Partnership Indonesia: Top 5 Mistakes You Must Avoid

Top 5 Mistakes to Avoid When Forming a Business Partnership in Indonesia

  • InCorp Editorial Team
  • 16 October 2024
  • 8 reading time

Many entrepreneurs who have been doing business in Indonesia for some time may need a partner at some point. Most of them feel they could be happier with their trajectory, even if they have achieved moderate success. Some feel stalled and think that their businesses are not going anywhere. That’s why you should consider a partnership in Indonesia.

Therefore, partnering in Indonesia can be an excellent way to take your business to a new height. Of course, the right business partnership can be very profitable and satisfying. On the other hand, the wrong one can strain your business and your relationship with that partner.

Strategies for Building a Successful Partnership in Indonesia

Establishing the best partnership in Indonesia offers immense opportunities but is challenging.

Here are five key steps to consider before entering into a partnership to help you navigate the complexities of business in Indonesia.

Prepare Thoroughly in Advance

Before launching your business operations with a partner, both parties should work together to develop a comprehensive framework. This should detail financing options, financial responsibilities, profit-sharing arrangements, and other vital elements.

Financial clarity can help prevent misunderstandings and conflicts, reducing the chances of a business partnership breakdown.

Be Ready for a Long-Term Commitment

A business partnership is a long-term commitment, much like marriage. If you don’t envision yourself in the partnership for the next five to ten years, it might be better to reconsider.

Ending a business partnership in Indonesia, especially with a legally binding contract, can be costly and time-consuming. Dissolving the partnership requires significant resources. Therefore, partnering with someone you foresee working with for many years is crucial.

Prioritize Clear Communication

Effective and transparent communication is important for the success of any partnership. While you may not always agree on every issue, fostering open, two-way communication helps both partners understand each other’s perspectives. This mutual understanding is key to achieving shared business goals.

Conduct Due Diligence

Many business owners must pay more attention to performing due diligence on their potential partners. This process includes conducting a thorough investigation and screening of the individual or organization with whom you plan to partner.

Due diligence is important before signing any contracts to assess the credibility of your potential partner in Indonesia. It helps protect you from possible risks and ensures you’re partnering with a reliable and trustworthy entity.

Draft a Comprehensive Partnership Agreement

Formal partnership agreements in Indonesia are recommended and a legal requirement. Operating without one is illegal and can expose you to legal issues.

A partnership agreement is critical to a successful partnership as it outlines how the business will operate. It should include the terms of the partnership, the responsibilities and rights of each party, ownership percentages, capital contributions, profit-sharing arrangements, and dispute-resolution procedures to prevent future complications.

Benefits of Doing Partnership in Indonesia

The most recognized types of partnerships in Indonesia are Sole Proprietorships (Perusahaan Perorangan), Limited Partnerships, and Firms (FA).

Starting a business partnership in Indonesia presents many opportunities for foreign investors. Whether you’re seeking the best partnership or investment, the country offers several advantages to help companies to thrive.

Low Labor Costs

Low labor cost is a key attraction for investors starting a business in Indonesia. Like many developing countries, Indonesia has a large workforce with lower wage rates than developed nations.

This allows companies to operate at a lower cost, making it an appealing destination for foreign investors to grow their businesses.

Trade Agreements

Indonesia offers trading companies opportunities thanks to several trade agreements. Notable agreements include the Regional Comprehensive Economic Partnership (RCEP), which provides for ASEAN countries, China, Japan, Australia, and more, and the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

Investment Incentives

Indonesia offers various investment incentives to attract businesses. These include reducing the corporate tax rate from 25% to 22% and fiscal benefits such as zero-rated VAT in some areas. Additionally, 13 special economic zones offer more favorable conditions for investors, making Indonesia an attractive business destination.

Abundant Natural Resources

Indonesia is rich in natural resources, providing an essential advantage for businesses, especially in production industries. Many developed countries choose to invest in Indonesia to access these raw materials without needing to import them from elsewhere, reducing both time and costs.

