Pro Rata Profit Sharing Agreement (Kenya)
Pro Rata Profit Sharing Agreement
PRO RATA PROFIT SHARING AGREEMENT Date: [Agreement Date] This Pro Rata Profit Sharing Agreement ("Agreement") is entered into between: FIRST PARTY: Name: [Party One Name] ID / BRS No.: [Party One Id] KRA PIN: [Party One Kra Pin] Address: [Party One Address] SECOND PARTY: Name: [Party Two Name] ID / BRS No.: [Party Two Id] KRA PIN: [Party Two Kra Pin] Address: [Party Two Address] [Additional Parties] (each a "Party" and together the "Parties").
1. Business and Commencement
1. BUSINESS AND COMMENCEMENT 1.1 The Parties carry on or intend to carry on the following business or venture (the "Business"): Business Name: [Business Name] Description: [Business Description] 1.2 This Agreement takes effect from [Commencement Date]. Profits generated from the Business on and after the commencement date shall be shared in accordance with this Agreement. 1.3 This Agreement is an express agreement modifying the default equal profit-sharing rule in Section 24(a) of the Partnership Act Cap. 29, to the extent that the Parties are carrying on the Business as a partnership under that Act.
2. Capital Contributions and Profit Sharing Ratios
2. CAPITAL CONTRIBUTIONS AND PROFIT SHARING RATIOS 2.1 The Parties have contributed, or agree to contribute, to the Business as follows: First Party ([Party One Name]): Contribution: [Party One Contribution] Nature of Contribution: [Party One Contribution Type] Profit Share: [Party One Profit Share]% Second Party ([Party Two Name]): Contribution: [Party Two Contribution] Nature of Contribution: [Party Two Contribution Type] Profit Share: [Party Two Profit Share]% [Additional Party Shares] 2.2 The profit sharing ratios stated above total 100% and represent each Party's entitlement to the distributable net profits of the Business calculated in accordance with Clause 3. 2.3 Any adjustment to a Party's participation percentage must be documented in a signed written amendment to this Agreement.
3. Calculation of Net Profits
3. CALCULATION OF NET PROFITS 3.1 For the purposes of this Agreement, "Net Profits" means: [Net Profit Definition] 3.2 The accounts of the Business shall be prepared on a [Accounting Period] basis by [Accountant] in accordance with generally accepted accounting standards. The accounts shall be finalised and presented to all Parties within 30 days of the end of each accounting period. 3.3 Any Party who disputes the profit calculation may refer the matter to an independent certified accountant appointed by agreement of all Parties or, failing agreement, nominated by the Institute of Certified Public Accountants of Kenya (ICPAK). The independent accountant's determination shall be final and binding, save for manifest error.
4. Distribution of Profits
4. DISTRIBUTION OF PROFITS 4.1 Distributable net profits shall be distributed to each Party in accordance with their profit share percentage within [Distribution Timeline]. 4.2 Payment method: [Payment Method]. Each Party shall provide their nominated bank account, M-Pesa number, or other payment details to the Business account manager and shall promptly notify the other Parties of any change. 4.3 A profit distribution statement showing the gross profits, each deduction, the net profit, each Party's share, and the payment amount shall be issued to each Party with each distribution.
5. Loss Sharing
5. LOSS SHARING 5.1 Losses of the Business shall be shared among the Parties as follows: [Loss Sharing] 5.2 No Party shall be required to contribute funds to cover a loss beyond their agreed capital contribution without their express written consent.
6. Tax Obligations
6. TAX OBLIGATIONS 6.1 [Kra Tax Obligation] 6.2 Each Party is individually responsible for declaring their profit share and paying income tax to the Kenya Revenue Authority (KRA) at the applicable rate under the Income Tax Act Cap. 470. The partnership is treated as a transparent entity under the Income Tax Act — each partner is taxed on their individual share of partnership income. 6.3 Each Party shall provide their KRA PIN to the Business accountant and shall cooperate with the preparation and filing of all required tax returns.
