Whether you are a local entrepreneur or a foreign investor, choosing the right legal entity for your business is crucial for success in this exciting and complex market.
Selecting the favorable form of Business entities in Indonesia is a crucial decision that needs a thorough appreciation of several aspects,
such as ownership structure, management control, liability protection, and regulatory compliance. By doing so, you can minimize your risks, optimize your operations, and maximize your opportunities for growth and success in Indonesia’s vibrant and competitive market.
Indonesia is a dynamic and diverse country, with a vibrant and rapidly growing business landscape. However, the Indonesian government has implemented a range of policies to attract foreign investment and promote economic growth, such as tax incentives, streamlined procedures, and investment protection guarantees. These conditions are favourable for entrepreneurs who wish to register a firm in indonesia.
In this guide, we will take a deep dive into the different types of legal entity in Indonesia, their pros and cons, and help you make the right choice for your business.
Multiple types of legal entity in Indonesia
There are several types of legal entity in Indonesia that a business can register as. Each legal entity in Indonesia has its advantages and disadvantages, and choosing the right one for your business depends on your specific needs and goals.
Here is a brief explanation of the different types of business entities in Indonesia:
1. Local Company / Perseroan Terbatas (PT)
PT is also described as a limited liability company, which has been established as a legal person used to manage a business made up of capital shares. The most popular business entities in Indonesia, are due to their low amount of capital required for new businesses and have an easier time setting up when compared with foreign businesses.
A PT company typically consists of 2 shareholders from the local area one director and one commissioner. However, the drawback to a PT business is the fact that it does not allow the amount in foreign-owned shares to be permitted. That means only local entrepreneurs can be able to create this type of company in Indonesia.
The time required to create a PT is about 3-4 weeks. This can be very beneficial for people who want to start a local industry without the intention of involving foreign investors.
The investment minimums range from 3,500 USD to 35,000 USD, 35,000 USD-700,000. USD and more than 700,000 USD for medium, small and large businesses, respectively.
Pros:
- Limited liability protection for shareholders
- Flexibility in terms of shareholding structure and management
- Entry to an extensive span of funding sources
- Recognized and respected by customers, suppliers, and investors
Cons:
- Higher setup and maintenance costs compared to other legal entities
- More complex regulations and reporting requirements
- Limitations on foreign ownership and investment
2. Foreign-owned Company / Penanaman Modal Asing (PMA)
The PT PMA firm is evaluated to be a completely or somewhat foreign-owned LLC that is regulated by the Foreign Capital Investment Law and the authorization of the Capital Investment Coordinating Board (BKPM) is expected before registration.
The primary advantage of incorporating the PT PMA company is that it’s the best legal way for foreign-owned companies to conduct business and earn revenue in Indonesia. But, due to its global position in the market, its initial capital cost will be substantial however it does not apply to all business areas.
The least investment for a PT PMA firm is calculated to be around 700,000 USD and an extended waiting period of 10 weeks to establish. This type of business entities in Indonesia isn’t typically used unless you are an investor from another country or a company that plans to run an operation in Indonesia.
Pros:
- Greater flexibility in terms of ownership and management compared to local companies
- Ability to invest in certain sectors that are restricted to local companies
- Access to a large and growing Indonesian market
- Access to a highly skilled and relatively inexpensive workforce
Cons:
- Higher setup and maintenance costs compared to local companies
- More complex regulations and reporting requirements
- Probable political and financial fluctuation in the nation
3. Representative Office (KPPA)
An office representative (KPPA) is also referred to as a subsidiary from an out-of-country parent which is not a way to help your business generate income.
The goal of setting up any type of company in Indonesia involves conducting market studies to assess the potential of the location for the business and also for corporate communications.
The benefit of establishing the KPPA can be that it does not require a minimum amount of capital needed and it comes with a quick start-up time of just 7 weeks.
KPPA is a good option for companies that want to stay in Indonesia for a KPPA is ideal for foreign companies or investors who aren’t looking to leap into the Indonesian market without conducting an initial study and assessment
Pros:
- Ability to establish a physical presence in Indonesia without the need for a local partner
- Can perform market analysis, establish business networks, and upgrade the parent firm products or assistance in Indonesia
- Lower setup and maintenance costs compared to local companies and PMAs
Cons:
- Cannot engage in revenue-generating activities in Indonesia
- Limited to a specific period of operation, typically 3-5 years
- The limited scope of activities and restricted access to certain markets and sectors
Conclusion
We expect that this article would have offered you valuable knowledge and practical tips for navigating the complex world of legal entities in Indonesia. Indonesia has a vibrant and supportive business ecosystem, with a growing number of startup communities, co-working spaces, and incubators that can provide valuable resources and networks for entrepreneurs.
Eventually, operating as a company in Indonesia has its pros and cons, and it is important to carefully consider before choosing the right type of company in Indonesia
You should consult with a professional expert from Odint Consultancy if you need help choosing the right types of business entities in Indonesia.
FAQ’s
The most familiar types of company in Indonesia is Perseroan Terbatas (PT), a limited liability company.
Yes, foreigners can acquire a company in Indonesia through a foreign-owned company (Penanaman Modal Asing or PMA).
The needs to set up a PT in Indonesia include at least two shareholders, one director, one commissioner, a minimum paid-up capital of IDR 50 million, and registration with the Ministry of Law and Human Rights.
A representative office is limited to conducting market research and promotion activities, while a PMA can engage in revenue-generating activities and own assets in Indonesia.
No, there are restrictions on foreign ownership of PTs in Indonesia. Foreign ownership is limited to a maximum of 100% in certain sectors, while others require local ownership or a joint venture with a local partner.
