File129081 A

MASTER THESIS
BUSINESS ORGANIZATIONAL LAW REFORM IN INDONESIA
Name : Fani A. Siregar
ANR : 607227
Master Program : International Business Law
Coordinator : Prof. Erik P.M. Vermeulen
Supervisor : Jing Li, M.Phil., LLM.
Date : June 2012
i
ABSTRACT
Business organizational law reform has been main agenda of legislation in both common and
civil law jurisdiction countries for the last 20 years. The reform is intended to create a
suitable business organizational form for different types of firms, in particular, small and
closely held firms. In an attempt to encourage entrepreneurship environment in Indonesia,
recently, the government of Indonesia issued a proposal to reform its partnership law. A draft
bill has been issued and the consultation is in process. This paper intends to explore whether
or not the regulatory efforts in Indonesia follow the similar pattern with the countries that has
successfully reformed their business organizational law and will create new business form
that is favorable for entrepreneurs to start business. A comparison with regulatory reforms in
the United States, United Kingdom, France, Colombia and Singapore, the jurisdictions that
have been successfully reformed its business organizational law, is made to illustrate the
reform that have been taken by those countries. Further, this paper found that the proposed
regulatory reform in Indonesia took different path from the other countries as it merely
“patching-up” the existing partnership law. Therefore, there is doubt that the reform proposal
on partnership law will be able to achieve its goal.
i
Table of Contents
ABSTRACT .............................................................................................................................. I
1. INTRODUCTION.............................................................................................................. 1
2. BUSINESS ORGANIZATIONAL LAW REFORM: LESSONS FROM OTHER

COUNTRIES ...................................................................................................................... 7
2.1 DETERMINANT FACTORS FOR LAW REFORM ............................................................... 7
2.2 BUSINESS ORGANIZATIONAL LAW REFORM IN OTHER COUNTRIES ............................ 8
2.2.1 United States ................................................................................................8
2.2.2 United Kingdom .........................................................................................12
2.2.3 France ........................................................................................................15
2.2.4 Colombia ....................................................................................................17
2.2.5 Singapore ...................................................................................................18
3. BUSINESS ORGANIZATIONAL FORMS IN INDONESIA ..................................... 25

3.1 OVERVIEW OF BUSINESS ORGANIZATIONAL FORM IN INDONESIA ............................ 25
3.1.1 Private Partnership ....................................................................................26
3.1.2 General Partnership ..................................................................................27
3.1.3 Limited Partnership ...................................................................................29
3.1.4 Corporation................................................................................................31
3.2 RECENT EFFORT TO REFORM THE PARTNERSHIP LAW .............................................. 35
4. ASSESSMENT OF THE PARTNERSHIP LAW REFORM IN INDONESIA ......... 39

4.1 RELUCTANCE TO PROVIDE LIMITED LIABILITY TO THE PARTNERSHIP ...................... 39
4.2 ADMINISTRATIVE BURDEN FOR THE ESTABLISHMENT AND MAINTENANCE OF
PARTNERSHIP ............................................................................................................ 41
4.3 LIMITED DEFAULT RULES ON INTERNAL RELATIONSHIP .......................................... 43
5. CONCLUSION ................................................................................................................ 44
ii
Chapter I
Introduction
For businessmen and common people alike, corporation is, arguably, the most
common business organization forms known to them. This notion seems plausible. Since the
end of nineteenth century large-scale business firms had come to be organized in the form of
corporation1.
Prior to the emergence of corporation, partnership was the dominant form used for
organizing jointly owned business firms2. The idea of partnership is relatively simple and
straightforward. It is a contractual entity that arising from the intent of its individual owners
to carry on a business venture 3 . These individual owners act in two different capacities
toward the firm. First, they act as the capital provider. Second, each of them directly involves
in managing the firm, including representing and binding the firm with third parties4. As the
consequences of the former capacities, each individual owner shall have the right to share
profits resulting from the operation of the firm. While the latter expose each individual owner
to joint and several liabilities for the firm‟s debts and obligations5. The personal character of
partnership makes it enjoy a high degree of contractual flexibility in determining its structure,
internal relationship and operation. Partners in a partnership, for example, have the freedom
to determine who has the representation rights vis-à-vis third parties, how to share the profit
and loss, how to exit and buy-out investment from the partnership. However, this personal
character also bring disadvantages for the partnership, the dissociation of its owners may lead
to dissolution of the firm6.
When the commercial and industrial activities grew, it also created the need for bigger
firms. The firms have to be organized is such a way that it will transcend and survive their
1
Henry Hansmann, Reinier Kraakman, The End of History for Corporate Law, 89 Georgia Law Journal 439,
2000 - 2001.
2
Henry Hansmann, Reinier Kraakman, Richard Squire, The New Business Entities in Evolutionary Perspective,
2005 University of Illinois Law Review, Number 5.
3
Larry E. Ribstein, The Evolving Partnership, 26 J. Corp. L. 819, 2001.
4
William Mitchell, Early Form of Partnership, Select Essay in Anglo-American Legal History, Vol. 3, 1909,
available at http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2086&chapter=
158758&layout=html&Itemid=27
5
Id.
6
Larry E. Ribstein, The Rise of The Uncorporation, Oxford University Press, 2010, p. 158.
1
individual promoters and owners7. Additionally, the firms must possess a feature that can
attract outside investors in order to raise money in the capital market 8. These features were,
indeed, unfulfilled if the firm has been established in form of traditional partnership.
Responding to those issues, business people started to obtain charter from the state and
organize their business firm into the form known today as corporation9.
Corporation was viewed as solution to the above issues. The corporation is mainly
characterized by: legal entity, limited liability, transferable shares, delegated management
and investor ownership10. These characteristics viewed as a respond to the economic needs of
large firms. The law gave the business firm organized as corporation the “entity” status11.
This meant that a chartered corporation was recognized as a distinct legal entity, separate for
any of its owners or managers, for purposes of buying, selling or holding property, of making
contracts, and of suing and being sued12. Further, the status of “entity” allows the owners of
business firm to partition their personal assets from the business firm‟s assets 13 . The
partitioning, in the one hand, allow the owners to have “limited liability”, the owners are not
the personally liable for the debts or liabilities of the business firm14. On the other hand, the
investors of business firm cannot compel dissolution of the business firm to satisfy the claim
of their personal creditor15 or buy his interest16. The dissolution of the business firm can only
be possible if the board of directors and the owners acting as group decided to do so. Thus,
unlike the default rules in traditional partnership, the corporation will remain survive
notwithstanding the exit of its owners. In a large corporation, separation of ownership and
control are deemed inevitable, as it will be very costly for numerous individuals if they were
involved in the daily management of the firm. The management role was designated to a set
of specialists, the managers, to avoid the bureaucratic cost of collective decision-making17.
7
Id, pp. 65-66.
8
Id.
9
Margaret M. Blair, Locking In Capital: What Corporate Law Achieved For Business Organizers In the
Nineteenth Century, 51 UCLA L. REV. 387, 389 (2003), p. 390.
10
Henry Hansmann and Reinier Kraakmann, What is Corporate Law, chapter 1 in The Anatomy of Corporate
Law, Second Edition, Oxford University Press, 2010.
11
Id.
12
Id, pp. 391.
a
14
Id.
15
Hansmann et.al, supra note 13.
16
Ribstein, supra note 6, p. 71.
17
Joseph A. McCahery and Erik P.M. Vermeulen, Corporate Governance of Non-Listed Companies, Oxford
University Press, 2009, p.7.
2
As business forms evolved from traditional partnership to corporation, and so did the
law. As described in the previous section, initially, corporation was the choice of business
form for large firms that demand to attract capital from large number of passive small
investors. Accordingly, conventional wisdom said that corporate law is evolving to suit the
needs of publicly held corporations. In many jurisdictions, corporate law is intended to
reduce the main agency problem that commonly arise in publicly held corporation, namely,
conflicts between individual shareholders and managers18.
The suitability of corporate form for closely held business firms, however, has been
subject to debate. Indeed, many closely held business firms organized themselves as
corporation in order to obtain the protection of limited liability. This choice, however, is not a
voluntary one but rather due to reluctance of government to extend limited liability feature to
other business organizational forms19. The need of closely held corporations are, of course,
different to those of publicly held corporations due to (i) the relatively small number of
shareholders, (ii) no ready market for corporate stock; and (3) substantial (majority)
shareholders participation in the management, direction and operation of the firms20. Certain
agency problems, such as shirking by management, that arise in publicly held corporations
might not be appeared in its counterparts. Easiness of access to limited liability and
contractual freedom for internal governance might be more important for them. Admittedly,
certain jurisdiction, like Germany and France have enacted special legislation to govern
closely held corporation, which became effective on 1892 and 1921 respectively21. However,
it was modelled on public corporation and capital–oriented structure22. The corporate law
consists of many mandatory provisions that maybe suit well for publicly held corporation but
cumbersome and costly for close corporation to apply. The development of corporate law is
in contrast with the fact that the close corporation is outnumbered the publicly held
18
Id, p. 6
19
20
McCahery and Vermeulen, supra note 17, p. 24.
21
Timothy Guinnane, Ron Harris, Naomi R. Lamoreaux, Jean-Laurent Rosenthal, Ownership and Control in the
Entrepreneurial Firm: An International History of Private Limited Company, Center Discussion Paper No. 959,
available at http://ssrn.com/abstract=1071007. The Gesellschaft mit beschränkter Haftung (company with
limited liability, usually abbreviated GmbH) were introduced as a respond to make corporation form available
for small and closely held business firm as opposed to Aktiengesellschaft (AG) which were considered more
suitable for publicly held firm. Similar development occurred in France with the introduction of Société á
responsibilité limitée (SARL).
22
Erik P.M. Vermeulen, The Evolution of Legal Business Forms In Europe and the Unites States, Venture
Capital, Joint Venture and Partnership Structures, Kluwer Law, 2003.
3
corporation23. Pursuant to the data issued by the World Bank in 2004, the close corporation
accounts for more than 55% of registered business and 90 per cent of output in OECD
countries24.
Bearing in minds the above problems with corporate law provisions and convinced by the
importance of small and medium enterprises (SMEs) in economic growth25 lead to the debate
on whether it is necessary to expand the business organizational forms that meet the need of
closely-held business forms. The proponents of the reform pointed out that the new business
organization form must be more varied, less complex and can potentially enhance efficient
outcomes26. This group referred to the success introduction of hybrid business forms, Limited
Liability Company (LLC) and Limited Liability Partnership (LLP) in the United States, as
example of efficient business form for different type of firm including small firms27. The
success story of the U.S. LLC and LLP have not gone unnoticed elsewhere. The United
Kingdom and Singapore, for example, have also enacted the LLP statutes. The law reform to
provide vehicle for closely held business firms, however, is not limited to the creation of new
forms such as the LLC and the LLP. In several jurisdictions, the law reform took place in
corporate law through simplification of requirements of formation and operation for closely
held corporation. This reform also allows closely held corporations to contract for their
internal governance whilst remain enjoy the protection of limited liability.
In case of Indonesia, SMEs‟ role in her economy is undoubtedly important28. It assumes a