7. Exit of a Party
7. EXIT OF A PARTY 7.1 A Party who wishes to exit the Business must give all other Parties not less than 90 days' written notice of their intention to exit. 7.2 Upon exit, the exiting Party's share shall be valued using the following method: [Exit Valuation Method] 7.3 The remaining Parties shall pay the exiting Party's exit value [Exit Payment Period]. 7.4 All profits accrued to the exit date but not yet distributed shall be calculated and paid to the exiting Party in accordance with their pro rata percentage within 30 days of the exit date. The exit must be notified to the Kenya Revenue Authority (KRA) to update the partnership's tax file. 7.5 Non-compete: [Non Compete Period]
8. Governing Law and Dispute Resolution
8. GOVERNING LAW AND DISPUTE RESOLUTION 8.1 This Agreement is governed by the laws of Kenya, including the Partnership Act Cap. 29 and the Law of Contract Act Cap. 23. 8.2 Disputes: [Dispute Resolution] 8.3 Term: [Agreement Term] 8.4 This Agreement may be amended only by written instrument signed by all Parties. IN WITNESS WHEREOF the Parties have signed this Agreement on the date stated above.
First Party
________________
Signature
Second Party
________________
Signature
Witness
________________
Signature
What Is a Pro Rata Profit Sharing Agreement (Kenya)?
A Pro Rata Profit Sharing Agreement in Kenya sets out the rights, duties and consideration binding the parties to it.
The Partnership Act Cap. 29 governs ordinary partnerships in Kenya and applies where two or more persons carry on business in common with a view to profit under Section 3(1). The Act provides default rules for profit sharing under Section 24(a), which states that partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses, unless there is an express or implied agreement to the contrary. A Pro Rata Profit Sharing Agreement constitutes an express agreement modifying this default equal-sharing rule by specifying the agreed proportion for each partner.
The Income Tax Act Cap. 470, administered by the Kenya Revenue Authority (KRA), treats a partnership as a transparent entity for income tax purposes. Each partner is taxed on their individual share of the partnership's income in proportion to their profit-sharing ratio. The partnership must file an annual return of income with KRA under Section 52B of the Income Tax Act, and each partner must declare their share of partnership income in their individual income tax return. A clear, written Pro Rata Profit Sharing Agreement with defined percentages is essential documentation for KRA compliance and audit purposes.
A Pro Rata Profit Sharing Agreement is also used in joint ventures and special purpose vehicles where the parties are not forming a partnership under the Partnership Act Cap. 29 but are co-investing in a specific project — such as a real estate development under the Land Act No. 6 of 2012, a construction project under a building contract, or a technology development project. In these contexts, the agreement functions as a profit distribution clause within a broader joint venture agreement, rather than as a standalone partnership instrument.
Under the Limited Liability Partnership Act No. 42 of 2011, which introduced limited liability partnerships (LLPs) into Kenyan law, profits of an LLP are shared among partners in accordance with the LLP agreement. The Pro Rata Profit Sharing Agreement functions as or incorporates the profit distribution provisions of the LLP agreement. LLPs are registered with the Business Registration Service (BRS) and must file annual returns with the Registrar under Section 55 of the LLP Act.
The Companies Act No. 17 of 2015 does not directly apply to profit sharing agreements, but where the co-venturers are corporate entities rather than individuals, the agreement must be executed in accordance with the corporate authorisation requirements of each company — including board resolutions and, where required, shareholder approval — under the Companies Act No. 17 of 2015. A well-drafted Pro Rata Profit Sharing Agreement includes a schedule identifying each party's contribution, participation percentage, and tax identification (KRA PIN) details for KRA reporting.
When Do You Need a Pro Rata Profit Sharing Agreement (Kenya)?
A Pro Rata Profit Sharing Agreement in Kenya is required whenever two or more persons or entities invest in, contribute to, or operate a business or project together and wish to distribute profits in proportion to their respective contributions rather than equally.
