Policy #2.

2: Enter Partnerships
Entrepreneurs who want to expand their business through partnerships,
i.e. they must partner with real, live human beings and not through
entities invented by state law. A partnership is an agreement between
two or more specific parties, i.e. one party can't sell their stake to
another party without getting permission from the existing partners.
Consequently, no longer can companies issue stocks (or other equity
instruments) on a public exchange to obtain capital. Such a rule would
also apply to private corporations.
This policy is explored in two posts. The first post explored the impact of
public companies on the economy. This second post explores the
partnership structure as an alternative to stock-based companies.

Part 2: Partnerships as an Antidote to Corporate Power

The Islamic approach to partnerships: The evidence for partnerships
is that Prophet Muhammad (saw) in the following hadith did not object to
the use of the partnership structure when they were asking about buying
merchandise using a mixture of cash and credit:
I and my partner bought something in cash and credit. Al-Bara ibn 'Azib
came to us so we asked him about this. He said: My partner, Zaid ibn AlArqam, and I did the same and we asked the Prophet (saw) about this. He
(saw) said: 'That which is in cash you take, and that which is in credit you
return it back'. [Bukhari]
In another hadith, Prophet Muhammad (saw): The Supreme said I am
the third of the two partners as long as one of them does not betray his
companion. If he betrayed, I would withdraw from them. [Daraqutni]
Both of these evidences show that partnerships are allowed in Islam.
The types of partnerships include:

Al-'Inan or "equal" where partners contribute both capital and labour.

Al-Abdan (bodies) where the two or more people partner on their labour.

Al-Mudharaba (two or more) where one or more parties contribute with

one or more parties that contribute just their labour.

Al-Wujooh (faces) where there are partners in labour or capital, but there
is also a partner in trust, i.e. in the matters of trading, overall business
operations, paying one's debts/bills, etc.

Al-Mufawadha (negotiation) where two partners share in all the types of

companies mentioned before, like a combination between the companies of
'Inan, Abdan, Mudharaba, and Wujooh.

The key, however, is understanding how the partnership rules prevent the
problems with public/private corporations. One of the pillars of contracts
(partnership, marriage, etc.) is that when two parties enter a contract
that they have a valid "offer and acceptance" (in Arabic "ijab and
qabool"). When party A offers partnership to party B, it is only an
agreement between A and B. Party B cannot just sell his share to Party C
without first asking Party A. In a sense, business partnership contracts
should be similar to the way that (normal) marriage contracts work: Billy
who is married to Sally can't sell his contract to Jack without first
divorcing Sally - who then subsequently must agree to marry Jack. The
key is that a partnership contract exists between specific parties defined
in the initial agreement. In contrast, when a company does an initial
public offering anyone can be a partner and they are permitted to sell
their stake to whomever they want.
Other rules include:

Control is defined by the number of bodies, not amount of money:

Unlike corporations, the more shares you have doesn't give you a greater say. In
the Mudharaba contract, the capital owner has all the money and the labour has
none - but both have the same say. It is left to them to negotiate based on their
respective positions as to how they will share the profits. That is, it is still
possible for the partner-in-capital to demand more than half of the profits if the
partner-in-labour agrees.

The loss is absorbed by the capital in the company. Abdurrazzaq

narrated in Al-Jami' from 'Ali (ra): The loss (al-wadhi'a) is upon the capital and
the profit is according to what they stipulated. Consequently, the labourer will
lose their effort but won't be personally liable for the loss.

Partners can't take a salary. The partner-in-labour (badan) can't

mitigate the downside risk by taking a salary; they must only take a share of the
profits. This combined with the previous requirement aligns the interest of the
partner-in-labour with the success of the overall businesses.

No limited liability. Islam is premised on personal accountability for

one's actions in this life and the next. Consequently, the corporate structure
(which limits such liability) is completely alien to Islam. Each partner is
accountable and responsible for the actions of their company. This is not just
debts but also any harm that a person may have done to their employees,
customers or others impacted by their business (aka negative externalities).

