Indonesia is an attractive destination for investors and/or persons looking to expand their businesses or implement non-profit activities. This is due to one crucial and overall factor. Indonesia has a large population of over 270 million people who are mostly in the working-age, representing a substantial market for goods and services. Due to the geographic importance, Indonesia is also subject to non-profit activities such as environmental preservations, aimed at decreasing the global footprints.
Factoring the great potential above, Indonesia has become one of the most preferential destinations to establish business entities. There are 2 (two) types of business entities in Indonesia; Non-Legal and Legal Business Entities. The main difference between the two is, the non-legal entities do not separate the owner's assets from the entity's assets, and the latter separates the owner's and entity's assets (the latter type of business entities ascertains the professionality of the shareholders).
A Legal Business Entity can be established in the form of Limited Liability Company (Perseroan Terbatas/ PT or "Company"), Foundation (Yayasan), Cooperative (Koperasi), or State-owned Enterprise (Badan Usaha Milik Negara or "BUMN"); while a Non-Legal Business Entity can be established in the form of Firm, Limited Partnership (Persekutuan Komanditer or CV), or Civil Partnership (Persekutuan Perdata).
This article discusses the general overview of a Legal Business Entity.
A. Limited Liability Company
Based on Law No. 40 of 2007 on Limited Liability Company ("Company Law"), a Company is defined as a legal entity limited by shares and established under an agreement. The Company conducts its business activities based on an authorized capital wholly consisting of shares or individuals that fulfill the criteria of Micro and Small Businesses as regulated under the laws and regulations regarding Small and Micro Businesses. Under the Company Law, a Company duly established under Indonesian laws must have, at least, minimum of 2 (two) shareholders (Article 7 (1) of Company Law).
It is important to note that the Company Law puts an emphasis on whether a Company is considered as an "incumbent" or a large company, or a Small-and-Micro Enterprise ("SME"). This difference also factors to the source of investment of the relevant company, which is differentiated under the Law of the Republic of Indonesia No. 25 of 2007 on Investment, as lastly amended by Law No. 11 of 2020 on Job Creation ("Investment Law").
- Large Companies: Please be informed that the
Company Law does not per se defines a Company is to be
considered as a "large company". This classification
refers to a company that is not considered as SMEs (please see
number 2 below for further context). In this regard, a Large
Companies are differentiated into:
- Foreign Investment Company (Penanaman Modal Asing or "PMA") or a company that has one or more foreign shareholders as a foreign person/entity, is deemed as a PMA Company. The definition of a PMA Company is still applicable even if one of the foreign shareholders only owns a fraction of the PMA Company's shares. Based on Article 12 of Head of Indonesia Investment Coordinating Board Regulation No. 4 of 2021 on Guideline and Procedure of Risk-Based Business Licensing Service and Investment Facility ("BKPM Reg. 4/2021"), a PMA Company is subject to a minimum capital investment of IDR 10 billion ("PMA Capital Requirement"). The PMA Capital Requirement shall be multiplied if the PMA Company will register more than 1 (one) Indonesia Business Field Classifications (Klasifikasi Baku Lapangan Usaha Indonesia or "KBLI") code and the PMA Company has more than 1 (one) business premises for each of its registered KBLI.
- Domestic Investment Company (Penanaman Modal Dalam Negeri or "PMDN") or a Company that consists of wholly 100% (one hundred percent) of Indonesian local ownership is considered a PMDN Company. On the contrary with the PMA Company, a PMDN is not subject to PMA Capital Requirement, given the whole local shares ownership. A PMDN Company is subject to a minimum capitalization requirement stipulated under Article 32 of Company Law, which is a minimum of IDR 50 million of authorized capital ("Authorized Capital"), with at least 25% of the authorized to be paid-up. Please note that the Authorized Capital under the Company Law is no longer required after the implementation of the Government Regulation No. 8 of 2021 on Authorized Capital, of a Company and the Establishment, Registration, Amendment, and Liquidation of a Company that Fulfils the Criteria for Micro and Small Businesses ("GR 8/2021") is effective (please see below for further context).
- SME: SME categories are stipulated under GR 8/2021. Please be informed that an SME is essentially be considered as a PMDN Company (i.e., only applicable for wholly 100% Indonesian local ownership), yet it is having a specific difference, such as: (i) it can be established by 2 (two) or more founders/shareholder; and (ii) for individual SME, it can be established by only one founder or shareholder (Article 2 of GR 8/2021).
A Foundation is a non-profit entity established for non-profit activities. It is a legal entity for conducting social welfare activities and giving back to the communities. Under Law of the Republic of Indonesia Number 16 of 2001 on Foundation, as amended by Law No. 28 of 2004 ("Foundation Law"), a foundation is defined as a legal entity having separated assets, and intended to achieve certain social, religious, or humanitarian goals.
Under Article 9 paragraph (1) of Foundation Law, a foundation is established by one or more persons who have separated their personal assets as the initial capital for the establishment of the foundation. Government Regulation No. 63 of 2008 on Implementing Regulation of Foundation Law ("GR 63/2008") further regulates that foundations are differentiated depending on the origin of the founders.
In Indonesia there are 2 (two) types of foundations in Indonesia are:
- local foundations, which are founded by Indonesian entities or nationals; and
- foreign foundations, which are founded by foreign entities or nationals.
- The Founder(s): A local foundation is incorporated in Indonesia; has, at least, one founder; and has separated personal assets set as the initial capital of the foundation. All founders must be Indonesian citizens.
- Capital Requirement: Based on Article 6 paragraph (1) of GR 63/2008, a Local Foundation is subject to a minimum initial capital of IDR 10 million.