significant role in the Indonesian industries as it represents 99.9 per cent of all business units.
In terms of economic contribution, the latest data provided the Ministry of Cooperative and
23
McCahery and Vermeulen, supra note 17, p. 25.
24
Id, citing from Doing Business 2004: Understanding Regulation.
25
Thorsten Beck, Asli Demirguc-Kunt and Ross Levine, SME, Growth and Poverty: Cross-Country Evidence,
available at http://www.tilburguniversity.edu/webwijs/files/center/beck/publications/ obstacles/crosscountry.pdf.
26
Joseph A. McCahery and Erik P.M. Vermeulen, The Evolution of Closely Held Business Forms in Europe,
The Journal of Corporation Law, chapter in The Governance of Close Corporation and Partnership, J.A.
McCahery, Theo Raaijmakers and Erik. P.M. Vermeulen (Eds), Oxford University Press, 2004.
27
Ribstein, supra note 6.
28 In Indonesia, SMEs are grouped into three categories: micro, small and medium. The categorizations are
based on either the total of net assets (excluding land and building) or the total gross revenue generated by a
business in a year. Micro enterprise is a business that has maximum net assets of IDR 50,000,000 (approx. EUR
4,000) or total annual gross revenue of IDR 300,000,000 (approx. EUR 24,000). Small enterprise is a business
that has maximum net assets exceeding IDR 50,000,000 up to maximum amount of IDR 500,000,000 (approx.
EUR 40,000) or total annual gross revenue exceeding IDR 300,000,000 (approx. EUR 24,000) up to maximum
amount of IDR 2,500,000,000 (approx. EUR 200,000). Medium enterprise is a business that has maximum net
assets exceeding IDR 500,000,000 up to maximum amount of IDR 10,000,000 (approx. EUR 400,000) or total
annual gross revenue exceeding IDR 2,500,000,000 (approx. EUR 200,000) up to maximum amount of IDR
10,000,000,000 (approx. EUR 500,000).
4
SME shows that SMEs contributes 56.53 per cent to Gross Domestic Products, 97.3 per cent
to total work force and 8.85 per cent to non-oil and gas exports29.
In order to prepare the existing and future entrepreneur with good business environment, the
Indonesian government considers that it is necessary to provide suitable business vehicle for
small and medium business firms. In Indonesian market place, the business organizational
forms available are confined to sole proprietorships, partnerships and corporations. Until
recently these business organizational forms were regulated largely in the Civil Code and the
Commercial Code. These Codes were first promulgated in 1847 during the Dutch colonial
era. The first reform was made in 1995 by the enactment of Act No. 1 of 1995 regarding
Perseroan Terbatas (Limited Liability Company), which came into force on March 7, 1996
(“Act No. 1). The Act No. 1 replaced twenty-one articles in the Commercial Code. The Act
No. 1 was subsequently replaced by the prevailing regulation, Act No. 40 of 2007 regarding
Perseroan Terbatas (Limited Liability Company) (“Indonesian Company Law”). The
partnerships, however, remains regulated by the provisions of the Civil Code and the
Commercial Code. In 2009, the Indonesian government appointed an expert group to review
and reform the partnership law. The expert group is responsible to prepare a draft
consultation documents as well as draft bill on partnership law. The expert group issued its
first report by the end of 2009. Until today, however, the draft bill is still subject to
discussion and consultation.
With due consideration of the above, the objectives of this research is to discuss the
path of regulatory reforms taken by Indonesia with respect to business organizational form
through a comparison with other countries‟ experience. Whether or not the proposed reform
will create new business forms that possess similar characteristics with those tested forms in
other countries. Therefore, Chapter 2 of this paper shall discuss the business organizational
law reforms taken in the United States, United Kingdom, France, Colombia and Singapore as
response to the needs of providing business vehicle for closely held business firms. The
determinants factors that shape the law reform on business organizational forms as well as
the basic features of the new business forms will be discussed. In this chapter the United
States, United Kingdom and Singapore will be chosen to represent the common-law system
as well as Colombia and France to represent the civil-law system. Chapter three will provide
29
Ministry of Cooperative and Small, Medium Enterprise of the Republic of Indonesia, available at
http://www.depkop.go.id/index.php?option=com_phocadownload&view=file&id=202:perkembangan-data-
usaha-mikro-kecil-menengah-umkm-dan-usaha-besar-ub-tahun-2008-s.d.-2009&Itemid=93
5
insight relating to the existing business forms in Indonesia and recent effort to modernize the
law. Chapter four will analyse and provide possible suggestion that may assist in providing
suitable business organization form for closely held business firm Indonesia. The last chapter
is concluding chapter.
6
Chapter 2
Business Organizational Law Reform: Lessons From Other Countries
2.1 Determinant Factors for Law Reform
In most countries, law making is an interactive process between various parties

