Q&A: Partnership Agreement


Monday, 15 October 2007 12:42

Question: I have been offered a partnership in a business under the following conditions:

(a) I will invest a sum of R50 000.00.
(b) My share of profits will be 10 % of the amount I have invested.
(c) If there is a loss, I will not receive any profits.
(d) Should I wish to terminate the partnership, the capital that I invested will be returned. Please advise whether these conditions are correct. If they are incorrect, what will the correct procedure be?

Answer: The conditions that you have outlined make the deal purely an interest transaction. It is thus haraam to enter into such a “partnership”.

Some basic conditions of a partnership and the correct procedure thereof are as follows:

ΠAll partners must invest capital into the business. For instance, Zaid and Yusuf form a partnership. Zaid invests R10 000,00. Yusuf will not invest capital but will run the business. Both will own the business equally and share the profits in equal proportions. This is incorrect. Both must invest capital as well, even though Yusuf invests only R500. However, every partner must invest some capital.


You may be sold a specific share in the business for the amount you wish to invest. For instance, you buy 20% of the business for R50 000. The price paid for the share is always fixed by mutual agreement. The net worth of the business or its market value, etc., can be used as a guide, though it is not necessary to make these figures the basis of the price. Once you have purchased 20% for R50 000.00, you will own 20% of the business in its entirety. You now own 20% of every asset in the business —– 20% of the stock, fixtures and fittings, vehicles, stationery and even the doormat.

Ž The share of profits must be determined as a percentage of the actual profits earned. It cannot be fixed in any other way. It is also not necessary that the percentage of profits must be in proportion to the share owned. In the above example you own 20%. However, it could be mutually agreed that you will take 40% of the profits. This is in order. Thus if the net profit at the end of the year was R100 000.00 you will take R40 000.00, though you own only 20% of the business. If R10 was earned, you will take R4 only.


-Any losses incurred will be shared in proportion to the ownership. If a net loss of R100 000 is incurred, you will be liable for 20 % of this amount.

-If the business is sold to a third party or dissolved, you will take 20% of the proceeds. For example, if one week after purchasing the said share the business was sold for one million rands, you will take two hundred thousand rands. If, Allah forbid, the business is destroyed in a disaster and whatever remains is sold for R1000, you will take only R200. The rest of your capital has been lost.

-If the partnership is terminated by any one partner selling off his share to the remaining partners, the price of the share will be determined in exactly the same way as when it is sold to an outside party – by mutual consent. The net asset value or the market value can be used as a benchmark if the parties wish to do so. However, the price will be fixed by mutual consent, whether it is much below market value or far more than it.

These are just some of the basic aspects pertaining to partnerships. One should however always consult an experienced Aalim and discuss the details of the transaction. The problems often occur in the details which sometimes render the transaction impermissible