5 Important Points to Remember before Entering a Business Partnership in Indonesia

5 Important Points to Remember before Entering a Business Partnership in Indonesia

  • InCorp Editorial Team
  • 14 October 2024
  • 6 reading time

Have you ever wondered why big or small businesses form strategic partnerships in Indonesia? It has been evident that finding a good business partner in Indonesia will not only increase the bottom line but also expand your network and open the door to many opportunities.

However, not all business partnerships in Indonesia work out as planned. Some companies have faced all sorts of minor or major problems when they work with business partners who fail to bring anything to the table.

Therefore, before you seal a deal with a business partner in Indonesia, consider the five important points discussed below.

How to Start a Business in Indonesia as a Foreigner

Establishing a business in a foreign country can be both thrilling and challenging. Indonesia presents promising opportunities for foreign entrepreneurs.

If you’re considering entering the market, follow these detailed steps on how to register a company in Indonesia as a foreigner.

Conduct Market Research

Conducting thorough market research is essential before establishing your business in Indonesia. This includes identifying market gaps, understanding local consumer preferences, and analyzing your competitors.

With this information, you can create a solid business plan that explains your objectives, target market, value proposition, and revenue projections. A well-defined plan guides your actions and demonstrates your commitment to Indonesian authorities.

Select the Right Business Structure

Selecting the appropriate business structure is vital. As a foreigner, you may choose a Limited Liability Company (PT PMA Indonesia), allowing foreign ownership.

Collaborate with a legal consultant to choose the best structure for your company. Register your business name and get a tax identification number (NPWP).

Capital and Investment Requirement

Indonesia mandates a minimum capital requirement for foreign-owned businesses. Prepare the funds and deposit them in a local bank account to comply.

Your investment plan should align with the Indonesian Ministry of Investment/BKPM regulations. Arrange financial statements and a feasibility study to showcase your business’s viability as a foreign-owned company in Indonesia.

Get Required Licenses and Permits

Navigating Indonesia’s regulatory landscape requires acquiring the appropriate licenses and permits. Work closely with legal experts to secure approvals from the proper authorities, such as the BKPM and local government agencies. Key permits include the Business License (Izin Usaha) and the Location Permit (Izin Lokasi).

Visas and Employment

You must adhere to Indonesia’s labor laws if your business involves hiring local employees or expatriates, such as:

  • Secure the work permits and visas for your foreign employees.
  • Consider partnering with a professional employer organization (PEO) to simplify employment.
  • Ensure compliance with employment regulations.

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Types of Foreign Business Presence in Indonesia

Foreign businesses looking to start a presence in Indonesia have two main options:

  1. Establishing a New PT PMA (Limited Liability Company with Foreign Ownership): This process involves creating a deed of establishment that includes the company’s articles of association and securing approval from the Ministry of Law and Human Rights (MOLHR) through the Online Single Submission (OSS) system.
  2. Acquiring an Existing PT PMA: This option necessitates conducting due diligence to evaluate the company’s financial and legal status before the acquisition, followed by registration with the OSS system.

The Benefit of Doing Business Partnership in Indonesia

Indonesia offers a compelling investment environment due to several key factors. Here are some reasons why doing business partnerships in Indonesia could be profitable and sustainable for your business.

  • Low Labor Costs: A large workforce and competitive wages make Indonesia an attractive destination for businesses seeking to reduce operational expenses.
  • Favorable Trade Agreements: The Regional Comprehensive Economic Partnership (RCEP) and the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) provide significant advantages for companies operating in the Indonesian market.
  • Investment Incentives: Tax breaks, fiscal benefits, and special economic zones encourage foreign investment.
  • Abundant Natural Resources: Indonesia’s rich resources offer a competitive advantage to production industries.
  • Ease of Doing Business: Government reforms have simplified the business registration process.
  • Technology Transfer: Foreign investment often brings advanced technologies to Indonesia.
  • Land Ownership: Foreign companies can own land under building rights titles.

What to Know Before Entering a Partnership in Indonesia

Before venturing into a partnership venture, it’s essential to carefully consider the legal framework, cultural factors, and potential challenges that may arise.

1. Prepare in Advance

Both parties should prepare a framework before establishing business operations with their partners. This framework should include details on financing options, financial responsibilities, profit sharing, and other issues, providing a clear example of a business partnership in Indonesia.

Money is important in this partnership, so you must be meticulous and precise on financial issues upfront. This can prevent the fallout from a business partnership.

2. Ensure You Are Ready for a Long-term Commitment

The best business partnership is not for the faint-hearted. It is a long-term commitment for all partners, just like marriage. If this is not something that you see yourself in for the next five or ten years, you should probably give up the thought of forming a business partnership.

This is because breaking up with a business partner in Indonesia is costly when you have a contract that holds all parties responsible legally. Dissolving a partnership in Indonesia takes significant money, time, and other resources.

Therefore, working with a business partner in Indonesia with whom you can best have a long-term relationship.

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3. Communicate Clearly

Effective and clear communication is pivotal for you and your business partner to thrive together. Sometimes, it may be challenging to agree on everything.

However, effective, two-way communication allows partners to understand each other’s viewpoints. This mutual understanding enables both parties to achieve shared business goals.

4. Conduct Due Diligence

Many business owners overlook the importance of conducting due diligence on their business partners in Indonesia. Due diligence is a deep screening and investigation of the partnering individuals or organizations.

Due diligence is imperative before signing a contract or establishing a partnership. You should assess the credibility of the company or business partner in Indonesia with whom you want to collaborate.

5. Prepare a Partnership Agreement

All partnerships in Indonesia require a partnership agreement, and working with a business partner without a partnership agreement is considered illegal in Indonesia.

Furthermore, a partnership agreement is one of the critical factors to its success because it guides how this partnership operates.

It outlines all terms, responsibilities, rights, regulations, ownership percentage, capital contribution, profit percentage, and dispute resolutions that serve both parties and prevent future legal complications.

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Seamless Business Partnerships in Indonesia with InCorp

Entering into a business partnership in Indonesia can be both rewarding and challenging. Our extensive experience meets your investment and regulatory compliance objectives.

To ensure a successful collaboration, InCorp is dedicated to providing you with the essential support you need with:

Fill out the form below to ensure your partnership thrives 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.