responsible to interpret, preserve and develop the law 30 . These parties, which consists of
legislators, judiciaries, practitioners, regulatory agencies, professional groups and legal
scholars create an elite law-making group called “legal formants‟31. Ideally, this interaction
between legal formants shall produce positive outcome in law-making process resulting in
efficient legal rules and institutions32. Professor Vermeulen illustrates the interaction of legal
formants in establishing the rules for closely held business firms as follows, once the
legislators have enacted efficient rules the judiciaries will adjust the rules if economic and
social change renders them obsolete. Further, as the judiciaries may not always be able to
manage the economic and social change, it will turn back to the legislators to update the
rules. The legal scholars play its part by providing advise to the legislators to reform the rules
when they opined that the current rules are no longer appropriate. Hence it is expected that
the rules are, in any events, updated and meet demands33.
In reality, however, the above ideal conditions are rarely occurred. Legislators, in
promulgating rules, are not always considering what it is best to meet the economic and
social needs. As suggested by Professors McCahery and Bratton, legislators may act
opportunistically “when tax revenues, export earnings, jobs, technology or other positive
externalities yielded by the attraction of factors of production also happen to yield
appropriate political benefits, either in the form of electoral advantage, satisfaction of the
demand of favoured interest groups, or the satisfaction incident to enhancing public
welfare”34. The judiciaries are also facing difficulties when they have to keep up with change.
This problem is arguably more obvious in civil law countries as judiciaries are bound to
follow the civil law codes that discourage the judiciaries‟ ability to complement the statutory
30
E.P.M. Vermeulen, supra note 22.
31
Id., citing Rodolfo Sacco, Legal Formants: A Dynamic Approach to Comparative Law, American Journal of
Comparative Law 39, 1-34; 343-402.
32
Id.
33
Id.
34
William Bratton and J.A. McCahery, An Inquiry into the Efficiency of the Limited Liability Company: Of
Theory of Firm and Regulatory Competition, Washington and Lee Law Review 54: 629-686.
7
law35. On the contrary, critics also addressed to the judge-made-law systems of common law
countries, where the highly discretionary natures of judges often viewed as increasing
uncertainty and causing confusion36.
2.2 Business Organizational Law Reform in Other Countries
2.2.1 United States
In order to provide limited liability for closely held business firm, the United States introduce
new form of business organization such as Limited Liability Company (“LLC”) and Limited
Liability Partnership (“LLP”). The name of the LLC may contain the word “company”,
however, this business organization form is not a corporation in its traditional sense. The
LLC and the LLP combine the features of limited liability that previously available only for
corporation with the freedom of contract among the investors and managers that are
traditional to the partnership. As the consequence, scholars are differing in their opinion
whether the LLC and the LLP constitute a continuing development of the corporate form or
of the traditional partnership37. Nevertheless, scholars and commentators agreed that the LLC
and LLP are, fundamentally, a hybrid of the corporate and partnership forms.
The emergence of LLC began in 1977 in Wyoming. History shows that the enactment of the
first LLC statute was a success story of two groups of entrepreneurial individuals pursuing
legal innovations to meet the needs of their clients38. In the late 1960s, Hamilton Brothers Oil
Company was engaged in in international oil exploration activities organized as
unincorporated foreign business entities. These foreign entities, particularly the Panama
limitada, enjoyed partnership taxation39 under the U.S. law and had the protection of limited
35
Vermeulen, supra note 22.
36
Id.
37
Hansmann et.al., argued that the LLC and the LLP are best to understand as part of a continuing development
of the corporate form and the partnership has been evolving into different direction. In their opinion partnership
form will remain useful for situation where the firm‟s assets might not constitute a credible bond vis-à-vis its
creditors. See supra note 2, p. 4. On the other hand, Ribstein argued that the LLC and the LLP were evolving
from partnership with limited liability feature. See supra note 6, pp. 119-132.
38
Susan Pace Hamill, The Story of Limited Liability Company: Combining the Best Features of a Flawed
Business Tax Structure, available at http://ssrn.com/abstract=760471.
39
In the U.S. corporations are subject to double taxation, taxed both at corporate level and shareholder level
(when the profits of the corporation distributed to shareholders as dividend) while the partnerships taxation –
pass-through tax treatment – is based on the assumption that partnerships are mere aggregate of individual
partners who redistribute profit among themselves, hence, taxed on individual level. See Fransisco Reyes and
E.P.M Vermeulen, Company Law, Lawyers and “Legal Innovation”: Common Law versus Civil Law, Lex
8
liability under the applicable foreign law40. In the early 1970s, however, the structure were no
longer suitable due to capital and participation quota limitation as well as the reluctance of
the U.S. court to recognize the protection of foreign based limited liability41. As the result,
the lawyers representing Hamilton Brother Oil Company lobbied the Alaska legislature to
adopt proposal for an innovative business organization form, the LLC 42 . The LLC was
proposed to provide the protection of limited liability on one hand and qualified for
partnerships taxation under the U.S. law. However, the initial legislative efforts in Alaska
were failed. After these failed attempts, the proponents of Alaska LLC Proposal successfully
lobbied the Wyoming legislature to enact the fist LLC statute43.
The initial LLC, however, did not enjoy the taxation benefit of partnership as the Internal
Revenue Service (“IRS”) denied to recognize the Wyoming LLC as a partnership for tax
purpose44. The situation was slightly changed in 1980 when IRS finally issued a private letter
to Hamilton Brothers Oil Company securing the favourable partnership taxation for its
Wyoming LLC45. The uncertainties to secure preferential tax treatment were viewed as the
reason why the LLC was not a popular choice of business organizational form at the
beginning. In fact, until 1988, Florida was the only state other than Wyoming that enacted the
LLC statute in order to attract foreign investors, particularly from Central and South America
albeit it turn out later that the legislation failed to achieve such purpose46.
In 1988, the IRS finally confirmed that the LLC could benefit the partnership taxation
treatment provided that it does not meet at least two of the following criteria, continuity of
life, centralization of management, limited liability and free transferability of interest 47. This
relaxation of tax status became the initial driving force for the enactment of LLC statutes in
other states. In addition, the jurisdictional competition48 and pressures from domestic interest
Research Topics in Corporate Law & Economics Working Paper No. 2011-3, available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1907894.
40
Hamill, supra note 38.
41
Id.
42
Id.
43
Id.
44
Id.
45
46
Id.
47
Ribstein, supra note 6. Vermeulen, Id.
48
In the U.S. firms can choose to incorporate under the rules of one state while doing business or locating assets
in other state(s). This rule applied for all business organizational forms (i.e., general partnership, the LLP, the
LLC and corporation). There are two main reasons that enable the jurisdictional competition. Firstly, the U.S
9
group 49 were also fuelled the spread of LLC statutes 50 across states in the U.S. On 17
December 1996, the IRS issued final regulations, dubbed the “Check-the-Box” regulations
that provide all LLCs and other domestic unincorporated business form are automatically
taxed as partnership as long as they are not publicly traded 51. Around the same time all states
in the U.S. have adopted LLC statutes52.
Following the clarification of LLC taxation status, LLCs have become the popular choice of
business firms in the U.S. As shown in Table 1, the number of LLCs established in Delaware,
a state well known as the preferred destination to form business firms, were outnumbered the
establishment of other business organizational forms even if they are combined together.
It is stated that the rise of the LLC expanded the menu of business form by combining limited
liability, a flexible governance structure and preferential tax treatment53. The LLC has made
it easier for business to organize an entity without cumbersome formation and capital
maintenance rule as well as eliminating numerous administrative formalities that usually
required for establishing a corporation54. Additionally, most the LLC default rules provide
for decentralized management directly by members unless the members themselves agreed to
stipulate otherwise55. The LLC member can also specify the “rules of the game” through
operating agreement that will prevail over its articles of organization in the even of a conflict.
These benefits have been argued as the reason why the LLC are more suitable than
corporation from closely held and small business firms.
Constitution commerce clause guarantees the freedom of trade among states and forbids discrimination against
firms merely because they are incorporated in other U.S. states. Secondly, the ability to conduct interstate
business gives the host states incentives to recognize incorporation states rules. Accordingly, states are in
competition with other states to make their jurisdiction attractive for doing business by, among others, providing
rules that served best to the need of business. See Ribstein, supra note 3.
49
In 1990, Barbara Spudis and Bob Keatinge established sub committees on LLC in the Tax and Business
Section of the American Bar Associations. The sub committees conducted massive effort to promote LLC
through various channels such as assisted state LLC drafting committees, created a working group to produce a
prototype of limited liability company act and actively lobbied the IRS to clarify the taxation rules for LLC. See
50
51
52
Id.
53
54
Id.
55
Id.
10
Table 1. The Market Share of the LLC in Delaware
Business
2005 2006 2007 2008 2009 2010 2011
Organization Forms
Statutory Trust 3,200 3,868 4,449 2,581 1,312 1,263 1,319
LPs/LLPs 8,802 9,948 9,813 7,623 5,488 6,362 7,287
LLCs 87,630 96,831 111,820 81,923 70,274 82,027 93,219
Corporations 34,337 34,733 35,700 29,501 24,955 28,121 31,472
Source: Delaware Division of Corporation, Annual Report 2007, 2010, 2011
The development of LLPs occurred later than the LLCs, in the early 1990s. This development
resemble that of the LLP that is a reform initiated by group of professionals with a direct
economic or personal interest in obtaining some financial benefit for themselves56. In this
case the groups of professionals were Texas lawyers concerned that their personal assets may
be at risk because of negligence or malpractice by other partner(s) over whom they have no
control 57 . At that time, most law firm in Texas were established as general partnership.
Accordingly, consistent with the principle of general partnership, each individual partner is
personally liable for all partnership obligations if the obligations exceed the assets of the
partnership. Following the collapse of Texas‟s bank and saving loan associations in the late
1980s, the U.S. Federal government begun to start the recovery by brought suit against
shareholders, directors and officers of theses failed financial institutions, however, the
recovery rate was considered insufficient 58 . The government then turn to lawyers and
accountants who had represented the failed financial institutions before they collapse and
brought malpractice claim against them, being the reason are these professional usually
protected by substantial malpractice insurance and had numerous wealthy partners 59. Some of
the defendants in these suits, however, were persons who had nothing at all to do with
representation of the various thrift institutions 60 . Facing the possibility to be exposed to
personal liability, the lawyers lobbied the Texas legislature to adopt limited liability
56
Robert W. Hamilton, Professional Partnership in the United States, 26 J. Corp. L. 1047 2000-2011, p. 1055.
57
Robert W. Hamilton, Registered Limited Liability Partnerships: Present at the Birth (Nearly), 66 U. Colo. L.
Rev. 1065 1994-1995, p. 1066.
58
Id, p. 1069.
59
Id, p. 1069.
60
Id, p. 1070.
11
partnership 61 . The original Texas LLP bill modified the principle of partner vicarious
liability by providing limited liability to a partner in professional partnership from another
partner‟s professional errors, omissions, negligence, incompetence or malfeasance62.
The successful of LLP in Texas urged law and accounting firms in other states to thrust the
legislature to adopt similar LLP statute, as they were concerned facing potentially firm-wide
liability by having offices in states that did not recognize the LLP form. Since then the LLP
statute has evolved by extending liability protection beyond malpractice and other torts to
contract liabilities63. Additionally, unlike in its initial inception, non-professional firms are
also allowed to form LLP.
2.2.2 United Kingdom
The introduction of LLP in the United Kingdom was fairly similar to those of the U.S. It is
suggested that the main determinant was the pressure from interest group, the professional
auditor firms, for limited liability in conducting their activities and their unwillingness to
incorporate64. These auditors firms have been campaigning for a change to the law of joint
and several liability for some time, however, in 1996, the U.K. Law Commission rejected the
suggestion that the law on joint and several liability should be changed 65. The successful
implementation of LLP in providing limited liability for professional firms (including
auditors) in the U.S. has further motivated them to press the U.K. legislature to introduce
LLP in the U.K66.
Around the same time, two auditor firms, Ernst & Young and Price Waterhouse, were
drafting a law for Jersey in the Channel Island to introduce LLPs. They were threatening the
U.K. that they would move to Jersey if LLPs were not made available in the U.K 67. This
development coincidence with the U.K. 1997 General Election in which the main political
parties were seeking to demonstrate to their constituencies that their were business friendly
and promised that a U.K. LLP would be introduced. The Labour Government, who turned out
61
62
Id.
63
Hamilton, supra note 56.
64
Judith Freedman, Limited Liability in the United Kingdom – Do They Have a Role For Small Firms?, 26
Journal of Corporation Law 897 200-2001, p. 898.
65
Id, p. 905.
66
Id.
67
Id.
12
to win the election, was set the goal to „create in Britain a true enterprise culture where the
chance to start and succeed in business is genuinely open to all”68. The combinations of these
factors accelerate the enactment of LLP Act in July 2000 and came into force in April 200169.
Although the LLP Act was proposed initially to meet the needs of professional firms, during
the legislation process it was decided to extend the LLP Act so that any two people could set
up an LLP and did not limit its use to regulated professional firms 70. The U.K. LLP combines
a body corporate with exist as a legal person separate form its members, protection of limited
liability for its members who are not personally negligent or wrongdoing, contractual
freedom to govern its internal relation (although the U.K. LLP Act provides default
provisions, based on partnership law, for any firm not providing its own agreement) and
preferential tax treatment as partnership71.
The suitability of U.K. LLPs for the needs of small firms, however, has been subject to
debate. Freedman argued that there are several reasons why U.K. LLP may not be beneficial
for small firms. First, the cross-reference to various regulations concerning U.K. LLP (i.e.,
the Company Act, the LLP Act and the Regulations) has resulted in great complexity and a
set of provisions that are very difficult to use, even for seasoned professionals72. Second, a
U.K. LLP is required to comply with the provisions of the Companies Act concerning
disclosure and filing requirement, including filing and statutory audit of accountants 73. Third,
U.K. LLP required at least two members. If an U.K. LLP carries on business with a single
member, he will become personally liable after six months if he knows he is the only
member74. This provision creates problem, as a member must find at least another member
before they able to set up an U.K. LLP. Further, when the circumstance changes through
death, divorce of disagreement, survival member will be required to find the replacement. To
the contrary, under U.K. Companies Act, a person could register and maintain a corporation.
68
Gordon Brown, 18 June 2001 (speaking at HM Treasury at the launch of new measures to tackle the
productivity gap with Britain‟s major competitors) cited from Arad Reisberg, Corporate Law in the UK After
Recent Reforms: The Good, the Bad, and the Ugly, Current Legal Problems (2010) 63 (1): 315-374, available at
http://clp.oxfordjournals.org/content/63/1/315.full.
69
Freedman, supra note 64, p. 905.
70
Id, p. 899.
71
Id.
72
Id, p. 903.
73
Id, p. 903. These requirements continue to apply even though the U.K. has reformed its Companies Act in
2006. See Reyes and Vermeulen, supra note 39.
74
Judith Freedman and Vanessa Finch, The Limited Liability Partnership: Pick and Mix or Mix Up, Journal of
Business Law 2002, Sep, 475-512.
13
In addition, U.K. LLPs also bound by some provisions of the Insolvency Act relating to
voluntary agreement, administrative orders and the winding up of the business75. Therefore,
setting up an U.K. LLP could lead to higher transaction cost for small firms. Additionally,
U.K. LLP can only be formed by a new registration. Conversion from other business forms
into U.K. LLP is not permitted.
Confronted with the unanticipated drawbacks of U.K. LLP Act, corporate lawyers in the U.K.
were experimenting with key provisions in the LLP Agreement for the benefit of both small
and large firms that opt to form U.K. LLP76. As a result, the U.K. LLP has become a practical
and useful vehicle for variety of small and larger business77. Evidence shows that the number
of business firms opt to form LLP in the U.K. in recent years are increasing although it is still
lower than those who register for corporation form. This phenomenon may be partly
explained that the formation of corporation in the U.K. under the 2006 Companies Act is
relatively simple and straightforward.
Table 2. New Registrations of Business Forms in the United Kingdom78
Business 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 -

