The Pros and Cons of Business Entities in Indonesia

Business entities in Indonesia, also known as separate entities, do not allow mixing up transactions related to the business with those of its owners or other businesses.

Transactions associated with the business must be recorded separately, and the performance in terms of profitability and cash flow must be measured independently as well. Doing so requires separate accounting records which exclude the assets and liabilities of individuals or other companies.

The main benefit of running business entities in Indonesia lies in the simplicity of their establishment. An Establishment Deed signed in front of a notary and legalised by Local District Court is sufficient, and no other legal processes are required.

In this article, we present the most common business entities in Indonesia known as Limited Partnership, Firma and Perusahaan Perorangan (Sole Proprietorship).

What is the most prospective business sector in Indonesia? Read here 5 Most Prospective Business Sectors in Indonesia

Limited Liability Partnership

Commanditaire Vennootschap, also known by its acronym CV, is a partnership established by one or several Indonesian citizens, which includes both active and sleeping partners.

Types of Business Partners

Sleeping Partner

Sleeping partners, also known as silent, limited or passive partners, only investin the operation of the company and do not interfere in the managementand business activities.

Their profit is limited depending on the capital they provide as well as theirlosses. Overall, they have less exposure to liability.

Active Partner

Known as general partners, these individuals act as leaders and take full responsibility for a company’s liabilities and assets.

They run the company, have control over the management, operations, use of capital within the company as well as they have the right to agree and participate in business activities with third parties.

Characteristics of CV

Advantages:

Ease of establishment
• Large capital with several partners
• Easy to get a loan
• Greater credibility
• Higher chance of expansion

Disadvantages:

• Difficult to withdraw the deposited capital
• The survival of CV is uncertain
• Possibly unjust responsibilities among partners

Firma (Fa)

Firma, literally known as “trade union”, is often called Firma or Fa. This type of cooperative business entity form is established by two or more Indonesian citizens with a common nameand is usually used in the commercial field such as trading and service business fields.

The founding of a Firma is proceeded by the execution of an agreement deed witnessed by a notary, and the responsibilities are evenly distributed and not limited to each partner.

Each partner has the right to lead and have the authority to represent the company, make decisions and taking risks of losing his or her deposit.

Characteristics of Firma

Advantages:

• The validity of a Firma is permanent
• Higher credibility and opportunity for expansion
• Based on different skills and expertise, staff are categorised into their own division
• Greater financial ability due to large capital

Disadvantages:

• A new partner is not permitted without the consent of every partner
• Internal conflict among partners can threaten the management and survival of the company
• Each partner is responsible for paying off the unpaid debt with their personal property

Sole Proprietorship

Known as a sole trader, individual entrepreneurship or proprietorship, this type of individual company is also called Perusahaan Perorangan in Indonesian.

It is a company owned by one person and thus the simplest business form to be run by entrepreneurs.

Individuals can create this type of entity without specific procedures as there are no special or statutory provisions governing these individual companies and legal distinction between the owner and the business entity.

Characteristics of Sole Proprietorship

Advantages:

• Simplicity of the entity with minimum legal restriction
• Relatively easy to set up and dissolve
• Freedom to determine the minimum amount of capital
• Beneficial for entrepreneurs or start-ups with small capital
• Ownership can be transferred anytime
• The owner is the only one who enjoys the benefits

Disadvantages:

• Usually smaller profits compared to other entities
• The owner is  the only one who is obliged to bear all losses, including his/her personal assets

You might also want to check: FAQ: How to Start a Business in Indonesia

Choosing the right form of business entities in Indonesia is not a decision to be taken lightly. It is important for business owners to make such decision with sound counsel and expert advice from business professionals.

Cekindo can help you in every stage of setting up your company in Indonesia. Contact our teams in Jakarta, Semarang or Bali.