Revenue sharing is a very flexible concept which involves sharing operational losses or profits among affiliated private financial participants. Revenue sharing may take the form of an all-or-nothing arrangement in which no gain is shared and all gain accrues to the common pool. Alternatively, revenue sharing may occur as a cost-only profit Sharing cost is more appropriate for small businesses that generate little profit but large amount of overhead expenses. In this instance, the costs incurred are split among fewer individuals rather than the larger group of organization members. Cost-only revenue sharing may be used for any business purpose, even if it does not result in an increase in revenue.
The United States Federal government, as represented by the U.S. Department of the Treasury, is an owner of a large number of tax liens. These liens allow the government to raise capital from other parties for the purpose of financing programs that are directly related to the operation and management of the government’s business. Some examples of these types of programs are: debt payments, refunds, and for the development of infrastructure and townships. Many state and local governments are also leveraged by revenue sharing programs.
There are two basic types of revenue sharing arrangements that work in the private sector. One is an owner-user fee system in which plan sponsors agree to accept payments from users for the use of their facilities or services. In this arrangement, plan sponsors generally include a certain percentage of the total costs of the facility or service. Plan assets are typically invested to guarantee that these payments will be available when they are needed. This method of financing has a long history in the public sector, but has been discontinued by most major cities due to the prohibitive cost of building new facilities.
Another revenue sharing option is revenue auctioning, in which plan sponsors regularly offer revenues to participating venues for sales. A potential revenue auction facility attracts a number of potential customers who bid on a variety of goods or services, with each payment coming primarily from plan sponsors. Plan sponsors normally need to pay property taxes, labor taxes, and other special assessments, so revenue auction revenues are usually received from these sources. This revenue sharing option has a long and distinguished history in the public sector, but has been discontinued by many large cities because of the prohibitive cost of constructing new facilities.
The third type of revenue sharing arrangement is a contractual revenue sharing plan, in which plan sponsors agree to accept payment from users for the use of their facilities or services and include a performance bond, similar to a loan, in order to assure that they will be able to cover expenses and provide the funds. These bonds may also be used as guarantees of repayment of claims by users, if there is a loss of usage. This type of revenue sharing arrangement may pay only a portion of the expense to the users, or may pay the whole expense. This option usually involves long-term contracts and may pay only part of the expense for the duration of the agreement.
The fourth option is a revenue sharing arrangement using a combination of the fourth and fifth options. In this revenue sharing option, users have the option to make contributions to a mutual fund that is operated by the venue that collects fees. The mutual fund collects the fees on behalf of users, pays the costs of operating the fund, and makes a one-time distribution of its income to the users. The users pay an annual membership fee to the mutual fund, contribute a portion of their income to the fund, and benefit from the residual earnings of the fund. This option can be very attractive to high net worth investors who do not have the time or access to invest in a large managed mutual-fund portfolio.
The fifth option is to pay for the recording and collection of fees and disbursements through the use of a combination of software programs. Some of these software programs are provided by service providers and contain a built-in revenue sharing mechanism. These service providers also allow users to enter transaction data and disburse funds through a Web portal. In the case of a small investment fund, this option might be desirable because it allows the user to directly access the administrative records.
Revenue sharing is an important consideration for retirement planning participants. It ensures that both the employer and the plan participant remain closely accountable for their respective financial interests. Care should be taken to ensure that all plan participants understand their tax implications and the tax treatment of any transactions that occur during their retirement. If a plan participant does not understand their plan’s revenue sharing obligations, they could unintentionally violate their fiduciary responsibilities.