Ease of Starting a Business

According to the World Bank, Indonesia ranks 73rd out of 190 countries for ease of doing business. The government has simplified business registration and offers strong support for foreign investors. For example, the Online Single Submission (OSS) system streamlines obtaining a Business Identification Number (NIB).

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Technology Transfer Royalties

Foreign investment in Indonesia often leads to technology transfer, where advanced technologies from developed countries are brought to Indonesia. This benefits investors and the local market, accelerating development while creating financial gains from technology use.

Foreign Land Ownership

Foreign investors in Indonesia can own land under the Building Rights Title (HGB) through a foreign-owned company (PT PMA). This legal protection allows foreign businesses to build on the land and earn income from selling or renting properties.

5 Business Partnership Mistakes in Indonesia

A partnership is a long-term strategy; to ensure its success, you must avoid these five mistakes. By learning from these examples of partnership mistakes in Indonesia, you can better navigate potential challenges and create a strong, sustainable collaboration.

One of the businesses’ biggest mistakes is needing the proper legal structure for their partnership.

Choosing the proper partnerships is how you start a business; otherwise, you waste valuable time and money. Limited and general partnerships are the two common legal partnership structures in Indonesia.

Often, entrepreneurs who start a business together opt for a general partnership over a limited one due to its easy setup and more straightforward structure.

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2. You Lack Shared Vision

The excitement of starting a business together can sometimes make you overlook your compatibility with your partner. You and your partner may have different business goals and visions.

Always communicate or over-communicate with your prospective partner to understand that you are on the same page.

Constant communication about how a business decision is handled and what business goals to achieve is the key to moving forward in any partnership in Indonesia. If you find out that the partner is not the right fit, don’t even start.

When starting a business with a partner, you may encounter many challenges related to entity formation, intellectual property protection, loans and financing, contract specificity, and other legal obligations and liabilities.

Therefore, seeking legal advice before and during partnership formation is extremely important. A professional legal consultant can provide valuable resources and support that can help mitigate partnership risk and ensure future business success.

While many business owners prefer to invest in marketing and product development, hiring a legal advisor should not be an afterthought.

The sooner you employ the assistance of a legal consultant, the more you can save money and headaches down the road.

4. You Skip the Written Contract

Another mistake is that a business owner can fail to implement a partnership contract or agreement. No matter how good your relationship with your partner may be, it may be a disaster if you don’t establish agreements and systems.

Drafting a written agreement before commencing a partnership in Indonesia clarifies the parameters of this professional relationship. It helps your business reap the most benefits from the capital and combined skills.

5. You Don’t Adopt an Exit Strategy

An exit strategy is important, but many business owners must implement it. Most entrepreneurs quit a business because of business failure, partnership failure, burnout, and even boredom with the company. Therefore, it pays a great deal to plan your exit strategy.

The right exit strategy can protect your rights and wealth and avoid legal disputes.

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Build a Strong Partnership in Indonesia with InCorp

Entering a business partnership in Indonesia requires a solid legal foundation to ensure long-term success. Whether launching a startup or managing an established company, having a well-drafted partnership agreement is essential to protect your business and minimize risks.

At InCorp, we offer expert guidance tailored to your unique business needs. Our team can assist you with:

Fill out the form below to safeguard your business and ensure a smooth partnership experience in Indonesia.

Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

Get in touch with us.

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Frequent Asked Questions

There are three things business owners need to consider before setting up a business in Indonesia: the type of business entity, capital requirements, and regulations.

Indonesian regulations separate local companies from foreign companies. Generally, foreign-owned companies (PT PMA) have more limitations than their local counterparts (Local PT). However, to pursue more foreign direct investment in the country, the government has taken several bold initiatives to increase the ease of doing business and provide numerous attractive incentives for foreign investors.

There are two main types, namely, primary business licenses and non-primary business licenses. The primary ones commonly apply to various industries, such as general and industrial business licenses. Additional non-primary ones are included, depending on the operations of your business. Examples of non-primary business licenses are operational and commercial licenses.

Yes, you must apply for it to be able to issue work permits for your foreign employees. This permanent business license is also a prerequisite for the applications for other business licenses and import licenses.