Net Profits Interest
What is Net Profits Interest?
Net profits interest is the proportion of net profits paid out to a particular investor, according to his or her percentage stake in the company.
How Does Net Profits Interest Work?
Net profits interest is most often used in reference to oil and gas contracts in which the property owners lease the property to a developer or producer in return for a percentage of the proceeds.
Let's say that John owns an oil field and wants to lease it to Company ABC, which will then get the oil out. Company ABC agrees to the deal and grants John a 20% net profits interest. If Company ABC makes $20,000,000 next year after all expenses are deducted (that is, in net profit), then John is entitled to 20% of those profits, or $4,000,000.
Why Does Net Profits Interest Matter?
Often, the holder of net profits interest has limited liability in the sense that he or she does not responsibility for a sharing a proportionate share of losses (though the owner may deduct the losses from future payments). Typically, net profits interests are considered nonoperating interests for accounting purposes.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.