Organization Forms 2005 2006 2007 2008 2009 2010 2011
Private Companies 332,700 370,800 448,700 371,700 329,600 365,100 395,800
Limited Partnerships 1,245 1,175 1,063 1,251 1,151 1,104 1,539
LLPs 5,191 6,570 8,818 9,198 8,855 9,760 10,145
Source: U.K. Companies House
The law reforms to provide most competitive private business form in the U.K. were not
limited to the LLP Act. Inspired by the partnership reform in the U.S., in November 1997 the
Department of Trade and Industry requested the Law Commission and the Scottish Law
Commission to undertake a joint review of partnership laws, the Partnership Act 1890 and the
75
Reyes and Vermeulen, supra note 39.
76
Id.
77
Id.
78
Figures for year 2004 – 2005 to 2008 – 2009 are for England, Wales and Scotland (Great Britain) only.
Figures for year 2009 – 2010 and 2010 – 2011 include England, Wales, Scotland and Northern Ireland (United
Kingdom).
14
Limited Partnership 190779. The purpose of the review was to modernize and simplify the
partnership law, particularly with respect to independent legal personality, continuity of
business irrespective of changes of ownership, simplification of solvent dissolution and a
model partnership agreement80. Partnership law reforms deemed important to establish an
efficient menu of business forms for business firms at all levels81. On 20 July 2006 the U.K
Government announced its decision to implement the limited partnership law reforms
recommended by the Law Commissions in their joint report. However, it did not intend to
take forward the recommendations in respect of general partnership law reform at that time82.
In 2009, following the failure of legislation process to take comprehensive review on the
U.K. limited partnership law, the U.K. Government issued draft the Legislative Reform
(Limited Partnerships) Order 2009 (“LRO”)83. The LRO was much shorter and contained
more limited instrument than the original reform plan. It made only two main changes:
making a certificate of registration conclusive evidence that a limited partnership has been
formed at the date shown on the certificate; and requiring all new limited partnerships to
include “Limited Partnership” or “LP” or equivalent at the end of their names.
2.2.3 France
Concern with the rigidity of provision in the company law and pressure of business
competition from other countries, in particular the U.K. and the Netherlands; the French
legislature introduced a simplified share company (société par actions simplifiée - SAS) in
1994 84 . The SAS is a business vehicle that provides limited liability and flexibility in
determining the organization and administrative structure. The parties of the SAS are, to a
large extend, free to decide on how it is to be managed and on the content of its by-laws85.
The SAS, however, may not offer its shares for subscription by the public86. First revision to
79
The Law Commission and Scottish Law Commission, Partnership Law – Report on a Reference under
Section 3(1)(e) Commission Act 1965, available at http://lawcommission.justice.gov.uk/docs/
cp159_Partnership_Law_Consultation.pdf
80
Id.
81
82
United Kingdom Department for Business and Innovation Skills, available at http://www.berr.gov.uk/
whatwedo/businesslaw/partnership/page25911.html.
83
Department for Business Enterprise and Regulatory Reform, The Legislative Reform (Limited Partnership)
Order 2009, Explanatory Document, available at http://www.berr.gov.uk/files/file51586.pdf.
84
Henry Lazarski and Alexandre Lagarrigue, The “New” SAS Legal and Tax Considerations, European
Taxation, Amsterdam, Vol. 40 (2000), No. 3.
85
Id.
86
Frank Wooldridge, The French SAS Business Entity, Amicus Curiae, Issue 28, June 2000.
15
the SAS was made in 1999, where a single person (either natural or legal) may form SAS 87.
Previously, an SAS can only be established by sociétés (companies or partnerships) that meet
certain capital requirements88. This 1999 reform were regarded as a successful attempt in
attracting large numbers of foreign firms to invest in France89.
Subsequent reform followed by the enactment of Act No, 2008-776, Le Roi de modernisation
de l‟economie dated 4 August 2008. This reform is viewed as the Act which final created the
SAS as intended by its instigator to become a universal form of commercial company90. It
streamlined and simplified the code, offering firms with easy access to the SAS, more
contractual flexibility and more beneficial fiscal regime for SMEs91.
The reforms captured by the Act are, among others, the reduction of minimum capital share,
non-cash contribution in the SAS and relaxation of the obligation to appoint statutory auditor.
In relation to the minimum share capital, as of 1 January 2009, article L 277-2 of the French
Commercial Code no longer required the SAS to maintain minimum share capital of €37,000.
Instead, it is required to have “such a share capital as is set out in the articles of association
and/or the bylaws” 92 . This provision effectively enables the SAS to have a minimum
authorized and paid up capital of €1.00. As a result, the SAS can now compete, on cost terms,
with the U.K. Limited private limited company for attracting newly incorporated firms93. The
reform also allowed the SAS to issue non-transferable shares in consideration for
contribution in kind, as well as experience, skills and knowledge94. This type of contribution,
however, cannot be considered in determining the level of the SAS share capital95. In respect
of account auditing, the shareholders of an SAS is no longer required to appoint statutory
auditor unless the SAS is a part of group of companies or the SAS equals or exceeds, at the
end of fiscal year, two or more of the following threshold: (i) consolidated balance sheet of
€1,000,000, (ii) turn-over (excluding taxes) of €2,000,000; and (iii) average number of
87
Id.
88
Id.
89
90
Squire Sanders, New regulations in French corporate law: An Overview, available at
http://larevue.ssd.com/New-regulations-in-French-corporate-law-an-overview_a1051.html
91
92
Wooldridge, supra note 86.
93
94
Id.
95
Wooldridge, supra note 86.
16
workers during the SAS‟ last financial period of 2096.
The reform of company law in France is, of course, not flawless. Reyes and Vermeulen
suggested that certain features of the SAS might require further attention by French
lawmakers. They pointed out the requirements to appoint a president to represent and bind
the SAS as an impediment to the organizational flexibility of the SAS97. Further, it is argued
that the legislation on the SAS does not provide a detailed set of default rules that could
easily fill the contractual gaps for the parties‟ omission98. Thus, inexperienced parties may
need to incur high transaction costs to obtain adequate legal advice in drafting the SAS‟
statute or otherwise may at risk of failing to make adequate provision for certain necessary
matters.
2.2.4 Colombia
Colombia is among the countries that recently reform its law in order to establish a vehicle
that specifically meet the needs of business characterized by concentrated ownership and
family-owned business. In December 2008, the Congress of the Republic of Colombia
enacted Act 1258 of 2008 that govern its Simplified Stock Corporation (Sociedad por
Acciones Simplificada – SAS)99. Similar to the development in the U.S., innovative local
corporate lawyer initiated the paths that lead to the enactment of the SAS Act 100 . As
suggested by its name the SAS simplifies various procedures and formalities that applied
when incorporating a traditional corporation such as public registration, mandatory rules on
formation of board, appointment of fiscal auditors and multiple managers101. At the same
time, the SAS provides limited liability to its shareholders from any obligations arising from
the business activities of the SAS as well as uphold straightforward and effective principle of
freedom of contract with respect to the activity of shareholders and managers102.
Under the SAS Act, it is now possible to form a corporation by one or more shareholders.
This provision is in contrast with the provision on Colombian stock-corporation, which
96
Id.
97
98
Id.
99
Fransisco Reyes, A New Policy Agenda for Latin American Company Law: Reshaping the Closely-Held
Entity Landscape, Research Paper, 2011, available at http://arno.uvt.nl/show.cgi?fid=115302.
100
101
Reyes, supra note 99.
102
Id.
17
required at least five persons for incorporating or starting its operation 103. Incorporating an
SAS can also be made through simple private and electronic document; hence, it is no longer
required to granting a public deed for incorporation104. The registration process has also been
simplified through electronic registration before the Mercantile Registry. As a result, an SAS
incorporation process can take less than two hours105. The SAS also enable its shareholders to
directly manage the SAS and obtain different class of shares, including shares with multiple
voting rights106. The SAS Act also specifically provides that disputes among shareholders or
between shareholders and managers in an SAS or even disputes involving third parties can be
referred to an arbitration or administrative adjudication procedure (Superintendence of
Companies) 107 . This specialized proceeding is intended to simplify the requirements for
dispute resolution procedures, shorten the timeline and obtain high-quality judgment form
arbitrator or administrative officer duly trained to resolve corporate law dispute108. Similar to
SAS in France, a Colombian SAS cannot issue its shares to be registered within a stock
exchange or traded in securities market.
2.2.5 Singapore
Singapore is viewed as an example of an entrepreneurial jurisdiction 109 . It means that

Singapore lawmakers could be expected to adopt a cost-effective, reliable and flexible legal
regime if such action would bring a substantial increase in business activities. The position
taken by the Singapore lawmakers is understandable. Singapore is an island country with
limited land area and almost without any natural resources. Its economy depends heavily on
service producing industries 110 . Hence, Singapore lawmakers must ensure that its legal
framework remains competitive with other countries, particularly, in attracting entrepreneurs
to conduct their business in Singapore. Failure to do this may bring significant adverse to its
economy.
103
Id.
104
Id.
105
106
Id.
107
Reyes, supra note 99.
108
Id.
109
Joseph McCahery, E.P.M Vermeulen, Masato Hisatake and Saito Jun, Traditional and Innovative
Approaches to Legal Reform: “The New Company Law”, European Business Organization Law Review
(EBOR), Vol. 8, pp. 7-57, 2007.
110
See statistical data issued by the Ministry of Trade and Industry Singapore, it shows that service producing
industries contribute to almost 70% (seventy percent) of Singapore‟s economics structure, available at
http://app.mti.gov.sg/data/pages/485/doc/StructureofSgEconomy_AES2011.pdf.
18
As a response to the above and to make available a comparable range of business options,
Singapore government, on 11 April 2005, enacted the Limited Liability Partnership Act 2005
111
. The team responsible for drafting the LLP Act 2005 were essentially referred to the U.K.
Limited Liability Partnership Act 2000 and the U.S. Delaware Revised Uniform Partnership
Act112. The LLP Act 2005 therefore contains features drawn from both legislations. Similar
to its counterparts in the U.K. and U.S, a Singapore LLP is a legal entity separate from its
partners and comes into existence upon registration with the Accounting and Corporate
Regulatory Authority (ACRA)113. The Singapore LLP also has unlimited legal capacity to
enter into contract and conduct business continuously notwithstanding one or more partners
resignation, death or insolvency. However, unlike U.K. LLP, which can only be formed by a
new registration, in Singapore an existing general partnership or a company can be converted
to an LLP114. Similar to the U.K. LLP, a Singapore LLP must have at least two partners,
whether individual or corporation.
In terms of internal relationship among partners, a Singapore LLP resembles the principle of
a general partnership. Partners of a Singapore LLP can contract among themselves as to how
they will share the capital and profits, and can decide on other governance issues by drawing
up an LLP Agreement115. In the absence of such Agreement, or if a particular issue is not
dealt with in the agreement, the First Schedule of LLP Act 2005 contains provisions that can
fill the gap and help to set out the right and duties of the partners 116. Although partners in
Singapore LLP are not liable for the firm‟s debts and obligations, they are personally liable to
a third party as a result of a wrongful act or omission in the course of the partnership
business 117 . With regards to the management of Singapore LLP, unlike the U.K. LLP, it
required to appoint at least one manager who is natural person of full age capacity and
ordinarily resident in Singapore118. The manager need not be a partner of the Singapore LLP.
111
ACRA Legal Digest, May 2005, Issue No. 8, available at http://www.acra.gov.sg/NR/rdonlyres/
4B52C6B6-E89B-4DC3-A72C-A9C4BC62AAAB/10278/ACRA_LDI_08.pdf
112
Lan Luh Luh, Limited Liability Partnership Act 2005 Relevant to Professional Scheme Paper 2.2, Student
Accountant, March 2006, available at http://www2.accaglobal.com/pubs/students/publications/
student_accountant/archive/Luh0306.pdf
113
Id.
114
Id.
115
Id.
116
Id.
117
Id.
118
Allen & Gledhill, Limited Liability Partnership Act Singapore, available at http://www.rieti.go.jp/
jp/events/06022701/pdf/2-2_quek_paper.pdf
19
Section 25 of the LLP Act 2005 requires the Singapore LLP to maintain accounting and other
records that sufficiently explain the transactions and financial positions of the Singapore
LLP. It is not required to prepare profit and loss account or balance sheet or to have them
audited. Similar to the U.K and Delaware LLP, the Singapore LLP is available to be used for
any type of business and not limited to professional partnership 119 . Singapore LLP also
received taxation treatment as partnership rather than corporate taxation120.
Undeniably, the availability of Singapore LLP provides broader choice for businessperson
when assessing the option to structure their business. However, with respect to its suitability
for small and medium business, the Singapore LLP may not be the only available business
form. For years, Exempt Private Company (“EPC”) has been the popular choice for small
and medium firms 121 . As corporation, EPLC enjoyed status of legal entity and limited
liability protection. EPLC is a private company in which any corporation holds no beneficial
interest directly or indirectly122. One or more individual could establish the EPLC, provided,
however, that the number of shareholders shall not exceed 20 persons. The EPLC is
exempted from the audit requirements under Singapore Company Act and need not to file its
financial statements with the ACRA as long as its annual revenue does not exceed 5 million
Singapore Dollar123. Although EPC will be taxed as corporation, a newly set-up EPC enjoys
tax savings as they are entitled to tax exemptions on their first S$300,000 of taxable income
for each of their first three tax filing years124. The relaxation of formational and operational
requirements combined with the well-developed practice and experience of using EPLC for
structuring the business (as opposed to the relatively new Singapore LLP) might be seen as
the reason behind the EPLC popularity125. In first quarter of 2012, EPLC remains the most
popular business firms in Singapore followed by sole proprietorship.
119
Supra note 111.
120
Supra note 112.
121
122
http://www.singaporelaw.sg/content/BA.html#section%206
123
Id.
124
Janus Corporate Solutions, Singapore Company Registration Statistics Q1 2012, available at
http://www.guidemesingapore.com/docs/singapore-company-statistics-2012-Q1.pdf
125
20
Table 3. Singapore Business Registration by Entity Type
Source: Janus Corporate Solutions, Singapore Company Registration Statistics Q1 2012
21
Table 4. Hybrid Business Form in Several Countries
Country US LLC UK LLP SAS France SAS Colombia Singapore LLP
Delaware
Management Member managed, Member managed, Parties are free to decide Flexible. Shareholders Member managed,
unless otherwise unless otherwise the management may manage the unless otherwise
provided in the provided – mandatory structure, however, it is company directly provided in the
agreement designated members compulsory to have a agreement.
“President”.
Number of 1 or more 2 or more 1 or more 1 or more 2 or more