A Pro Rata Profit Sharing Agreement is needed when founding partners of a Kenyan startup contribute different amounts of capital, intellectual property, or labour and wish to reflect those different contributions in their respective profit shares. Without an express agreement, the Partnership Act Cap. 29 defaults to equal profit sharing, which may not reflect the actual economic bargain between the founders.
A Pro Rata Profit Sharing Agreement is required when co-investors in a Kenyan real estate project — such as a residential development or commercial property purchase — contribute different sums towards the purchase price, construction costs, or equity and wish to share rental income and capital gains in proportion to their monetary contributions. The agreement prevents disputes about distribution when the property generates income or is sold.
A Pro Rata Profit Sharing Agreement is needed when a Kenyan chama (informal investment group) structured as a partnership under the Partnership Act Cap. 29 has members who make monthly contributions of different amounts and wishes to distribute investment returns pro rata to contributions rather than equally. Many chamas operate on equal-contribution equal-share models, but chamas accepting variable contributions require a written pro rata agreement.
A Pro Rata Profit Sharing Agreement is required when a Kenyan business owner brings in a strategic partner or investor who contributes capital in exchange for a defined percentage of profits, without the investor taking a directorship or shareholding in the operating company. This arrangement is common in small and medium enterprises (SMEs) seeking growth capital without issuing equity shares.
A Pro Rata Profit Sharing Agreement is needed when two professional service firms — for example, an accounting firm and a law firm — collaborate on a specific client engagement and wish to share the fees earned in proportion to the work contributed by each firm. The agreement must specify how total revenue is calculated, how each firm's contribution is measured, and how distributions will be made.
A Pro Rata Profit Sharing Agreement is required when employees of a Kenyan company participate in a company-wide profit sharing scheme proportional to their salary, tenure, or performance score. Such schemes are common in sectors such as manufacturing, financial services, and telecoms and must comply with the Employment Act No. 11 of 2007 and the Income Tax Act Cap. 470 as regards employee tax obligations on profit share receipts.
What to Include in Your Pro Rata Profit Sharing Agreement (Kenya)
A Kenya Pro Rata Profit Sharing Agreement under the Partnership Act Cap. 29 must contain the following essential elements to be enforceable and commercially functional.
Parties and Identification: Full legal names, national identity card numbers or company registration numbers under the Companies Act No. 17 of 2015, KRA PIN numbers, and addresses of all parties. Corporate parties must confirm board authorisation for execution. For a partnership registered with the Business Registration Service (BRS) under the Registration of Business Names Act Cap. 499, the partnership's registered name should also be stated.
Description of the Business or Venture: A clear description of the business, project, or venture to which the profit sharing arrangement applies — for example, a real estate development at a specified address, an import and distribution business registered under a specific business name, or a technology project with defined deliverables. The description prevents disputes about whether the agreement applies to subsequent unrelated activities of any party.
Capital Contributions and Participation Ratios: A schedule setting out each party's capital contribution (in Kenya Shillings), the date of contribution, and the resulting pro rata percentage. For example: Party A contributes KES 3,000,000 (60%), Party B contributes KES 2,000,000 (40%). The schedule must total 100%. Where contributions include non-cash items — intellectual property, equipment, goodwill, or labour — the agreed monetary valuation of each non-cash contribution must be stated.
Definition of Net Profits: A precise definition of "net profits" for distribution purposes — total revenue less allowable deductions for operating expenses, cost of goods sold, depreciation of business assets, loan repayments, tax provisions, and any agreed reserves. The agreement must specify whether distributions are made from accounting profits or from cash available after maintaining a minimum working capital reserve.
Profit Calculation and Accounting Period: The accounting period for profit calculation (monthly, quarterly, or annually), the accounting standards to be applied (Kenya Accounting Standards or IFRS), the name of the auditor or accountant responsible for preparing the profit and loss account, and the deadline for finalising accounts after the end of each period.
