Understanding Partnership and Sole Proprietorship in Indonesia
The Business Advantage in Indonesia Lies in the Simplicity of Its Entities
The most common form of business partnership in Indonesia is the Sole Proprietorship (Perusahaan Perorangan), Limited Partnership and Firma (FA).
This guide aims to explore the advantages and disadvantages of each partnership entity. Familiarising yourself with their workings will help you decide if a partnership is the best option for your business.
Most business entities in Indonesia are separate entities. They do not allow transactions of the business to be tied with the owner or even other businesses in general. Any transactions associated with the business must have separate records kept.
Sole Proprietorship in Indonesia
This is the simplest form of business that you can set up in Indonesia. Although run by one person, ownership can easily be transferred anytime. Meaning if you have a partner whom you would like to hand over the business to, you can.
The biggest advantage is that this entity can be set up without any specific requirements or provisions. It quite is easy to set up and dissolve compared to other entities, and you get to determine your own capital. As the sole owner, you enjoy all the benefits. In general, this entity has small capital, limited types and quantities of production, have a small workers/labour force and use of simple technology production equipment.
Examples of this entity are small businesses or SMEs (Small and Medium Enterprises) such as workshops, laundry, beauty salons, restaurants, computer and internet rentals, grocery stores.
The drawbacks are that you potentially earn less than other bigger entities. As the owner, you are also obliged to bear the risks and losses.
The Limited Liability Partnership in Indonesia
This entity is also called the Commanditaire Vennootschap (CV). This partnership is established by one or several partners. They must be Indonesian citizens, and this applies to both active or sleeping partners.
A sleeping partner is a silent partner. Sometimes, it is called a passive partner. They only invest in the business operations but don’t interfere with the daily management of the business activities. This partner’s profit will depend on how much capital they invest and so will their losses. The sleeping partner is exposed to less vulnerability than the active partner.
An active partner is a general partner. They are leaders in the business and take full responsibility for the company. This includes any assets and liabilities. They control the operations and have a right to participate in third-party business activities too.
The CV is easy to establish and easy to get a loan in Indonesia. This entity has greater credibility and higher expansion potential. They also have a larger capital at their disposal with several partners.
The drawbacks of this entity include an uncertain survival and possible unfair responsibilities among partners. Withdrawing your capital could also be harder than expected.
Types of CVs
In its development, there are several forms of the limited partnership. The first is a pure community partnership. In this simplest form, there is only one complementary pesero and several limited pesero.
The second form is a mixed partnership. This form usually occurs in firm alliances that are in need of additional capital. Those who want to provide additional capital act as limited partners. While the pesero firm will automatically become a complementary pesero.
Whereas the third form of CV is a partnership of limited understanding. In this form, the company issues share with the aim of facilitating the withdrawal of paid-in capital. Each complementary and limited partnership holds these non-tradable shares.
Referring to the Law on General Provisions on Taxation which states that the entity as a tax subject is a group of people or capital that is an entity both doing business and not doing business that includes a limited liability company, limited liability company, other corporation, a state-owned or regional business entity with the name and in whatever form, firms, partnerships, cooperatives, pension funds, associations, associations, foundations, mass organizations, socio-political organizations, or similar organizations, institutions, permanent establishments and other forms of agency.
From the definition of the entity above it is clear that limited partnership in Indonesia is included in the subject of taxation. So, in general, the CV is also obliged to register to get a TIN or Taxpayer Identification Number (NPWP) as a limited liability company.
The CV Dissolution
Since essentially a limited partnership is a civil alliance, the end of a limited partnership is the same as a civil alliance regulated in Articles Civil Code.
Article 1646 of the Civil Code states that there are at least 4 things that cause the alliance to end, namely, the lapse of the time period of the partnership agreement, the destruction of the goods or the completion of the act which is the subject of the alliance, the will of the allies, and if one of the allies dies or is put under the possession or declared bankruptcy.
The Firma (FA) Business Partnership in Indonesia
Firma quite literally translates to a trade union. It is a cooperative type of business entity. Two or more Indonesians can establish this with a business name commonly used in the commercial field.
To form the FA, you will need an agreement deed that must be witnessed by the notary. The responsibilities of the business must be evenly distributed between partners. All involved partners have a right to represent the company and make decisions.
The advantages with this entity include the higher capital with more than one partner involved. The validity of this entity is also permanent, and they have the possibility of expanding in the future. Each staff in the business can be categorised based on their skills and expertise.
Every ‘partner’ who is authorized to manage the FA (also known as ‘executive partner’) can act directly (without the approval/knowledge of other management allies) on behalf of the FA. Whereas internally, responsibility towards third parties is jointly borne by all partners including ‘non-management allies’, unless the management allies have acted outside of interests or authorities based on the provisions of the articles of association and/or applicable law. In addition, it is important to take note that a FA is considered according to law to have ‘own wealth’ which must be released from ‘allied wealth’.
However, the disadvantage is that no new business partners can join without the consent of the existing partners. Any internal conflict is a potential threat to the survival of the business. Every partner is responsible for paying any unpaid debt the company has.
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