Members
Fiduciary Duties Access to information Specific default duties in Good faith – articles of “Abuse of rights” Defined by agreement –
and records the regulations association could provision default provision in First
provide more detailed Schedule; disclosure and
rules non-compete
Financial Rights Unless provided in the Unless provided in the Unless provided in the If no agreement (special Unless provided in the
agreement, profit and agreement, equal agreement, sharing in classes of shares) agreement, sharing in
losses allocated on the sharing rights proportion to members‟ sharing in proportion to proportion to the equity
basis of the agreed value contribution shareholding participation
22
Delaware
of the contribution
Freedom of Yes, complete freedom Yes, but some Yes, but some Yes, but some Yes
Contract mandatory rules mandatory rules mandatory rules
Transferable Yes, restriction could be No public offerings No public offerings Yes, restrictions could LLP Agreement –
Interest imposed by the allowed allowed be contractually default assignment of
agreement imposed financial rights
Legal Entity Yes Yes Yes Yes Yes
Limited Liability Yes Yes Yes Yes Yes, but claw-back

provision before
insolvency
Financial Members have access / An annual return and Parties are required to Shareholders must Members have access –
Statements no public disclosure annual statutory disclose annual accounts approve financial account and other
accounts must be filed statements and annual records must be kept for
accounts seven years
23
Delaware
Formation Simple certificate of Registration at the Registration at the Incorporation document Online registration with
formation (filed at the Companies House Commercial Court filed at the Mercantile ACRA
Secretary of State) Registry (online
registration)
Notarization of No No No No No
Charter
Taxation Check-the-box Pass-through Corporate Corporate Pass-through
Sectors Widely used Particularly Widely used Mainly micro Mostly professional
professionals and joint enterprises and small firm. However, it is also
ventures business used by other sectors.
Source: Reyes and Vermeulen (2011)126
126
24
CHAPTER 3
BUSINESS ORGANIZATIONAL FORMS IN INDONESIA
3.1 Overview of Business Organizational Form in Indonesia
As discussed briefly in Chapter 1, when a businessperson wishes to establish a business firm

under Indonesian law127, the basic choices are a sole proprietorship, a private partnership
(persekutuan perdata/maatschap), a general partnership (firma/vennootschap onder firma), a
limited partnership (persekutuan komanditer/commanditaire vennootschap), a cooperative
(koperasi)128 or a corporation (perseroan terbatas). Sole proprietorships appear to dominate
the informal sector. As the consequences, many of these businesses are not officially
registered with Indonesian authorities because of the nature and activities of the informal
sector 129 . The formal business sector is primarily comprised of incorporated entities
(cooperative and corporation) and unincorporated entities (private partnership, general
partnership and limited partnership)130.
The incorporated entities are given the status of “legal entity” by the operation of law, while
the unincorporated entities are considered as “non-legal entity”. The distinction between legal
entity and non-legal entity is, of course, unsurprising. This concept can be traced back to the
nineteenth century where corporation was the only business vehicle that has “entity” status
through special charter from the state131. The overview of each business organizational forms
is explained below.
127
Certain businesses, for example bank, insurance, financial institution or business firms owned by non-
Indonesian individuals or entities, must be established in form of corporation. See Act No. 7 of 1992 as
amended by Act No. 10 of 1998 regarding Banking, Act No. 2 of 1992 regarding Insurance and Act No. 25 of
2007 regarding Investment.
128
Cooperative in Indonesia is a business vehicle that has distinct features with other business organization
forms. Primarily, it is based on specific cooperative values of “self-help, self-responsibility, democracy and
equality, equity and solidarity”. Two or more individuals or cooperatives may form a cooperative. A cooperative
has legal entity status, hence allow its members to partition their personal assets from the cooperative‟s assets.
The management of a cooperative consists of two-tiers board, a board of management and a board of
supervisory. Unlike a shareholder in a corporation, a member of cooperative can only have a participation unit
and one voting right. Cooperatives may engage in any business as determined in its by-laws. Any profit
resulting from business activities of the cooperative shall be distributed on pro-rata basis to its members. See
Act No. 25 of 1992 regarding Cooperative. Due to its specific characteristic and values, cooperative will not be
discussed in detail in this paper.
129
Benny S. Tabalujan, The New Indonesian Company Law, 17 University of Pennsylvania Journal of
International Economic Law, 1996, at 884.
130
Id, at 884.
131
Blair, supra note 9.
25
3.1.1 Private Partnership
Private partnership can be defined as a contract between two or more individuals to cooperate
in order to make profit132. The partners must be contributing cash, property or labour to the
partnership133. Due to its consensual nature, the Indonesia Civil Code does not require the
contract to establish private partnership to be made in written form. However, in practice,
partners of a private partnership prefer to have the establishment agreement in writing for the
purpose of signalling the information about the private partnership to third parties. From
practical perspective, a written establishment agreement is also beneficial for the private
partnership in conducting its day-to-day activities such as registering for tax identification
number or opening bank account 134 . Moreover, having a written agreement will be most
beneficial for evidentiary examination purposes before the court in the event there is a
dispute, either an internal dispute between the partners with regard to their relationship within
the private partnership or external dispute with third party.
Each partner in a private partnership may directly exercise control over business and assets of
the partnership as well as enter into agreement with third parties, unless the partners agree
that such representation duties shall be delegated to a centralized management structure or
manager 135 . With regard to relationship with third party, unlike the liability principle in
general partnership, an individual partner will not be jointly and severally liable with the
other partners for the whole debts and obligations of the private partnership. She will be
personally liable only for the debts and obligations that were directly caused by her 136 .
Similarly, when an individual partner binds the private partnership into an agreement with
third party, such agreement shall only bind her and not the other partner(s), unless the other
132
Art. 1618 of the Indonesian Civil Code
133
Art 1619 of the Indonesian Civil Code
134
In order to apply for tax identification number with the tax office, a private partnership is required to submit
its memorandum/deed of establishment or other documents with similar effect that show the existence of the
private partnership. See http://www.pajak.go.id/content/mendaftarkan-diri-untuk-mendapatkan-npwp. Banks in
Indonesia require the submission of memorandum/deed of establishment or other documents with similar effect
for the purpose of opening bank account. This requirement is mandated by the banking regulations, in particular,
concerning the Know-Your-Costumer principle. An example of requirements to open a bank account can found
at http://www.hsbc.co.id/1/2/business/accounts/businessaccount.
135
Art. 1636 of the Indonesian Civil Code in conjunction with Art 44 of the Indonesian Commercial Code
136
Art. 1642 of the Indonesian Civil Code
26
partner(s) has given her prior approval or such agreement brings profit to the private
partnership137.
Although under the Indonesian law private partnership can be the business organizational
form for all business firms, it is often used to exercise a profession such as lawyers,
accountants and tax consultants138.
At the outset private partnership enjoys significant degree of flexibility in term of its
formation. There is no requirement to have its formation document to be made in certain
form. However, a separate set of legislation, the Act No. 3 of 1982 on Compulsory Enterprise
Regulation (“Act No. 3/1982”) imposed additional obligation for all forms of business
entities, including private partnership to be registered in a Register of Companies maintained
by the Ministry of Trade. The registration shall cover, at least, the complete identity of the
founders, the name of the private partnership, the official address of the private partnership,
the commencement date of the private partnership, the business activities of the private
partnership and the signature of the founder(s) that has the right to represent the private
partnership vis-à-vis third parties. The registration must be updated at any time as and when
there is a change on the data submitted to the Companies Register. Pursuant to Article 2 of
the Act No. 3/1982, the purpose of the Companies Register is to record the official, correct
and accurate information concerning a business firm as well as to serve as the official source
of information for the interested parties on the identities, data or other information
concerning a business firm registered in the Companies Register to ensure legal certainty in
conducting business activities.
3.1.2 General Partnership
Similar to the private partnership, a general partnership under Indonesian law is based on an
agreement between two or more individuals to organize a business in order to make profit
under a common name139. Partners in general partnership are also required to contribute cash,
property or labour to the partnership. Unlike the private partnership, however, the formation
137
Art. 1644 of the Indonesian Civil Code in conjunction with Art 1636 and 1637 of the Indonesian Civil Code
and Art 58 of the Indonesian Commercial Code.
138
Rudhi Prasetya, Maatschap, Firma dan Persekutuan Komanditer, Citra Aditya Bakti, 2002, at 4-5. See also
Indonesian Act No. 5 of 2011 regarding Public Accountant stipulates that business organizational form available
for public accountant profession are sole proprietorship, civil partnership or general partnership. Civil
partnership and general partnership are business organizational forms preferred by lawyers. See
http://www.hukumonline.com/berita/baca/hol17824/kantor-advokat-antara-firma-dan-persekutuan-perdata-
139
Art 16 of the Indonesian Commercial Code.
27
of general partnership is subject to certain requirements and formalities. The establishment
of general partnership must be drawn in a notarial deed140.
The deed of establishment must also be registered with the registry at the district court having
jurisdiction over the real seat of the general partnership141. Further, certain information from
the deed of establishment must be announced in the state gazette. The information that must
be disclosed are (i) the names and address of the partners, (ii) description of general
partnership‟s objects, (iii) the names of partners who are excluded to represent the general
partnership vis-à-vis third parties, if any, and (iv) the commencement as well as the
termination date of the general partnership (if the general partnership were established for a
certain period)142. In the absence of proper registration and announcement, third parties may
hold all partners jointly and severally liable for any action performed by any partner on
behalf of the general partnership, whether or not such partner excluded from representative
duties or the action falls within the general partnership's objects 143 . Consequently, any
changes to the disclosed information must be made in notarial deed and follow the same
registration and announcement formalities. The general partnership is also subject to the
requirement of Act No. 3/1982 that it must be registered with the Companies Register.
Therefore, unlike the private partnership, the general partnership is subject to two different
registration obligations that principally serve for the same purposes, namely, providing
official, correct and accurate information concerning a business firm for the benefit and
protection of third parties.
As a default rule, each individual partner in the general partnership partner may directly
exercise control over business and assets of the general partnership as well as enter into
agreement with third parties144. Based on this rule we can infer that it is also permitted to
appoint one or more partners to act as the representative of the general partnership. The
partners are jointly and severally liable for all debts and obligations of the general
partnership. Further, an agreement entered into by an individual partner for and on behalf of
the general partnership with third parties will be binding to all partners145.
140
Art 22 of the Indonesian Commercial Code
141
142
143
144
Art 17 (1) of the Indonesian Commercial Code
145
Art 17 (2) of the Indonesian Commercial Code
28
Similar to the private partnership, the partners in the general partnership enjoy a high degree
of contractual flexibility in relation to their internal relationship. For example, partners in the
general partnership may determine in their agreement on the right and obligations of a partner
toward the partnership, the distribution of profit and loss incurred by the general partnership
or even inserting non-competition clause that the partner cannot entered into or involved in
other venture which business may compete with the business of the general partnership.
The general partnership is obliged to maintain annual accounts and records in relation to the
assets and business activities of the company. There are no strict rules for the auditing or
format of the annual accounts and records. The partners may set out such requirements in
their internal governing agreement. However, the managing partners are required to prepare
and sign the annual accounts and records within 6 (six) months after the closing of the firm‟s
financial year. The Commercial Code does not impose any sanction or penalty for managing
partners who are failed to do so.
3.1.3 Limited Partnership
Limited partnership has its trait from the medieval centuries commenda, a purely speculative
enterprise, confined mainly at first to maritime trade in which one partner provide all or most
of the capital to the firm and the other traded in his own name146. In the commenda, the
capitalist partner who must have, as a rule, remained unknown to the merchants will enjoy a
limited liability, where the active partners who conduct the trade will be personally liable for
the firm‟s debts147.
Due to its characteristics, under the Indonesian law, a limited partnership is defined as
business firm that similar to those of general partnership but has one or more limited
partners148. As a consequence, the law applicable to the general partnership is also applicable
to the general partners in limited partnership. A general partner is required to contribute cash,
property or labour to the partnership while contribution from limited partners is limited to
cash only149. The general partner assumes the management of a limited partnership150. If the
limited partnership has more than one general partner, the general partners may jointly
assume the management duties or appoint one amongst them to act as managing partners. The
146
Mitchell, supra note 4.
147
Id.
148
149
150
Art 17 (1) of the Indonesian Commercial Code.
29
latter choice is, of course, rarely occurred as a partner who does not wish to involve in
managing the affairs of the limited partnership can simply choose to become limited partner.
Similar to a partner in the general partnership, the general partner is subject to unlimited
liability for all obligations and debts arising in relation to the limited partnership 151 . The
limited partner is prohibited from engaging herself in managing the company and, therefore,
her liabilities in relation to the obligations and debts of the firm is limited to the amount of
the contribution into the firm. In this respect, the liability of the limited partner resembles that
of a shareholder of corporations. If a limited partner is involved in management, either
directly or by proxy, his liability will be unlimited (even if third parties know of his status as
a limited partner)152.
The formation of the limited partnership also requires certain formalities, such as the
requirement to have the deed of establishment to be drawn in notarial deed form 153. The
registration requirements at the court having jurisdiction over the real seat of the limited
partnership and announcement in the state gazette are also applied for the limited
partnership154. The limited partnership must also be registered with the Companies Register.
The information that must be submitted with the Companies Register including (i) the date of
establishment of the limited partnership and its establishment period (if it is established for
limited period), (ii) the name and address of the limited partnership, (iii) the identities of each
limited partner and general partner, (iv) the value of contribution of each general partner and
limited partners and (v) the signature of the general partner that has the right to represent the
private partnership vis-à-vis third parties.
The limited partnership is obliged to maintain annual accounts and records in relation to the
assets and business activities of the company. There are no strict rules for the auditing or
format of the annual accounts and records. The partners may set out such requirements in
their internal governing agreement. However, the managing partners are required to prepare
and sign the annual accounts and records within 6 (six) months after the closing of the firm‟s
financial year 155 . The Commercial Code does not impose any sanction or penalty for
managing partners who are failed to do so.
151
152
153
154
155
30
As a general rule, a limited partnership shall be dissolved (i) upon the expiration of the period
set out in the deed of establishment (if any); (ii) upon the resignation, termination,
bankruptcy or passing away of a partner or (iii) by a court‟s final and binding judgment 156.
The partners, however, may set out in the limited partnership establishment deed that the
limited partnership is deemed to be re-established upon the resignation, termination,
bankruptcy or passing away of a partner157. This re-establishment of the limited partnership
shall follow the formalities and procedures that are required for the formation of a new
limited partnership.
In relation to the governance of internal relationship within the limited partnership, both the
Civil Code and the Commercial Code do not go into the details and left the partners to agree
among themselves on the governance of their internal relationship such as the distribution of
profit and loss, the procedures for resignation or termination of partners, the calculation of
assets in the event of resignation of termination of partners and the obligations of the
managing partners vis-à-vis the limited partners.
3.1.4 Corporation
Most provisions in the Indonesian company law are mandatory in nature. It can only be
deviated from in the articles if the relevant statutory provisions expressly so determines.
Unlike the incorporated forms that are defined as cooperation among individuals, a
corporation is defined as an association of capital, established by virtue of an agreement and
its capital divided into shares 158 . The formation of corporation is subject to a number of
formalities and can relatively time consuming. A corporation is formed by the execution of a
deed of establishment, which has to be drawn in notarial deed format159. Typically, the deed
of incorporation contains the articles of associations. The company law and the articles
govern the conduct of corporation in its day-to-day activities. The articles, however, are
subject to and must no be in conflict with mandatory provision of the company law 160. The
law required that the following subject must be dealt with in the articles: (i) the name and the
official seat of the corporation; (ii) the objects of the corporation; (iii) the amount of
mandatory share capital, issued share capital and paid-up share capital; (iv) the number of
156
Art 1646 of the Indonesian Civil Code.
157
158
Art 1 (1) of the Indonesian Company Law.
159
160
Art 4 of the Indonesian Company Law.
31
shares being issued, the classification of shares being issued (if any), the rights attached to
such class of shares and the nominal amount; (v) the number and official title of the member
of board of directors and board of commissioners; (vi) the procedures for holding general
meeting of shareholders; (viii) the procedures for the appointment, replacement and
termination of the member of board of directors and board of commissioners; and (ix) the use
of profit and the distribution of dividend 161 . The shareholders may state additional legal
provisions that apply mandatorily to the corporation, such as the pre-emptive rights or the
rights of refusal relating to the transfer of shares.
The founders or the notary, after the signing of the deed of incorporation, is required to apply
for formal approval from the Minister of Law and Human Rights (“MoLHR”) 162 . The
corporation come into existence and obtain its status as “legal entity” upon issuance of
approval from the MoLHR and, therefore, allow the shareholders to have “limited
liability”163. In this regard, the existence of corporation in Indonesia resembles the situation
that of in the earlier development of corporation where the founders of corporation must
obtain charter from the state to obtain the “entity” status. The MoLHR must then register the
deed of incorporation into the company registry maintained by the MoLHR and announce the
same in the state gazette.
The ICL requires that a corporation must have a minimum of two shareholders at all times164.
If, for any reason, it has only one shareholders and it does not remedy this situation within six
months, the sole shareholder shall be personally liable for any liabilities and losses of the
corporation 165. This requirement effectively makes it impossible to have a single member
corporation or wholly owned subsidiaries. This provision grounded upon the definition of
corporation under the Indonesian Company Law, and previously under the Indonesian
Commercial Code, that is a creature of contract. Thus, it requires two or more persons to
form a corporation.
161
162
Art 9 and 10 of the Indonesian Company Law.
163
164
165
32
A corporation in Indonesia is required to have a mandatory legal capital in the amount of IDR
50,000,000 (approx. EUR 4000) 166 . At incorporation, at least twenty five per cent of the
capital (IDR 12,500,000) must be subscribed and fully paid167. Any future subscription must
be paid in full and cannot partially paid. Payment for shares can be made in cash or in other
forms168. Independent expert must make assessment of the payment in other forms – such as
real or intangible property – to market value.
In relation to shares issued to the shareholders, as general rule, the Indonesian Company Law
stipulates that a share gives rights to its holder to have a vote during general meeting of
shareholder and to receive dividends as well as to receive the remaining assets upon the
dissolution and liquidation of the corporation 169 . However, the Indonesian Company Law
gives the liberty to the shareholders to determine, in the articles, that the corporation may
issue different class of shares that in turn gives its holders different rights compared to
ordinary shares such as shares with or without voting rights, rights to nominate and/or
appoint member of the board of directors and/or board of commissioner, exchangeable shares
sand right to receive preferential allocation of dividend payments 170 . The Indonesian
Company Law also stipulates that the shareholders may, in the articles, determine pre-
emptive rights or rights of refusal for issuance of new shares or transfer of existing shares 171.
The management structure of an Indonesian corporation applies two-tier structures. This