Distribution Procedure: The timeline for distributing profits after finalisation of accounts, the payment method (bank transfer to specified accounts, M-Pesa, or cheque), and the process for any party to dispute the profit calculation. A dispute resolution mechanism — referral to an independent accountant or to arbitration under the Arbitration Act No. 4 of 1995 before the Nairobi Centre for International Arbitration (NCIA) — should be included.
Loss Sharing: Whether losses are shared in the same pro rata proportions as profits, or whether any party's liability for losses is capped. Under Section 24(a) of the Partnership Act Cap. 29, the default rule is equal contribution to losses; the agreement must expressly modify this default if the parties intend a different loss allocation.
Withdrawal and Adjustment of Shares: The procedure for a party to increase their participation by making an additional capital contribution, to decrease their share by withdrawing capital, or to exit the venture. Any adjustment to participation percentages must be documented in a written amendment to the profit sharing schedule and signed by all parties.
Tax Obligations: Each party's individual responsibility for declaring their share of partnership income to the Kenya Revenue Authority (KRA) under the Income Tax Act Cap. 470 and for paying the appropriate income tax (individual tax rates for individuals, corporate tax at 30% for companies under the Income Tax Act). The partnership must file an annual return with KRA and provide each partner with a statement of their profit share for the year.
Confidentiality and Non-Compete: An obligation on each party to keep the financial results of the venture confidential and, where appropriate, a non-compete clause preventing any party from establishing a competing business during the term of the agreement and for a defined period after exit.
Governing Law and Dispute Resolution: The agreement is governed by the laws of Kenya. Disputes should be referred first to negotiation, then to mediation before the Nairobi Centre for International Arbitration (NCIA) Mediation Centre, and finally to arbitration under the Arbitration Act No. 4 of 1995 or to the High Court of Kenya.
The forms-legal.com Kenya Pro Rata Profit Sharing Agreement template is structured for use by partnerships, joint ventures, and co-investment arrangements and includes a contribution schedule adaptable to any combination of capital, labour, and IP contributions.
Under the Companies Act No. 17 of 2015, the Registrar of Companies at the Office of the Attorney General maintains the register of Kenyan companies. Section 3 of the Law of Contract Act (Cap. 23) governs contractual obligations. The Competition Authority of Kenya (CAK) enforces the Competition Act No. 12 of 2010. The Kenya Revenue Authority (KRA) administers corporate tax under the Income Tax Act (Cap. 470). The High Court of Kenya has unlimited original jurisdiction under Article 165 of the Constitution of Kenya 2010.
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Forms Legal. (2026). Pro Rata Profit Sharing Agreement (Kenya) (Kenya) [Legal document template]. Forms Legal. https://forms-legal.com/kenya/business/partnerships/pro-rata-sharing-agreement-kenya
"Pro Rata Profit Sharing Agreement (Kenya) (Kenya)." Forms Legal, 2026, https://forms-legal.com/kenya/business/partnerships/pro-rata-sharing-agreement-kenya.
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}Frequently Asked Questions
Under Section 24(a) of the Partnership Act Cap. 29, the default rule in Kenya is that partners are entitled to share equally in the capital and profits of the business and must contribute equally towards losses, unless there is an agreement — express or implied — to the contrary. This means that if two partners form a partnership where one contributes KES 3,000,000 and the other contributes KES 500,000, but they have no written profit sharing agreement, each will be entitled to 50% of the profits under the default rule. A Pro Rata Profit Sharing Agreement is an express agreement that modifies this default, allowing parties to allocate profits in proportion to capital contributions, labour input, or any other agreed basis. Without a written agreement, a partner who contributed significantly more than their co-partners will have no legal claim to a larger share of profits. This makes a written Pro Rata Profit Sharing Agreement critically important for any partnership where the parties' contributions are not equal.
