i

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.

ii

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

1

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 venture3. 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.

2

individual promoters and owners7. Additionally, the firms must possess a feature that can

attract outside investors in order to raise money in the capital market8. 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 assets13

. 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.

3

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

Ribstein, supra note 6, p. 66. 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.

4

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).

5

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

6

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.

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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 law30

. 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.

8

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

9

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 LLC42

. 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 interest47

. 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

Vermeulen, supra note 22. 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

10

group49

were also fuelled the spread of LLC statutes50

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 traded51

. 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

Hamill, supra note 38. 50

Vermeulen, supra note 22. 51

Hamill, supra note 38. 52

Id. 53

Vermeulen, supra note 22. 54

Id. 55

Id.

11

Table 1. The Market Share of the LLC in Delaware

Business

Organization Forms 2005 2006 2007 2008 2009 2010 2011

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

control57

. 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 insufficient58

. 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 partners59

. Some of

the defendants in these suits, however, were persons who had nothing at all to do with

representation of the various thrift institutions60

. 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.

12

partnership61

. 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 changed65

. 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.K67

. 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

Ribstein, supra note 6, p. 127. 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.

13

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 firms70

. 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 accountants73

. 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.

14

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

Organization Forms

2004 -

2005

2005 -

2006

2006 -

2007

2007 -

2008

2008 -

2009

2009 -

2010

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).

15

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

199484

. 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

Vermeulen, supra note 22. 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.

16

the SAS was made in 1999, where a single person (either natural or legal) may form SAS87

.

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

Reyes and Vermeulen, supra note 39. 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

Reyes and Vermeulen, supra note 39. 92

Wooldridge, supra note 86. 93

Reyes and Vermeulen, supra note 39. 94

Id. 95

Wooldridge, supra note 86.

17

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 Act100

. 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

Reyes and Vermeulen, supra note 39. 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

Reyes and Vermeulen, supra note 39. 101

Reyes, supra note 99. 102

Id.

18

required at least five persons for incorporating or starting its operation103

. 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 jurisdiction109

. 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 industries110

. 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

Reyes and Vermeulen, supra note 39. 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.

19

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 partners116

. 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

business117

. 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

20

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 partnership119

. 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 firms121

. 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

Reyes and Vermeulen, supra note 39. 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

Reyes and Vermeulen, supra note 39.

21

Table 3. Singapore Business Registration by Entity Type

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

22

Table 4. Hybrid Business Form in Several Countries

Country US LLC

Delaware

UK LLP SAS France SAS Colombia Singapore LLP

Management Member managed,

unless otherwise

provided in the

agreement

Member managed,

unless otherwise

provided – mandatory

designated members

Parties are free to decide

the management

structure, however, it is

compulsory to have a

“President”.

Flexible. Shareholders

may manage the

company directly

Member managed,

unless otherwise

provided in the

agreement.

Number of

Members

1 or more 2 or more 1 or more 1 or more 2 or more

Fiduciary Duties Access to information

and records

Specific default duties in

the regulations

Good faith – articles of

association could

provide more detailed

rules

“Abuse of rights”

provision

Defined by agreement –

default provision in First

Schedule; disclosure and

non-compete

Financial Rights Unless provided in the

agreement, profit and

losses allocated on the

basis of the agreed value

Unless provided in the

agreement, equal

sharing rights

Unless provided in the

agreement, sharing in

proportion to members‟

contribution

If no agreement (special

classes of shares)

sharing in proportion to

shareholding

Unless provided in the

agreement, sharing in

proportion to the equity

participation

23

Country US LLC

Delaware

UK LLP SAS France SAS Colombia Singapore LLP

of the contribution

Freedom of

Contract

Yes, complete freedom Yes, but some

mandatory rules

Yes, but some

mandatory rules

Yes, but some

mandatory rules

Yes

Transferable

Interest

Yes, restriction could be

imposed by the

agreement

No public offerings

allowed

No public offerings

allowed

Yes, restrictions could

be contractually

imposed

LLP Agreement –

default assignment of

financial rights

Legal Entity Yes Yes Yes Yes Yes

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

provision before

insolvency

Financial

Statements

Members have access /

no public disclosure

An annual return and

annual statutory

accounts must be filed

Parties are required to

disclose annual accounts

Shareholders must

approve financial

statements and annual

accounts

Members have access –

account and other

records must be kept for

seven years

24

Country US LLC

Delaware

UK LLP SAS France SAS Colombia Singapore LLP

Formation Simple certificate of

formation (filed at the

Secretary of State)

Registration at the

Companies House

Registration at the

Commercial Court

Incorporation document

filed at the Mercantile

Registry (online

registration)

Online registration with

ACRA

Notarization of

Charter

No No No No No

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

Sectors Widely used Particularly

professionals and joint

ventures

Widely used Mainly micro

enterprises and small

business

Mostly professional

firm. However, it is also

used by other sectors.