consists of (the board of) directors, which perform executive functions to manage and
represent the company172, and (the board of) commissioners, which advise and supervise (the
board of) directors173. This two-tier system is mandatory for both closely held and public
corporation. In relation to the closely held corporation, the Indonesian Company Law does
not specifically stipulate the minimum number of director and commissioner. Consequently,
it is possible for a closely held company to have only one director and one commissioner. In
a public company (or if the company engages in the business of mobilizing fund from the
public or that issue debt instruments) it is required to have at least 2 persons in the board of
166
167
168
169
170
171
172
Art 92 (1) and 98 (1) of the Indonesian Company Law.
173
33
directors and board of commissioners174. If the member of board of directors consists of more
than 2 persons, the company (in its articles or through their internal policy) may stipulate that
each member of the board of directors have different external and internal responsibilities.
Unlike the board of directors, where a company has more than one commissioner, the board
of commissioners act as a council. Therefore, no commissioner may act individually175. As a
principle, the board of directors is distinct entity from the board of commissioner and,
therefore, a same person cannot serve on both boards. However, the articles may stipulate
that, in specific situation, for example when all members of the board of directors being
unavailable, members of the board of commissioners temporarily resume the management
duties176. The power to appoint, replace or terminate member of the board of directors and the
board of commissioners is vested with the general meeting of shareholders177. The company
law does not specify the procedure as well as the requirement for the appointment,
replacement and termination of directors and commissioners and left such matter to be
regulated by the shareholders in the articles.
The board of directors of a company is obliged to prepare an annual company‟s working plan
prior to the commencement of the coming accounting year which must also contain the
annual budget of the company178. The annual working plan shall be submitted to the board of
commissioners or the general meeting shareholders as stipulated in the articles of
association179. Not later than 6 months after the end of the company‟s accounting year, the
Board of Directors is obliged to submit annual report (after it has been examined by the board
of commissioners) to the general meeting of shareholders180. The annual report must contain
among others, financial report (which consist of balance sheet, profit and loss statements) and
remuneration given to members of the board of directors and the board of commissioner
during that accounting year181. The financial report must be made in accordance with the
applicable Indonesia general accepted accounting principle. There no obligation to have the
174
175
176
177
Art 94 (1) and 111(1) of the Indonesian Company Law.
178
179
180
181
34
financial report to be audited unless the company is a public company or engaged in certain
areas of business such as in banking or insurance industries182.
Generally, the appropriation and distribution of profit in the company is made in proportion
to the capital contribution of the shareholders 183 . Nonetheless, as discussed above, it is
possible that the shareholders that hold certain class of shares receive higher dividends or
have priority over the dividend payment. The appropriation and distribution of profit shall be
decided by the general meeting of shareholders, provided that the company has a positive
profit balance (i.e., no loss form previous accounting years is carried forward)184. It is also
important to note that the company is obliged to set aside a certain amount of the net profit of
each accounting year for the reserves. This obligation shall remain operate until the reserves
have reached at least 20% of the issued and paid-up capital185.
3.2 Recent Effort to Reform the Partnership Law
As discussed in chapter I, in March 2009 the MoLHR has appointed an expert group to
review and reform the regulations concerning “non-entity” business organization form. The
members of this expert group consist of 2 law professors, 1 notary, 2 officers from the
Ministry of Law and Human Rights, 1 officer from the Ministry of Trade and 6 officers from
the Agency for National Law Development186. The main objective of this expert group was to
review, evaluate, analyse and identify the main problem in the existing regulations187. The
second objective was to prepare draft bill on private partnership, general partnership and
limited partnership188.
With this initiative the government acknowledged the significance of SMEs as main
contributors to Indonesian economy. Therefore, it is important to provide favourable
environment for the existing and future entrepreneurs189. One way to achieve these purposes
is by offering the right business organizational form to them. The government also viewed
that the existing regulations on private partnership, general partnership and limited
182
183
Art 52 in conjunction with Art 71 (2) of the Indonesian Company Law.
184
185
186
Naskah Akademik Rancangan Undang-Undang tentang Badan Usaha Bukan Badan Hukum (Academic
Report – Draft Bill regarding Non-entities Business Form) (“Expert Group Report”), Centre of National
Development, Agency for National Law Development. On file with the author.
187
Id.
188
Id.
189
Id.
35
partnership as provided in the Civil Code and the Commercial Code are no longer suitable to
keep up with the pace of modern economic development190.
By the end of 2009, the expert group issued its report accompanied by the draft bill on private
partnership, general partnership and limited partnership191. To everyone‟s surprise the Expert
Group Report does not seem to be made with careful deliberation. It, indeed, analysed the
existing law. However, it failed to identify the problems, let alone offer solutions that are
necessary to provide suitable business form for SMEs. The report, for example, mentioned
that whether or not it is necessary to provide an “entity” status for private partnership, general
partnership and limited partnership, but there was no further discussion on that matter. The
report, though, concluded that providing an “entity” status is not necessary at this point.
Additionally, the main discussions on the report were limited to the general law principles
that do not directly related to the issue in questions. As the consequences, the content of the
draft bill being issued is, more or less, remaining similar to the provisions in the Civil Code
and Commercial Code with several “patching-up”. In certain areas, the draft bill will impose
even more requirements compared to the Civil Code and Commercial code, which provision
may weaken access for SME to the business organizational forms.
The main proposed changes under the draft bill, are, as follows:
Private Partnership
The draft bill adopts almost similar definition of private partnership as the Civil Code that is
an agreement between two or more persons to cooperate in order to make a profit. The new
definition, however, broaden the definition of “person” to include natural person and “legal
entity” (i.e., companies and cooperatives)192. Therefore, it will open the possibility for “legal
entity” to form a private partnership.
On the formation of the private partnership, unlike the previous system under the Civil Code,
the founders will be required to have an establishment agreement in notarial deed form193.
The deed of establishment will have to be dealt with the following subjects: (i) the identity of
the founders; (ii) the name of the private partnership; (ii) the official seat of the private
partnership; (iv) the commencement and the termination (if the private partnership is
190
Id.
191
The Draft Bill is available at http://ditjenpp.kemenkumham.go.id/daftar-rancangan.html.
192
Art 1 (1) in conjunction with Art 1 (8) of the Draft Bill.
193
Art 3 of the Draft Bill.
36
established for certain period) of the private partnership; (v) the business activities of the
private partnership; (vi) the contribution of the partners; (vii) the distribution of profit and
loss-sharing; (viii) the rights and obligations of the partners194.
Further, the establishment agreement will also have to be registered with the professional
organizations195. This requirement implies that the private partnership will only be available
to exercise a profession such as lawyer, accountant and architect.
One significant proposal in the draft bill is the clarification on the possibility for the private
partnership to have assets separates to the assets of its partners provided that the partners
explicitly transfer the ownership of such assets to the private partnership and such transfer is
recorded in the establishment agreement or any of its amendment 196 . This provision will
enable the private partnership‟s creditor to have a priority claim over certain assets of private
partnership. This provision, however, does not abolish a partner‟s personal liability for the
debt or obligations of the private partnership arising from a contract entered into by her (for
and on behalf of the private partnership but) with third party 197 (unless in doing so, she
obtained approval from other partners). The relevant partner will be personally responsible to
compensate the private partnership for the losses suffered by that was directly caused by her
fault or negligence198.
Another new provision proposed by the draft bill is the obligation of the managing partner of
a private partnership (if any) to prepare and submit annual report to all other partners not later
than 6 months after the end of the private partnership‟s accounting year199. The annual report
shall also consist financial report that was prepared in accordance with the Indonesian
GAAP200. At the surface this proposed provision does not seem to impose additional burden
for the private partnership, as the partners in a private partnership may be predicted to agree
among themselves that a managing partner shall provide an annual report following the end
of the accounting year. However, the provision that obliges the financial report to be made
pursuant to the Indonesian GAAP might be proven as burdensome for small and medium
private partnership. Consider, for example, a newly established private partnership engaged
194
Art 10 (1) of the Draft Bill.
195
196
197
198
199
200
Art 25 (3) (b) of the Draft Bill.
37
in architecture consulting business and all of its partners are architects. It might be difficult
for the managing partner of such private partnership to prepare the financial report, as she
may not have sufficient knowledge in accounting. Hence, the managing partner would need
to engage third party to prepare the financial report, which effectively means that the private
partnership would need to incur additional cost for performing its business.
General Partnership
The draft bill does not propose significant changes on the regulations concerning the general
partnership. There are only 2 (two) notable changes that are proposed. Firstly, similar to the
proposal on the private partnership, the draft bill make it possible for “legal entity” to form a
general partnership201. By introducing this provision, the draft bill might change the principle
of unlimited liability that usually characterized the general partnership. To be sure, the draft
bill still adopted the principle that the partners shall jointly and severally liable for the debts
and obligations of the general partnership. However, it is now possible to limit the liability of
the partners by having legal entities to act as partners in the general partnership.
Second, under the draft bill the registration of the deed of establishment (and any of its
subsequent amendment) shall be made with the company registry maintained by the MoLHR
within 30 (days) as of the date of the deed of establishment 202 . Previously, under the
Commercial Code system, the registration shall be made with the local court.
Limited Partnership
The notable reform proposal for the limited partnership is similar to those of the general
partnership. The draft bill proposes that two or more individuals or legal entities may form
the limited partnership203. The draft bill also provides that the registration of the deed of
establishment shall be with the MoLHR instead of the court having jurisdiction over the
limited partnership as provided in the Commercial Code204.
201
202
203
204
38
Chapter 4
Assessment of the Partnership Law Reform in Indonesia
As I have briefly explored in Chapter 3, in the light of its objectives to review and reform the
existing partnership law, the expert group has considered it was not necessary to introduce
new business organization form as part of the proposal. According to the expert group, the
reform of partnership law is of absolute necessity if Indonesia intends to improve the
development of its SMEs industry, however, it should be made with due consideration to the
principles of the existing law and practices 205. That said, the expert group showed strong
tendency of both structural path dependence and rule-driven path dependence 206 in its
proposal to reform the partnership law. This can be seen from the fact that the existing
structures of business organizational forms are preserved in the draft bill. Moreover, the rules
on the private partnership, the general partnership and the limited partnership offered in the
proposal largely follow the existing law. In general, the proposal seems to contradict its own
purposes to firstly, provide favourable environment for the existing and future entrepreneurs
and secondly, replace the two centuries old Civil Code and Commercial Code to keep up with
the pace of modern economic development.
In this context, I will analyse several main issues in the draft bill by drawing comparison with
the regulations to that effect in other countries.
4.1 Reluctance to Provide Limited Liability to the Partnership
As mentioned in Chapter 3 above, the report and draft bill issued by the expert group
concluded that, at this point of time, it is not necessary to provide an “entity” status and
limited liability for partnership forms. Since the expert group did not elaborate the reason that
leads to their conclusion, we could only assume that the expert group was trapped to the
existing structure of business organizational forms and therefore hesitate to introduce a new
structure previously unknown in Indonesia. Under the Civil Code and Commercial Code
system (which were enacted in nineteenth century), the partnership (whether the private
partnership, the general partnership or the limited partnership) is heavily depended on its
205
Expert Group Report, supra note 186.
206
Lucian A. Bebchuk and Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and
