recommended dividend.