Definitions of Business Entities in Indonesia

There are several different business entities recognized in Indonesia. These entities differ due to their legal status, composition, purpose, financing, and even membership. To discover what types of business entities exist in Indonesia and to aid you in choosing one which will best serve your needs, here is a short description of various business entities in Indonesia.

PT (limited liability company): a legal entity established under an agreement, which conducts business activities with a capital based entirely of shares.[Article 1(1) of Law No. 1 of 1995]. The wealth of a PT is separated from the wealth of its owners, and the latter holds limited liability; only as much as the stock holds. Profits will be divided among shareholders by means of a dividend depending upon the amount of profit the PT earns.

CV: Commanditaire vennootschap; a partnership created by an individual or several individuals who trust money or goods upon another individuals or other individuals who run an enterprise and act as the leader. It is formed by means of an authentic deed, which is subject to be registered to the Clerk of a State Court where the firm is located and then the deed of establishment must be published in the Additional Official News of the RI. Despite being a business entity, a CV is not a legal entity for lacking in formal acknowledgement from the State in the form of laws.

Koperasi: An enterprise comprised of individuals or a legal entity, basing its activities upon the principles of cooperation as well as a manifestation of the people’s economic movement which is based upon the principle of familial. [Art. 1(1) of Law No. 25 of 1992]. A koperasi is operated based upon the Pancasila and the 1945 Indonesian constitution, and aims to achieve the prosperity of its members, first and foremost, and the society in general. A Koperasi is comprised of a minimum of 20 individuals, and its membership is open and voluntary. It is run democratically, providing a limited reward for investment, and its members are rewarded with the Koperasi’s profit with a share which commensurates with the amount of each of their own contribution.

Foundation: A legal entity encompassing wealth which is separable and is intended to achieve a certain goal in social, religious, and humanitarian areas, which do not have members.[Art 1(1) of Law No. 16 of 2001]. A foundation is comprised of Trustees, Managers, and Supervisors, and it erect a business entity or join one to raise funds for its cause, but the trustees, managers, and supervisors may not monetarily benefit from it.

Firm: a partnership held to run a company under a joint name. [Article 16 of the KUHD]. Not unlike a CV, it is formed by means of an authentic deed, which is subject to be registered to the Clerk of a State Court where the firm is located and then the deed of establishment must be published in the Tambahan Berita Negara RI. The sharing of profit is usually stipulated in its establishment agreement, but one party may not born the entire benefits or losses. If the division of profits and losses has not been agreed upon in advance, then the division is based on the balance of revenues in a fair and balanced manner and allies who contribute by labor only will be equalized with allies who put in the least amount of money or goods.

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Selecting a Business Entity – Think it Through

You’ve decided to form a small business and are worried about liability among other things. The obvious answer is to form a business such as a corporation or limited liability company…or is it?

There is a certain innate momentum that happens with commonly understood concepts. When it comes to starting a business, everything you watch/listen to/read will tell you to form a business entity for tax and liability purposes. Depending on the source, a great amount of bleating will then be undertaken discussing whether the corporation or LLC is the best entity to go with for your business.

You will note I use the word “bleating” in the paragraph above because that is exactly what is occurring. The concept of using a business entity is so engrained in the business mentality that many people form one without really thinking the process through. This can result in catastrophe when things go wrong or the incorrect positioning of an entity when things go right. Let’s consider a simple example.

Why do you incorporate your business? The common answer is to protect you from personal liability should a lawsuit or debt arise from the activities of the business. Nobody can argue with that, right? Not really, but the problem is that argument entirely misses the point in many ways. How so? Well, what if your biggest assets are in the corporation that is getting sued?

Assume I come up with the concept of Google. [I wish.] I form a corporate entity. I am now protected from personal liability for the debts of the business. Lucky me, but what about the really valuable assets? Google has many valuable assets ranging from the name to the servers to the patented advertising systems and so on. Well, guess what? If Google gets sued, all those assets are exposed to the lawsuit. Sure, I get to keep my house, but how will that measure up to the fact I just lost control of the Google search engine? My home will be a nice place for the wake after I throw myself off a bridge somewhere!

Should you form a business entity for your business? Yes. The question is what do you really want it to do. If the business will have a lot of valuable assets, say manufacturing equipment, then just incorporating isn’t really doing much for you because it leaves all that manufacturing equipment exposed. Might not it be better two form one business entity to own all the valuable assets and another entity to lease those assets and carry out the main business idea? Of course.

When it comes to creating an entity strategy for your business, don’t stop at the idea of protecting yourself from the liabilities of the business. Many times, the business assets are far more valuable than anything you own. Take the time to think it through. Try to separate the risk from the value. Once you do, then you will know the entities you need and how to proceed.

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