Governance, Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper
Series. Paper 266.
39
personal character, in particular, with respect to the management of the firm and the liability
of the partnership toward third parties. As the owners of the partnership are also directly
involved in the management of the partnership, partnership is a mere aggregate of persons
and personal liability of the owners for all debts and liabilities of the partnership is
justified207. Other possible explanation is that the expert group deemed that entrepreneurs
might simply choose to form a corporation if they need the protection of limited liability.
The reluctance of the expert group in extending the limited liability to partnerships is in
contrast with the development in other countries studied in this paper. In those countries, the
legislation has extended the limited liability protection to partnership form, therefore creating
a hybrid business entities, a combination between partnership and corporation. The creation
of the new business organizational forms does not necessarily mean that the traditional form
of partnership is completely abolished. It simply expands the choices of business
organizational forms for entrepreneurs intend to set up a business firm. The extension of
limited liability for partnership also brings significant advantage for the entrepreneurs as it
enables them to combine the best of the two worlds, the protection of limited liability as in
corporation in one hand and the flexibility of partnership in its internal governance.
Additionally, the entity status will protect their personal assets from the firm‟s creditors. This
feature would provide incentive for the entrepreneurs to start their business, as they would
not have to be worried that the failure of their business operation would also put risk to their
personal assets.
Turning back to the situation in Indonesia, currently, entrepreneurs are faced with limited
options when he intends to set up a business firm that offer the protection of limited liability.
Like it or not he must set up a corporation. This option is, of course, bringing several
drawbacks for him. First, setting up a corporation means that the entrepreneur will be
required to obey the minimum mandatory capital requirement. From the outset the amount of
minimum mandatory capital may not seem to be expensive and should not restrain
entrepreneur from setting up a corporation. However, a study conducted by the World Bank
in its Doing Business 2012 Report shows that the minimum mandatory capital in Indonesia
amounting to 46.6 per cent of income per capita208. This requirement alone may disincentive
entrepreneur to set up a corporation. Second, formalistic and administrative requirements
involve high cost, large number of procedures and long delays. For example, cost for notarize
207
Mitchell, supra note 4.
208
The International Finance Company, Doing Business 2012, Economy Profile: Indonesia.
40
company documents before public notary amounting to IDR 2,526,816 (approx. EUR 200),
cost for submission of the deed of incorporation for obtaining approval of the MoLHR
consist of the cost for name check in the amount of IDR 200,000 (approx. EUR 17) and cost
of non-tax state revenue (PNPB) for legal services of IDR 1,580,000 (approx. EUR 127) and
the cost for registering the company in the Companies Register in the amount between IDR
500,000 up to IDR 1,000,000 (depending on the size of the corporation). Third, the
entrepreneur will be bound by many mandatory and inflexible rules of the Indonesian
Company Law. For example, it must maintain two-tier management structure; hold annual
general meeting of shareholders and preparing annual working plan and budget to be
presented before the general meeting of shareholders. This mandatory requirement may be
required for larger corporation. However, its practicality for SMEs is highly debatable.
Consider a situation that is common in SMEs, let suppose two persons establish the
corporation, both of them also acting as the member of the board of director of the
corporation. The obligation of having to two-tier management structure will force them to
appoint a third person as the member of the board of commissioner. This requirement will
add more burdens for the entrepreneur, as they would have to incur additional cost for the
board of commissioners. To put it simply, the cost associated with the formation of
corporation might outweigh the benefit of limited liability for SMEs.
4.2 Administrative Burden for the Establishment and Maintenance of Partnership
One important and common issue in providing a suitable business form for closely held firms
are providing easy access to form business vehicle for wide range of business people. As
shown in Chapter 2, in other countries the reform to both partnership and company law
includes simplification procedure for formation through a simple submission or registration
of the incorporation documents with the relevant government agency (for example, the
Companies House in the UK or ACRA in Singapore), and such submission or registration can
be conducted through electronic means.
A study by Djankov et.al., reveals that business entry could be extremely expensive in many
countries not to mention the costs associated with corruption. The study also reveals that
heavier regulation of entry is generally associated with greater corruption that will only
beneficial to the politicians and bureaucrats in that country209. Another study in European
209
Simon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes, Andrei Shleifer, The Regulation of Entry, The
Quarterly Journal of Economics, Vol. CXVII, February 2002, Issue 1.
41
Union Member States by Becht et.al., also reveals that lower cost of incorporation attracts
more business formation210.
In Indonesia, the expert group when preparing its Expert Group Report and draft bill might
not weigh sufficient consideration to the result of the empirical studies mentioned above.
Consequently, the draft bill preserves the existing provisions of the Civil Code and the
Commercial Code that required a formalistic approach for incorporation of general
partnership and limited partnership, such as the obligation to have incorporation documents
in notarial deed format. The draft bill goes even further by requiring a notarial deed for
formation of the private partnership. The expert group argued that the requirement is
necessary to guarantee legal certainty for third parties who entered into contract with the
partnerships211. The reasoning of the expert group comes from article 1870 of the Civil Code
that gives a notarial deed an ultimate evidentiary value before the court of law as and when a
dispute arise212. By obliging the formation of partnership to be made in notarial deed, it is
expected that third parties could be protected from fraud or any deceitful action of the owners
of the partnership.
The merit of notarial deed for protection of third parties is, course, highly debated. It is
correct that under Indonesian law a partnership established agreement made in form of
notarial deed might help the entrepreneur to signal to the third parties on the credibility of
their business. However, to say that the notarial deed is an efficient measure to eliminate the
possibilities of fraud by the owners of the partnership is exaggerating. Recent financial fraud
in Indonesia provides evidence that the fact a business firm established by virtue of an
agreement made in form of notarial deed did not guarantee that fraud would not be
occurred213. If there is one thing for sure, the obligation of having the deed of establishment
to be made in the form of notarial deed will only raise the cost for entrepreneur to start a
business.
210
Marco Becht, Colin Mayer and Hannes F. Wagner, Where Do Firms Incorporate: Deregulation and the Cost
of Entry, ECGI Working Paper Series in Law, Working Paper No. 70/2006, August 2007.
211 Expert Group Report, supra note 186.
212
Id.
213
A recent financial fraud in Indonesia involving a bank, PT Bank Century Tbk., a public corporation that
subject to supervision of both the Indonesian Central Bank and the Indonesian Capital Market and Financial
Institution Supervisory Board. The shareholders of PT Bank Century Tbk., were charged for embezzled almost
USD 1 billion of costumer fund. As a corporation, of course, its deed of establishment and any of its subsequent
amendments were made in the form of notarial deed format. However, such requirement did not prevent the
fraud from occurring. See Bank Bailouts Rocks Indonesia, http://www.atimes.com/atimes/Southeast_Asia/
KI17Ae02.html
42
Current development in other countries, even in civil law countries such as France and
Colombia where notary usually plays important role for establishment of business firm, have
already moved toward a simple registration procedure without having to make the partnership
agreement in notarial deed. Even though registration will not guarantee that there will be no
fraud, the registration process is simpler and not as costly as notarial deed, and again less cost
could be an incentive for entrepreneurs to start up its business.
4.3 Limited Default Rules on Internal Relationship
One advantage of the partnership is that the partners generally enjoy a great degree of
freedom of contract in governing their internal relationship. The legislation on the partnership
usually provides default rules, which serve as a gap filling to the contract entered into by the
parties. The availability of default rules would help the inexperienced parties to reduce the
transaction costs that would otherwise be incurred to obtain adequate legal advice in drafting
the partnership agreement.
Notably the draft does not contain a detailed default rules on internal relationship amongst
the partners. The draft bill relies on the general good faith principle for contracts provided in
the Civil Code to govern their relationship. To be fair, the draft bill did provide sufficient
rules concerning partners‟ liability (either in the private partnership, general partnership and
the limited partnership) toward the partnership itself and third parties, management of the
partnership as well as partners‟ access to information and record, however, the draft bill does
not contain default rules on matters such as distribution of profit, voting rights to pass a
resolution, remuneration of partners acting in the management of the partnership or non
competition during the partnership or after an exit. The absence of these provisions from the
draft bill could be costly to entrepreneurs, as they might likely lack of expertise and therefore
have to rely on external advisors such as lawyers to assist them in drafting the partnership
agreement or otherwise may at risk of failing to make adequate provision for certain
necessary matters.
Ideally, the draft bill should contain, at least, basic default rules on internal relationship that
applies for partnership. Based on the study provided in Chapter 2 of this paper, the legislation
in other countries did provide more detailed default rules on internal relationship within the
partnership. In Singapore, for example, the default provision on limited liability partnership is
provided in the First Schedule of the Limited Liability Act 2005.
43
Chapter 5
Conclusion
Providing a business organizational form that most suitable for small and closely held firms
have became a common theme in regulatory reform in many countries in the last 20 years.
The wave of reform was started in the U.S by the introduction of hybrid business form, the
LLC and the LLP, which combines the limited liability protection of corporation and the
flexible governance arrangement of partnership. Admittedly, the creation of first LLC and
LLP in the U.S did not specifically intended as business organizational form for small firm
and closely held firms. However, its hybrid characteristic has been regarded as preferable
solution for different range of firms. Responding to the pressure from regulatory competition
and interest groups, the legislators in other countries follow the U.S. path in introducing the
hybrid business form. The new business forms broaden the option for entrepreneur to choose
from variety of business organizational form that suits their needs.
Recently, the Indonesian government has also proposed reform on its business organizational
law, in particular, the partnership law. The purpose of the reform is to prepare the existing
and future entrepreneur with good business environment, and one way to achieve this is by
providing suitable business vehicle for small and medium business firms. The proposal,
however, does not seem to pose similar characteristics to the reform in other countries. The
proposal refused the idea of creating new business forms that combined combines the limited
liability protection of corporation and the flexible governance arrangement of partnership.
Instead, it merely “patching-up” the provisions in the Civil Code and the Commercial Code
and introduce the revised provisions in a new legislation. To certain extent, the proposal may
even increase the cost associated with the set-up of business firm. The absence of regulatory
competition and interest group pressures in Indonesia may be attributed as the reason for the
reluctance of introducing new business form such as the LLC, the LLP and the SAS despite
their apparent advantages for small and medium firms compared to the traditional form of
partnership or corporation. This situation is exacerbated by the heavy path dependence
tendency of legal elites in Indonesia.
Having considered the above, there is doubt that the reform proposal on partnership law will
be able to achieve its goal. As the reform proposal does not result offer new business form
that has distinct characteristic with the existing available forms, it could be expected that the
reform would not encourage the establishment of many new businesses. If the government of
44
Indonesia wishes to provide good business environment for its small and medium enterprises,
it is necessary to take a step back and making comparative legal analysis with the legislation
in other countries that have been successfully reformed its business organizational law. The
reform proposal must be able to correctly answer the problem rather than just maintain the
principle of the existing regulation as well as provide the incentives for entrepreneurs to start
their business.
45
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http://www.rieti.go.jp/ jp/events/06022701/pdf/2-2_quek_paper.pdf
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Small, Medium Enterprise of the Republic of Indonesia, available at
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Mix Up, Journal of Business Law 2002, Sep, 475-512.
46
- Guinnane, Timothy, et.al., Ownership and Control in the Entrepreneurial Firm: An
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1047 2000-2011.
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49

