101 Complete Guide to Partnership Agreement in Indonesia

Navigating the complexities of establishing a partnership in Indonesia can be daunting, especially for foreign companies entering this market. A well-structured partnership agreement in Indonesia is essential for ensuring a successful collaboration, outlining the roles and responsibilities of each party, and protecting their rights.

What is a Partnership Agreement?

In Indonesia, a partnership agreement is an official contract by law established between parties participating in the partnership. A partnership agreement in Indonesia ensures that all partners communicate clearly and understand.

The contract is not just a verbal agreement. It includes terms and conditions and has to be put down in writing. Partners involved can only alter the agreement unless they reach a mutual consensus regarding the change.

Therefore, a legal partnership agreement in Indonesia is the best way to protect a business and each party’s interests. You should always prepare a partnership agreement when you start a partnership with an individual or a company.

Assistance from a legal consultant or attorney is necessary to ensure that you do not leave out any important details. A legal professional can also help you identify potential risks and issues regarding the terms and conditions.

Why is a Partnership Agreement Important?

Trust is an essential element in partnership. However, people can only predict the future, especially in business. Therefore, a partnership agreement is important for almost every business in Indonesia. Here are some reasons:

• To avoid tax issues
• To prevent legal complications and liability issues
• To work out issues regarding the conflict of interest
• To deal with a partner’s life changes
• To set up every partner’s roles and responsibilities
• To solve disputes

READ MORE:

• 5 Important Points to Remember before Entering a Business Partnership in Indonesia
• A Guide to the Advantages and Disadvantages of Joint Ventures in Indonesia

What is Included in a Partnership Agreement?

The partnership agreement details the terms agreed upon by all partners regarding how the business or project will be operated and managed in a legally binding document. Partners should seek professional assistance to draft clear and detailed guidelines, which should include:

• Name of the partnership
• Names and personal details of the partners
• Responsibilities of each partner, including managerial roles
• Conflict resolution procedures
• Partnership termination procedures
• Term and length of the partnership
• Ownership transfer details
• Share ownership, profit distribution, and loss allocation
• Meeting protocols (how meetings will be conducted, attendees, and voters)

Additionally, the agreement must specify each partner’s capital contributions, ownership proportions, and how disputes will be resolved.

In cases where a partner impedes the business’s growth, the agreement should outline how to handle the situation and remove the partner if necessary.

5 Considerations That Should Be Included in the Partnership Agreement

Here are five considerations that every partnership agreement should include:

Capital Contributions

The agreement should clearly define each partner’s contribution to the partnership and their respective ownership percentage. While cash is the most common contribution form, property, securities, assets, or specific skills can also be considered valid contributions.

Partner Duties

The partnership agreement should clearly outline each partner’s responsibilities to avoid confusion over authority. This includes defining their level of authority, decision-making power, significant management roles, and other duties within the business.

Profit and Loss Allocation

The agreement should determine how profits and losses will be allocated among partners, typically in proportion to their ownership percentage. It should also clarify whether partners can take regular withdrawals (draws) from their share of the profits or if they will receive their total allocation at once, depending on their financial needs.

Liability Acceptance

Depending on the type of partnership, partners may or may not be personally liable for the business’s obligations. This is a critical consideration, as personal assets could be at risk if the company incurs debt or becomes insolvent.

Dispute Resolution

Disagreements are inevitable in any business. The agreement should outline how disputes will be resolved, such as requiring arbitration or mediation before resorting to legal action, to prevent costly and lengthy court battles.

How Do You Prepare a Partnership Agreement?

A partnership agreement ensures all parties understand their roles and responsibilities in the business. Here’s a simplified guide to writing one:

Define the Partnership Structure

Begin by identifying the type of partnership you’re forming. Common options include:

• General Partnership: Partners share responsibilities, profits, and liabilities.
• Limited Liability Partnership: Partners have limited personal liability for business debts.
• Limited Partnership: General partners manage the company and have limitless liability, while limited partners’ liability is restricted to their investments.

Also, include:

• Business name and primary activity
• Type of business entity (individual, LLC, corporation)
• Main office location
• Who can become a partner
• Start date of the partnership

Outline Capital Contributions and Ownership

Clarify what each partner contributes regarding time, money, or assets. You can also assign value to non-monetary contributions if agreed upon. This section should detail each partner’s ownership percentage.

Detail Profit, Loss, and Allocation

Determine how profits and losses will be distributed among partners. Specify:

• Distribution based on capital contributions or ownership percentages
• Whether decisions require unanimous or majority votes
• If partners will receive compensation for services

Set Decision-Making and Management

Establish how the business will operate by covering the following:

• Meeting schedules and voting procedures
• Who will handle the day-to-day management
• Who can sign contracts on behalf of the partnership

Plan for Changes and Contingencies

Prepare for events like a partner’s departure, retirement, or death. Regularly review and update the agreement to reflect changes in the business.

Include Legal Provisions and Finalize

Add legal clauses to protect all partners in case of disputes. Consult a lawyer to ensure the agreement complies with regulations. Once finalized, each partner should sign it.

READ MORE:

• 15 Global Business Expansion Strategies to Consider
• Top 5 Mistakes to Avoid when Forming a Business Partnership in Indonesia

Template for Partnership Agreement in Indonesia

To help guide you through the process, we’ve developed a template for a business partnership agreement that covers key elements and will serve as a solid foundation for building a strong and legally compliant partnership in Indonesia.

• Partnership Name and Purpose
• Term of Partnership
• Capital Contributions
• Ownership and Profit Sharing
• Management and Decision-Making
• Duties and Responsibilities
• Withdrawal, Death, or Incompetency of a Partner
• Admission of New Partners
• Confidentiality and Non-Compete Clauses
• Termination and Dissolution
• Governing Law
• Signatures

Business Partnership Opportunities for Foreigners in Indonesia

Foreign companies looking to establish a business partnership in Indonesia have two main options:

• Establishing a New PT PMA (Limited Liability Company with Foreign Ownership): This process involves creating a deed of establishment, including the company’s articles of association, and securing approval from the Ministry of Law and Human Rights (MOLHR) through the Online Single Submission (OSS) system.
• Acquiring an Existing PT PMA: This option requires conducting due diligence to evaluate the company’s financial and legal status before purchasing it and registering it through the OSS system.

How InCorp Can Assist with Your Partnership Agreement

A well-structured partnership agreement is crucial for any business relationship in Indonesia. It ensures all parties understand their roles, protects their rights, and helps avoid potential disputes.

At InCorp, we have years of experience helping businesses in Indonesia draft tailored partnership agreements based on their unique needs and business models. Our services include:

• Company Registration
• Business Licensing
• Legal Agreement Services

Why Choose InCorp?

• Proven Expertise: We’ve helped numerous companies draft partnership agreements across various industries.
• Tailored Solutions: We customize agreements based on provincial rules and regulations, ensuring compliance wherever your business operates.
• Comprehensive Services: Besides partnership agreements, we offer services for business process outsourcing, immigration consultation, product registration, and more.

Let us help you secure a stable and prosperous partnership. Fill out the form below to discuss your business requirements with our expert legal team.