Start-ups are not just about creating a great product, but involve paperwork like any other business. Avoid these rookie legal mistakes that can really harm your start-up journey!
Yes, you read it correctly – unnoticed legal issues can trip up your startup faster than your head can spin. Legal matters don’t even make it to the to-do-list when you are excited about setting up your venture and launching it. However, this doesn’t mean other enterprises would allow you to infringe upon their trademarks or you can provide false or incorrect information to your investors.
Whatever business model you pursue, the law will be a part of the process, which if used correctly, can help you fulfill your goals, and position your startup for success. However you look at it, the only way you can spare yourself the needless anguish is by avoiding these common legal mistakes that most start-ups and entrepreneurs make.
There are many common mistakes foreigners make when they start to set up company in Indonesia. Some of them happen due to lack of preparation, some of them as a result of twisting the law. This article helps to avoid those mistakes and get your company up and running without unnecessary delays.
#1 Business activities are unclear
The first question anyone setting up a company in Indonesia should ask themselves is:
What are going to be my business activities?
Knowing your business activities is important as it determines your business classification (KBLI). Note that there are KBLI’s that can be owned 100% by foreigners, however many of them are in the negative investment list and therefore restrict or prohibit foreign ownership.
For example, one of the main challenges a lifestyle business in Bali is facing is when entrepreneurs are trying to set up different activities under one company. However, in Bali there are several limitations on the business classifications that can be registered under one PT PMA.
See us covering this more in depth on our recent service How to Start a Business in Indonesia.
Sometimes the business activities fall under several KBLI’s. In such case ask your consultant to advise you which KBLI would be the most convenient for the incorporation process.
#2 Getting into unsafe nominee arrangements
Nominee arrangements with friends and family are one of the riskiest when it comes to entering the market. A secure solution is having a nominee agreement with a proper structure.
Let´s say instead of choosing nominee individuals you use a company such as KontrakHukum.com (former BuatKontrak.com) to sign a nominee agreement with. After the agreement use either us or a trustworthy local corporate nominee to pledge the shares. This way you have a documentation that is approved by the Indonesian laws and can safely conduct business.
This set of agreements helps control 2 main risk factors:
Risk of nominee leaving with your assets
You being able to manage the company without nominee’s support (especially if the nominee is not willing to cooperate in the future)
Using a nominee company instead of an individual eliminates many potential risks. For example if any of the following happens to the nominee individual:
Due to the above the shares are given to people not involved in the business at all. For example inherited by children of the nominee who are not interested in the wellbeing of the business.
#3 Starting the company with too small capital
Prior to incorporation, think of the size of your team. How many foreigners are you planning to hire in the following couple of years? This helps you set the capital correctly.
The current capital requirement in Indonesia is IDR 1 billion (~ 75,000 $US) per each foreign employee. Changing this number at a later stage is both time-consuming and costly.
Indonesian company law defines business sizes based on their capital:
0 – 50 million IDR: micro business
51 million – 500 million IDR (~3,900 – 38,000 $US): small business
501 million – 10 billion IDR (~38,000 – 760,000 $US): medium-sized business
> 10 billion IDR (> 760,000 $US): large enterprise
To protect local businesses, foreigners are allowed to start a foreign owned company (PT PMA) with a minimum amount of paid up capital IDR 2,5 billion (~ 190,000 $US).
We strongly advise against using the smallest amount of capital. Small companies are not allowed to hire foreigners or join big tenders. Increasing your capital in the future is more complicated than starting the company with bigger capital from the beginning.
#4 Using unprofessional agent to register the company
How to choose from multiple service providers?
As in every field of business, some agents offering their services turn out deceitful. Here is what to look out for:
Can the agent provide references? Ask feedback from their previous customers, this should give you good insights on what will lie ahead when stepping into business with this particular agent.
Is the agent local or locally owned company? The Foreign Investments Coordinating Board (BKPM) allows only locally owned consultancies to process PT PMA applications. Your agent should be either locally owned or have a local entity for that purpose.
Is the agent aware of BKPM regulations and references? The regulations in Indonesia are changing rapidly and a qualified agent keep a client up to date. Ask the agent for a law referral to given facts, shady agent often gives out misleading information.
