Abdullah had an idea for a technology product. Abdullah (Mumbai) gave the idea to John (Europe).
Daniel loved the idea and proposed to form a company on 50-50% partnership basis in Europe named ABC Pvt Ltd.
The product Idea will need some research (under the supervision of John), the cost of which will be funded by a Third Party Investor.
The funding recieved will also be utilisied by John for carrying out Legal work & marketing activities.
The developed product will be patented and then the licence to manufacture will be given to another company for an upfront fee. Additionally, every unit of the product sold will generate a commission (profit) for ABC Pvt. Ltd.
Forming a company under these conditions, the profit sharing will be 40% for the investor, and the remaining will be shared equally between Abdullah & John.
Is it permissible for Abdullah to form a company in such a manner?
Is it permissible under Shariah laws to licence the product for an upfront fee, & commission on per unit sodl thereafter??
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuhu
We understand that you developed an idea for a technological product. You proposed the idea to Daniel who proposed to form a company on 50/50% partnership basis. The product will be developed and supervised by John. The company will be funded by a third party investor. The investor will receive 40% while you and John will share the remainder of the profit. The product will be patented and the license sold to another company. Moreover every unit sold will generate commission for the company.
We understand that you intend to launch a joint venture with your partner for the development of a technological product. You and your partners will jointly develop the product while the investor will contribute the capital to fund the proposed project.
You, Abdullah state that the company will be formed on a 50/50% percentage basis between yourself and Daniel while the profit share will be 40% to the investor and 60% for you and John. In principle, the shareholding is different from the profit sharing structure as we understand. Shareholding in the company constitutes proportionate ownership of the underlying asset which is the technological product. In principle, the partners in a partnership agreement share in both the profits and ownership of the business assets. The profits realized must be linked to a tangible asset. They simply cannot buy a right to share in profits rather they should receive direct ownership of the underlying business asset. Therefore we advise for the investor and John to be also issued with shareholding in the company based on mutual agreement and capital contribution. All the partners must contribute some form of capital in exchange of receiving ownership in the company.
According to Shariah, this type of partnership is termed as Musharakah. Therefore all the rules and laws of Musharakah will govern this partnership.
Musharakah is a partnership wherein two or more partners contributes investment capital to the partnership. The partners are referred to as Shareek.
In a Musharakah partnership, a fixed profit ratio/percentage may be fixed. For example, partner A receives 60% of the profits while partner B receives 40% of the profits. However, a fixed amount cannot be fixed nor can a percentage on the capital investment be fixed.
All losses will be based on capital contribution.
With regards to your last question, it is permissible to sell the license for a fixed fee. However it is impermissible to receive commission for ongoing sales as your company did not actively promote the sale of the units.
And Allah Ta’āla Knows Best
Checked and Approved,
Mufti Ebrahim Desai.