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MASTER THESIS

BUSINESS ORGANIZATIONAL LAW REFORM IN INDONESIA

Name : Fani A. Siregar

Master Program : International Business Law

Coordinator : Prof. Erik P.M. Vermeulen

Supervisor : Jing Li, M.Phil., LLM.

Date : June 2012

2. BUSINESS ORGANIZATIONAL LAW REFORM: LESSONS FROM OTHER

3. BUSINESS ORGANIZATIONAL FORMS IN INDONESIA ..................................... 25

4. ASSESSMENT OF THE PARTNERSHIP LAW REFORM IN INDONESIA ......... 39

In case of Indonesia, SMEs‟ role in her economy is undoubtedly important28. It assumes a

Business Organizational Law Reform: Lessons From Other Countries

2.1 Determinant Factors for Law Reform

In most countries, law making is an interactive process between various parties

2.2 Business Organizational Law Reform in Other Countries

2.2.1 United States

Statutory Trust 3,200 3,868 4,449 2,581 1,312 1,263 1,319

LPs/LLPs 8,802 9,948 9,813 7,623 5,488 6,362 7,287

LLCs 87,630 96,831 111,820 81,923 70,274 82,027 93,219

Corporations 34,337 34,733 35,700 29,501 24,955 28,121 31,472

Source: Delaware Division of Corporation, Annual Report 2007, 2010, 2011

2.2.2 United Kingdom

Table 2. New Registrations of Business Forms in the United Kingdom78

Business 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 -

Private Companies 332,700 370,800 448,700 371,700 329,600 365,100 395,800

Limited Partnerships 1,245 1,175 1,063 1,251 1,151 1,104 1,539

LLPs 5,191 6,570 8,818 9,198 8,855 9,760 10,145

Source: U.K. Companies House

Singapore is viewed as an example of an entrepreneurial jurisdiction 109 . It means that

Source: Janus Corporate Solutions, Singapore Company Registration Statistics Q1 2012

Country US LLC UK LLP SAS France SAS Colombia Singapore LLP

Number of 1 or more 2 or more 1 or more 1 or more 2 or more

Legal Entity Yes Yes Yes Yes Yes

Limited Liability Yes Yes Yes Yes Yes, but claw-back

Taxation Check-the-box Pass-through Corporate Corporate Pass-through

Source: Reyes and Vermeulen (2011)126

BUSINESS ORGANIZATIONAL FORMS IN INDONESIA

3.1 Overview of Business Organizational Form in Indonesia

As discussed briefly in Chapter 1, when a businessperson wishes to establish a business firm

3.1.2 General Partnership

3.1.3 Limited Partnership

The management structure of an Indonesian corporation applies two-tier structures. This

3.2 Recent Effort to Reform the Partnership Law

Assessment of the Partnership Law Reform in Indonesia

4.1 Reluctance to Provide Limited Liability to the Partnership

4.2 Administrative Burden for the Establishment and Maintenance of Partnership

4.3 Limited Default Rules on Internal Relationship

- ACRA Legal Digest, May 2005, Issue No. 8, available at

- Allen & Gledhill, Limited Liability Partnership Act Singapore, available at

- Development of SMEs and Large Businesses in Indonesia, Ministry of Cooperative and

- Hamilton, Robert W., Professional Partnership in the United States, 26 J. Corp. L.

- Janus Corporate Solutions, Singapore Company Registration Statistics Q1 2012,

- Mitchell, William, Early Form of Partnership, Select Essay in Anglo-American Legal

- Naskah Akademik Rancangan Undang-Undang tentang Badan Usaha Bukan Badan

- Ribstein, Larry E., The Evolving Partnership, 26 J. Corp. L. 819, 2001.

- Squire Sanders, New regulations in French corporate law: An Overview, available at

- Statictical Data of Singapore Economy, available at

- Tabalujan, Benny S., The New Indonesian Company Law, 17 University of

- The International Finance Company, Doing Business 2012, Economy Profile: