The concepts of profit sharing and equity share are unrelated, although it may be easy to confuse the two similar-sounding terms. Both profit share and equity share differ in their purposes, implications and recipients, but both have roughly to do with the assets of a business.
Profit sharing is the act of designating a portion of a company’s profit to be distributed to its employees. When businesses earn a profit, they can choose to reinvest the profit back into the company, share it with investors in the form of dividends, share it among private company owners, share it with employees or any combination of these.
Equity share is essentially an ownership stake in a business. Partners in a private partnership, members in an LLC and shareholders in a corporation all own an equity share of their companies. An equity share does not necessarily grant owners a right to a portion of company profit, but it does guarantee a portion of the net proceeds from company liquidation.
Profit sharing is a way to financially reward employees for their hard work. Employees comprise the engine that drives business success, directly influencing sales and profitability. Profit sharing is a way to show employees exactly what their hard work accomplishes for the company, and to prove that the company recognizes employees’ contributions to company profit.
Equity share is a way to get a company owner or investor truly involved and engaged with a company. Owning an equity share in a company can be highly beneficial if a company succeeds, giving company partners additional incentives to steer their businesses to success.
Profit sharing can be distributed among employees and company owners, but it is only rarely given to anyone outside of the company. Profit sharing is a purely internal activity between a company and those who work to make it succeed.
An equity share, on the other hand, can be granted to nearly anyone, including other companies in some cases. Equity shares can be given to investors as an incentive to risk their money, or shares can be given to owner/managers who are involved in day-to-day management tasks. Equity shares can be given to stockholders from around the world, including individuals and institutional investors, for corporate businesses.
Profit sharing generally occurs annually or at less-frequent intervals. Companies may hold off on making profit-sharing decisions until they reach specific income levels, or they may increase or decrease profit-sharing frequency based on economic and market conditions.
Equity share is not a lump-sum, repeatable payout like profit sharing. Purchasing an equity stake in a company is an investment, whether long or short term. It is not something to look forward to on a regular basis, but something to take the initiative and act upon at your own discretion.