Source: Reyes and Vermeulen (2011)126

126

Reyes and Vermeulen, supra note 39.

25

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

sector129

. 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.

26

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 account134

. 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

manager135

. 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 her136

.

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

27

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.

28

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 objects143

. 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

Art 23 of the Indonesian Commercial Code 142

Art 26 of the Indonesian Commercial Code 143

Art 29 of the Indonesian Commercial Code 144

Art 17 (1) of the Indonesian Commercial Code 145

Art 17 (2) of the Indonesian Commercial Code

29

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

Art 19 of the Indonesian Commercial Code. 149

Art 19 of the Indonesian Commercial Code. 150

Art 17 (1) of the Indonesian Commercial Code.

30

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 partnership151

. 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 form153

. 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 year155

. The Commercial Code does not impose any sanction or penalty for

managing partners who are failed to do so.

151

Art 18 of the Indonesian Commercial Code. 152

Art 20 of the Indonesian Commercial Code. 153

Art 22 of the Indonesian Commercial Code. 154

Art 28 of the Indonesian Commercial Code. 155

Art 6 of the Indonesian Commercial Code.

31

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 judgment156

.

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 shares158

. 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 law160

. 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

Art 30 of the Indonesian Commercial Code. 158

Art 1 (1) of the Indonesian Company Law. 159

Art 7 (1) of the Indonesian Company Law. 160

Art 4 of the Indonesian Company Law.

32

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 dividend161

. 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

corporation165

. 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

Art 15 of the Indonesian Company Law. 162

Art 9 and 10 of the Indonesian Company Law. 163

Art 10 (6) of the Indonesian Company Law. 164

Art 7 (1) of the Indonesian Company Law. 165

Art 7 (5) of the Indonesian Company Law.

33

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 corporation169

. 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 payments170

. 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 shares171

.

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

Art 32 (1) of the Indonesian Company Law. 167

Art 33 (1) of the Indonesian Company Law. 168

Art 34 (1) of the Indonesian Company Law. 169

Art 52 of the Indonesian Company Law. 170

Art 53 (4) of the Indonesian Company Law. 171

Art 57 (1) of the Indonesian Company Law. 172

Art 92 (1) and 98 (1) of the Indonesian Company Law. 173

Art 108 (1) of the Indonesian Company Law.

34

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

Art 92 (4) of the Indonesian Company Law. 175

Art 108 (4) of the Indonesian Company Law. 176

Art 118 of the Indonesian Company Law. 177

Art 94 (1) and 111(1) of the Indonesian Company Law. 178

Art 63 of the Indonesian Company Law. 179

Art 64 of the Indonesian Company Law. 180

Art 66 (1) of the Indonesian Company Law. 181

Art 66 (2) of the Indonesian Company Law.

35

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 shareholders183

. 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

Art 68 (1) of the Indonesian Company Law. 183

Art 52 in conjunction with Art 71 (2) of the Indonesian Company Law. 184

Art 71 (3) of the Indonesian Company Law. 185

Art 70 of the Indonesian Company Law. 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.

36

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.

37

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 amendment196

. 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 party197

(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

Art 11 of the Draft Bill. 196

Art 12 (4) of the Draft Bill. 197

Art 31 (1) of the Draft Bill. 198

Art 15 (1) of the Draft Bill. 199

Art 25 (2) of the Draft Bill. 200

Art 25 (3) (b) of the Draft Bill.

38

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 establishment202

. 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

Art 1 (2) in conjunction with Art 1 (8) of the Draft Bill. 202

Art 82 of the Draft Bill. 203

Art 1 (3) in conjunction with Art 1 (8) of the Draft Bill. 204

Art 86 of the Draft Bill.

39

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 practices205

. That said, the expert group showed strong

tendency of both structural path dependence and rule-driven path dependence206

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.

40

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.

41

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.

42

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

43

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.

44

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

45

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.

46

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