Partnership in company

[~ ibnAdam ~]

:salam:

A friend of mine intends to start a consultancy. A consultancy provides services, training, software/hardware development etc.
He does not have enough resources so he asked me if I can invest some money and become a sleeping partner.

I want to know whether it will be permissible for me to join him?

Mufti Taqi Uthmani sb says: http://albalagh.net/qa/stocks.shtml

A Muslim can acquire the shares of a joint stock company with the following conditions:

1. The main business of the company must be Halaal (permissible) according to Shariah. So, a Muslim cannot invest in a company whose main business is Haraam, like the traditional banks, insurance companies, companies dealing in wines, etc.

2. If the main business is Halaal, but it is involved in borrowing money on Interest or placing its funds in an Interest bearing account a Muslim share-holder should raise his voice against this practice in the annual general meeting of the company.

3. When a Muslim share-holder receives a dividend he must ascertain that proportion of the profit of the company which has accrued on its interest-bearing accounts. Then a similar proportion from his own dividend must be given by him to a person or persons entitled to receive Zakaat.

4. If all the assets of a company are in a liquid form and the company has not yet acquired any fixed assets or any stock for trade, then the sale and purchase of shares must be on their par value only.

I understand the points 1-3 but point 4 is not clear for me. The 'assets' for starting a consultancy are the technical skills of the person as no machinery or equipments are purchased until now. So will it be permissible or not?

Can I join him on equity share basis? That is, if he gets a profit, then he gives me 5% of the profit + return my investment. If he loses, then I get 5% loss in my investment.

:jazak:

[hammadrizwan]

Asalam WR WB

Mufti Taqi Usmani is referring to buying or selling of the shares if the 'assets' (meaning physical) are all still in liquid form (cash or equivalents) of a joint-stock company. If nothing has been purchased with the monies as of yet, then the shares can only be sold at par value with no premium or discount being offered (otherwise you would be selling money at an increase or decrease).

What that means is for example you invested 100K with your friend as an equity investor at 100 shares at 1K each. Tomorrow I decide to join the company as an investor, your shares can only be sold at the value of 1,000 per share [since all the money is still in liquid form]. If however, you've purchased equipments/stock/etc. then there can be a variance in the price (due to the purchased items, which could price the shares higher or lower than1K) since the business has already completed some functions.

Hope that helps.

I used to be in the industry... ;)


:salam:

A friend of mine intends to start a consultancy. A consultancy provides services, training, software/hardware development etc.
He does not have enough resources so he asked me if I can invest some money and become a sleeping partner.

I want to know whether it will be permissible for me to join him?

Mufti Taqi Uthmani sb says: http://albalagh.net/qa/stocks.shtml


I understand the points 1-3 but point 4 is not clear for me. The 'assets' for starting a consultancy are the technical skills of the person as no machinery or equipments are purchased until now. So will it be permissible or not?

Can I join him on equity share basis? That is, if he gets a profit, then he gives me 5% of the profit + return my investment. If he loses, then I get 5% loss in my investment.

:jazak:

[~ ibnAdam ~]

JazakAllah khair for the reply. But since I am not familiar with all the business terms and process, can you please explain this part again?

What that means is for example you invested 100K with your friend as an equity investor at 100 shares at 1K each. Tomorrow I decide to join the company as an investor, your shares can only be sold at the value of 1,000 per share [since all the money is still in liquid form]. If however, you've purchased equipments/etc. then there can be a variance in the price (due to the purchased items, which could price the shares higher or lower than1K) since the business has already completed some functions.

Suppose he has 90k and I invest 10k. He intends to buy equipment for 50k and give training or provide other services for 80k. So out of 100k that he had initially, he spent 50k and gained 80k in 3 months. Now he has 130k. Can I get 10% of 30k (profit) + my investment of 10k back from him after 3 months?

[~ ibnAdam ~]

If the above is permissible, then is there any rule that profit/loss share percentage should be equal to the initial investment percentage? For example, in the above scenario, if my initial investment is 10% then I must get 10% share in profit/loss or can it be fixed at 5% or 15%?

[yousufs]

Suppose he has 90k and I invest 10k. He intends to buy equipment for 50k and give training or provide other services for 80k. So out of 100k that he had initially, he spent 50k and gained 80k in 3 months. Now he has 130k. Can I get 10% of 30k (profit) + my investment of 10k back from him after 3 months?

If the above is permissible, then is there any rule that profit/loss share percentage should be equal to the initial investment percentage? For example, in the above scenario, if my initial investment is 10% then I must get 10% share in profit/loss or can it be fixed at 5% or 15%?


Assalamu Alaikum.

Yes you can get 10% of total profit (30k) after 3 months, if profit is calculated and distributed after 3 months. Also you can get your investment back if you have done the deal that way (that the partnership will end after 3 months). If not, you will need your partner's consent to end the partnership and pull your investment back.

The rule for profit and loss in a partnership business is as following :

1. Loss will be always according to investment proportion. (In this scenario, 10%.) Even if the profit distribution ratio is more or less than the investment ratio.
2. Profit can be more than investment proportion, if the partner is a working partner. For a sleeping partner, profit proportion can't exceed investment proportion.
3. Profit = Revenue - Expense. So no share can be allocated in revenue or in expense. All shares should be in profit, which is alright in this scenario.
4. Profit allocation should be described as a percentage of profit (Revenue-expense). Not percentage of investment. Also not in actual number.
For example, we can make deal as : 10% of profit. Not 10% of investment. Also not $1,000 every $10,000. Also not $1,000 from profit.

Hope this answers your question. Jazakallah.