Under the Income Tax Act Cap. 470, a partnership in Kenya is treated as a transparent entity — the partnership itself does not pay income tax; instead, each partner is taxed on their individual share of the partnership's net income in proportion to their profit-sharing ratio. The partnership must file an annual return of income with the Kenya Revenue Authority (KRA) under Section 52B of the Income Tax Act, disclosing the total net income and each partner's share. Each partner then includes their share of partnership income in their individual income tax return (for individuals, taxed at graduated PAYE rates of up to 35%) or their corporate income tax return (for companies, taxed at 30%). A clear Pro Rata Profit Sharing Agreement with defined percentages is essential for both the partnership's KRA return and each partner's individual return. Partners must have KRA Personal Identification Numbers (PINs) and must declare their profit share even if it is not distributed during the year.
Yes, with qualifications. The Partnership Act Cap. 29 sets out default rules that apply in the absence of agreement between the partners. Section 19 of the Act expressly provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all partners. A Pro Rata Profit Sharing Agreement can validly override the default equal-sharing rule in Section 24(a), can exclude a partner from sharing in profits from specific activities under Section 24(b), and can modify the default management rights in Section 24(e). However, the Act cannot be contracted out of in ways that affect third parties — for example, under Section 8, every partner is an agent of the firm and may bind it in contracts with third parties regardless of internal restrictions in the partnership agreement, unless the third party knows of the restriction. The partnership agreement, including the Pro Rata Profit Sharing Agreement, is a private document that governs the internal relationship between partners.
A Pro Rata Profit Sharing Agreement between partners in a general partnership is not required to be registered separately, but the partnership itself may need to be registered. Under the Registration of Business Names Act Cap. 499, a partnership carrying on business in Kenya under a name other than the true names of all the partners must register the business name with the Business Registration Service (BRS). Registration is a straightforward process involving submission of BRS Form BN/2 and payment of the prescribed registration fee. For a Limited Liability Partnership (LLP) under the Limited Liability Partnership Act No. 42 of 2011, registration with the BRS Registrar of LLPs is mandatory and the LLP Agreement — which includes the profit sharing provisions — must be filed with the Registrar on formation. Failure to register a required business name renders the partners personally liable in proceedings, but does not make the profit sharing agreement unenforceable between the parties themselves.
When a partner exits a partnership under the Partnership Act Cap. 29, several consequences follow. First, where the partnership is a partnership-at-will (one without a fixed term), any partner may dissolve the partnership by notice under Section 26 of the Act, which may trigger a winding up and distribution of assets. Second, the remaining partners and the exiting partner must agree on the valuation of the exiting partner's share — including their share of accumulated profits, goodwill, and capital. A Pro Rata Profit Sharing Agreement should include a buyout clause specifying the valuation method — net asset value, discounted cash flow, or a multiple of earnings — and the payment timeline. Third, any profits accrued up to the date of exit but not yet distributed must be calculated and paid to the exiting partner in accordance with their pro rata percentage. The agreement should specify the accounting date for calculating exit profits. Fourth, the exit must be communicated to the Kenya Revenue Authority (KRA) to update the partnership's tax file and to terminate the exiting partner's tax obligations in respect of the partnership.
Yes. Employers in Kenya may establish profit sharing schemes for employees under which a portion of the company's annual profits is distributed to employees in proportion to their salary, tenure, or performance score. Such employee profit sharing arrangements are governed by the Employment Act No. 11 of 2007, which requires that the terms of any profit sharing scheme be clearly communicated to employees — through the employment contract, an employee handbook, or a standalone profit sharing policy. Under the Income Tax Act Cap. 470 and the PAYE Regulations, profit share payments received by employees are treated as employment income and are subject to Pay As You Earn (PAYE) tax, withholding by the employer and remittance to KRA. Employees must receive an itemised pay statement showing the profit share component. The Pro Rata Profit Sharing Agreement should be referenced in the employment contract and should specify the formula for calculating each employee's pro rata share, the accounting period, and the payment timeline after annual accounts are finalised.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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