When looking to set up company in Indonesia, find a service provider whose background you have checked and behaviour you can trust.
With KontrakHukum.com (former BuatKontrak.com) your company can benefit from years of experience and corporate knowhow. The same quality is guaranteed for all market entry services in Indonesia.
Once you have chosen an agent to work with, make sure to keep an eye on the progress. If your agent fakes your signatures (and it happens more than you would think) it means that you basically have no control over what they will apply for.
For those considering registering a PT PMA on their own, it is technically possible. However, unless you are incredibly well informed about the sudden changes in the regulations, mistakes will occur. This means your application will either be refused or delayed, both result in wasted time and money.
#5 Not reporting taxes and investments correctly
Tax reporting in Indonesia
Always report your taxes on time from the very beginning. You must report tax immediately after receiving your tax card, regardless of whether you had any activity or not. This is something that the authorities in Indonesia are keeping a close eye on more and more.
Tax reporting is not complex and can be easily outsourced if you don’t have an accountant on your payroll. There’s really no excuse why to skip a report and attract the tax office attention.
Key areas of compliance
When it comes to the rest of the compliance in Indonesia, then in addition to tax reporting, the key areas foreign owned businesses must follow are:
Social security programs (BPJS)
Indonesia accepted a new policy in 2017 – health insurance is currently mandatory to all country´s employers.
Another crucial compliance topic is investment reporting – every PT PMA must report its investment activity. For the reporting there are different deadlines depending on what stage your business is in.
A certain person must be responsible for the making of the report as per BKPM.
Overall it should be a priority for an entrepreneur to keep the compliance in order as eventually this is more cost effective. Your company documentation is linked, if something is not properly settled, it slows down the process overall.
#6 Not preparing enough time to set up company in Indonesia
For those entrepreneurs used to business incorporation timelines being less than a month, prepare for a slightly different timeframe in Indonesia.
Unlike in more developed markets, plan to set up company in Indonesia well in advance. What we’ve seen often is businesses waiting for a significant contract to then start thinking of a company setup. It should be the other way around.
Opting for a shelf company in the last minute
A shelf company is a ready-made company that comes without any activities. The main benefits of the purchase are:
It already has an existing bank account, registered address and all the necessary reports are correctly submitted. You are buying a company with a clean history, you can use it to conduct business, participate in tenders, issue invoices etc.
Shelf company becomes available for doing business immediately after the purchase.
Opting for the shelf company works well if it has the right kind of business classification that fits with activities you plan to do in Indonesia.
Why we have listed this here as a mistake is that we often see the shelf company purchase in Bali as a last minute move to quickly enter the market and start conducting business. However this may result in you buying a company with a license that does not match your business classification (aka for a restaurant you need a company with a valid building permit with correct function).
#7 Giving up because Indonesia seems too complicated
Despite the fact that statistically, doing business in Indonesia is getting easier every year, there are still talks about the red tape referring to bureaucracy while doing business.
This is one way of looking at things. An entrepreneur is successful in Indonesia when he or she overcomes the fact that surroundings are a limitation and sees them rather as an opportunity. This is what Indonesia is all about – exploring the possibilities and coping with the changes.
For those willing to take the journey, accessing the around 260 million consumers base can be quite rewarding. Thanks to the above mentioned red tape, the competition is also not too extensive. Those already in the market can see that the efforts taken were worth it.
The described bureaucracy, obstacles and changing regulations force a number of businesses to become hesitant of even following through the incorporation process.
Bonus tip: Thinking that regulations that don’t make sense don’t need to be followed
There are several aspects that confuse foreign investors, especially the ones who have experience with developed markets. For example:
Why is company registration such a long process? Why can’t I have a registered office in my residential house?
Do I really need to involve a second shareholder?
Why is the capital requirement that big?
Why can I own only X% of the business?
Keep an open mind and even if your experience is different, be tolerant and accepting towards the laws you are facing. If some laws are confusing, this is no reason to disobey or go past the law, this is where you should ask help from an agency.
The fact that investors have been facing unanswered legal questions has led to several restaurants in Bali to operate without permits. Processing the required building permits costs money and takes time, which often the entrepreneurs are not willing to invest in. Either because they are not familiar with the procedures or they wish to start the business faster. Unfortunately it’s illegal and not sustainable.