The two forms of foreign foundation are (a) Foreign Individual Foundation and, (b) Foreign Entity Foundation. Each form has different requirements prior to their establishment. Please refer to the points below on the differences:
- The Founder(s): A Foreign Individual Foundation is established by a foreign individual, while a Foreign Entity Foundation is founded by a foreign legal entity. It could be a limited liability company or cooperative established in a foreign country. Founders of a Foreign Individual Foundation are required to provide a Statement Letter stipulating that the establishment of the foundation in Indonesia will not be detrimental to the Indonesian people.
- Capital Requirement: Under Article 11 points (1) and (2) of GR 63/2008, every Foreign Individual or Foreign Entity Foundation is subject to a minimum initial capital of IDR 100 million. Moreover, the company management of a Foreign Entity Foundation must submit a Statement Letter stating the validity of the assets, which would become the initial capital of the foundation.
In the establishment stage, the foundations must be ratified by the Ministry of Law and Human Rights ("MoLHR") and registered to the Online Single Submission ("OSS") system.
Cooperative is a legal entity established for the peoples' economic movements based on the principle of kinship. Under Law No. 25 of 1992 on Cooperatives, as amended by Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation ("Cooperatives Law"), a cooperative is a legal entity established by individuals or other cooperatives, whose members have separated their assets as the capital to run a business. The business should meet the economic, social, cultural aspirations and shared needs of the members, in accordance with the values and principles of cooperatives.
There are 2 (two) different forms of cooperatives are Primary Cooperatives and Secondary Cooperatives. A Primary Cooperative is established by, at least, 9 (nine) individuals, while a Secondary Cooperative is established by, at least, 3 (three) Primary Cooperatives. Founders of Primary and Secondary Cooperatives would become members of the Cooperative. (Article 6 of Cooperatives Law)
The individuals who can be members or founders of a Primary Cooperative are only local individuals. If a foreign individual intends to become a member, he or she can only to be an extraordinary member. As further regulated under Ministry of Cooperative ("MoC") Regulation No. 9 of 2018 on Implementation and Guidance of Cooperatives ("MoC 9/2018"), the rights of an extraordinary member are:
- the right to speak but not to vote, elect, or be elected as administrator or supervisor;
- the right to receive the remaining proceeds of the operation, as decided in accordance with the decision of the meeting of members.
(Article 18 of Cooperatives Law and Article 61 paragraph (2) of MoC 9/2018)
Since members of a cooperative are also the owners, they are entitled to utilize the services provided by the cooperative (Article 20(2) of Cooperatives Law). In other words, members have limited liability up to the paid-up capital, but they also reap economic benefits from the services provided by the cooperative. For instance, members of a Saving and Loan Cooperative (Koperasi Simpan Pinjam), can deposit their money into the cooperative, which would be circulated as loans to other customers. Additionally, members can also withdraw their money from the cooperative.
D. State-owned Enterprise (Badan Usaha Milik Negara or BUMN)
A BUMN is a Company where the entire or majority of the capital is owned by the state through direct participation from the separated state budget (i.e., the company should be fully, or, at least, 51% owned by the Indonesian government) (Article 1 of Law No. 19 of 2003 on State-owned Enterprises as amended by Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation Law ("BUMN Law"). The operation of BUMNs is supervised by the Minister of State-owned Enterprises ("MoSOE"), who is the formulator and enforcer of policies in the field of state-owned enterprise development.
Given a BUMN is practically a Company, it must comply with the Company Law. However, the establishment of BUMNs has specific requirements compared to that of private companies as stipulated under Government Regulation No. 45 of 2005 on Establishment, Management, Supervision, and Dissolution of BUMN as amended by GR 23 of 2022 ("GR 45/2005"). BUMNs in Indonesia are divided into several business fields, including telecommunication, transportation and tourism infrastructure, trade, insurance, forestry, construction, energy, and other various industries.
Persero BUMN and Perum BUMN
According to Article 9 of BUMN Law, BUMN companies can take the form of Persero or Perum.
Persero BUMNs are established with the objective of providing competitive and profitable goods or services. The establishment is subject to the Company Law. The relevant minister proposes the establishment to the president after a joint review with the relevant minister and the Minister of Finance ("MoF"). The organs of Persero BUMN include the shareholders, Board of Directors ("BoD"), and Board of Commissioners ("BoC") (Article 3 (1) of GR 45/2005).
Unlike Persero BUMN, Perum BUMN focuses on providing services to meet the public needs, in terms of goods or services, rather than pursuing profits. A Perum BUMN is established with a proposal from the relevant minister to the president, along with the basis for consideration after being reviewed by the relevant minister and MoF. The organs of Perum BUMN include the relevant minister, BoD, and Board of Supervisors ("BoS") (Article 3 (2) of GR 45/2005).
There are various vehicles for implementing commercial or non-commercial business activities in Indonesia. For your ease of references to understanding our elaboration, kindly refer to the table below:
|Business Entity||Ownership||Approval||Minimum Capital Requirement and/or Remark|
|PMA Company||consists of 2 (two) Foreign Individuals or Companies (or jointly with Local Individual or Company)||✓||✓||
|PMDN Company||consists of, at least, minimum 1 (one) Local Individual or Company||✓||✓||
|Foreign Individual Foundation||Foreign Individual (or jointly with Local Individual)||✓||✓||Minimum capital of IDR 100 million;|
|Foreign Entity Foundation||Foreign Legal Entity||✓||✓||Minimum capital of IDR 100 million;|
|Local Foundation||Local Individual||✓||✓||Minimum capital of IDR 10 million;|
|BUMN||Indonesian government (51% or full ownership)||✓||✓||No capital requirement;|
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.