How will such partnerships dismantle corporate power? The

amazing thing about partnership structures is that they simultaneously
give an avenue for entrepreneurs to grow their wealth and at the same

time it puts natural limits on how they can grow their wealth. What is
meant by natural is that there is no arbitrary limit as to how big the
company can be in terms of "dollars" (e.g. amount of assets held, annual
revenues it can earn, etc). Instead the size of the company is limited by
how well the partners can come to an agreement on working together
and agreeing on how to move forward.
How do such rules ensure that companies don't dominate the
economy?
It should come as no surprise that today the partners-in-capital dominate
the negotiation when dealing with the entrepreneur or company-founder.
In fact, 4 out of 5 company founders are forced out of their own company
by the owners of capital.
The ease of organizing and dissolving partnerships enables companies to
break up if the partners disagree on how to run the company. Any
partner, labour or capital, can simply exit the company. This will force the
remaining partners to either buy the exiting partner or dissolve the
company and divide up the assets as per the agreement.
In other words, what limits the size of partnerships - and the ability of
owners-in-capital from overwhelming such structures - is that the
partners have equal footing when it comes to establishing the company,
regardless of how much money they have invested in the company.
Digger deeper into the mechanics of start-ups, we can see how such rules
empower the "penniless entrepreneur". The reality of successful
entrepreneurs is that they are driven by passion. Even more interesting
is that this passion may lead the founders of companies to "make
decisions that conflict with the wealth-maximization principle". This can
lead to conflict with the partners-in- capital who are likely to be more
focused on their "return on investment" (ROI). More generally, when
people get together it is inevitable for differences of opinion to emerge
between them. For example, the partner-in-labour (e.g. the founder) may
want to sell the company for less than the other partners or the founders
have differences that emerge over time, such as change in life plans, how
much they want to focus on the business, etc. As venture capitalist Mark
Suster notes in the video, he has to act "as a marriage counselor with
startups who don't get along". In reality, some of these disputes will
require a judge to settle the differences that could force the dissolution
of the company or set the price at which one partner can buy out the
other. This feature highlights two key points:

Partnership structures enable a more entrepreneurial economy: In

contrast to the current Capitalist approach to investing, this approach to
partnerships would elevate the status of the founder (i.e. the entrepreneur) who
can't be pushed out of their own company. Investors will have to work with
entrepreneurs on a more level playing field as they will fear the founder will
simply pull the plug or find other investors to replace them (keeping in mind
there is no other way to invest since there are no treasury bills and no stock
markets). This doesn't mean that entrepreneurs have unlimited leeway as they
will still need to work with partners-in-capital if they want to expand, it just
means they have more options on how they want to shape their business.

Empowering skilled employees to go out on their own: In wellestablished industries (retail, service, etc.) employees move from unskilled
workers to skilled workers. At this point, the worker will have the option to keep
working as an employee or start their own business. For example, if his current
employer wants to keep him, then she may have to make him a partner or let
him go and find other investors to start his own business, depending on how
valuable he is to the current business operations.

Regardless of the scenario, the point is capital doesn't rule the day. The
partner-in-labour can retain their agency and determine the direction of
their involvement in the company.
It should also be noted that the death of one of the partners requires the
contract to be re-written. That is, the heirs of the deceased partner do
not automatically become partners as the surviving partners must have a
valid "offer and acceptance" with the children of the deceased who
themselves may unable to agree and want to liquidate the business and
"cash out". This emphasizes the original point where if a structure,
theoretically, includes say 10,000+ people, it becomes structurally
unstable as it constantly requires reorganizations when one of the
partners dies or one of the partners decides to leave. In other words,
Islam makes it hard for people to assemble mega-companies that
dominate the economy and concentrate wealth in the hands of the few.
What's implicit in the above discussion is that it's a good thing that
companies can't live forever - in contrast to what we're taught in school
about corporations having unlimited life. The ability for people to
reorganize their companies enables for companies to be smaller. This
prevents businesses from taking over not just business but politics as
well and enables such structures to enable distribution of wealth instead
of concentration of wealth.
In summary, the partnership rules in Islam make the human element
indispensable and ensure that business remains a tool within the hands
of people and not make people tools for business.