Companies in Islam

(Read Rules of Trade / Selling Here)
Being a comprehensive way of life, Islam has laid down specific laws for trading and designated various rules for when individuals come together to form a company for business purposes.

Basics of a Corporate or Company

1. The Company (Sharika in Arabic) is an agreement between two or more people to carry out some business to make profit. Sole proprietors (single person company) are also allowed in Islam.
2. The Company & its partners (owners) are one unit, not separate entities. It is their personal wealth which is the capital of the business, and upon this the contract is formed.
3. The profit distribution ratio is agreed in the contract, e.g. 50/50 or 40/60. And it is not linked to the ratio of investment.
4. The loss ratio is fixed to investment ratio. For example, if one person invests 40%, he would bear 40% loss in case it happens.
5. All parties have to abide by the contract; One Party Can Not Make a Change on its Own. Change to terms & condition can only be made by mutual agreement which basically means agreeing upon a new contract.
6. A partner’s liability will not be limited to the amount put in; thus there is no limited liability in Islam. This rule is a huge blessing from Allah. People cannot waste others money and simply walk away, as is common practice in limited liability companies under capitalist system.

Contract- The Foundation of a Corporate:

A corporate is formed when two or more persons agree upon a set of terms & conditions for business. These are then agreed upon by all; hence forming a contract (Aqd in Arabic). This contract has to be correct according to Islamic laws. Take for example, one party offers to setup a business to sell bananas imported from Brazil at a shop by investing equal amount of money and distributing profit equally among two. Other party accepts the offer & joins in, hence a corporation is formed.

Allah Almighty has commanded two simple principals to emphasize the impotence of a contract. These two simple rules eliminate doubts and provide convenience:

1- Write your Contracts:

“O you who believe! When you contract a debt for a fixed period, write it down……………. You should not become weary to write it (your contract), whether it be small or big, for its fixed term, that is more just with Allah; more solid as evidence, and more convenient to prevent doubts among yourselves”. Surah Al Baqarah – 282

2- Take Witnesses:

“And get two witnesses out of your own men……..   ……But take witnesses whenever you make a commercial contract.” Surah Al Baqarah – 282

Areas in which Corporate can Trade:

a- Corporate Can Operate in a Trade that is Beneficial to Society:
Islam allows businesses to deal in permissible areas only. It prohibits trading in haram such as alcohol, and anything that is damaging to the society, be it mentally such pornography or physically such as drugs.

b- Key Utilities Can Not be Used for Private Benefits:

Any commodity that is a basic need such water, gas, electricity & petrol are not allowed to be traded by private business (privatised). Our beloved Prophet Muhammad (SAW) said “Muslims are partners in three things: in water, pastures & fire“. This means that the ownership of key utilities will always remain in the hands of state who will utilize it for the benefit of its citizens only.

In all other sectors of the economy companies can operate freely without any intervention by the state, individuals can come together to fulfil any need in the economy.

Read about types of companies, the differences with current corporate and why preset Share System is not allowed Here in Next Part.