Understanding the Meaning of Legal Entity


Understanding the Meaning of Legal Entity

In general, business entity is an association having business activities for the purpose of seeking profit. Business entities are divided into two forms, namely Business Entities that are not in the Legal Form Entities (“Non-Legal Entity”) and Business Entities in the Legal Form Entities (“Legal Entity”). An association which is performing business activities, need legal protection for the sustainability of their business activities. Legal Entity is a title which could be obtained by an association to guarantee legal protection for the continuity and simplify the implementation of their business activities. Then, how important is Legal Entity for an association’s business activities?

  1. What is the meaning of Legal Entity?

Legal Entity or rechtspersoon is a legal subject whose existence is recognized. Legal Entity is formed for specific purposes, with a separation between personal assets and assets belonged to Legal Entity and has regular management and organs to operate the Legal Entity. As a legal subject, Legal Entity may also take a legal action, to sue or to be sued in court.

  1. What is the difference between Non-Legal Entity and Legal Entity?

Non-Legal Entity is an association which is formed for specific purposes without any separation between the private assets and the association’s assets. Whilst, Legal Entity is an association formed for a specific purpose, when an association has been legalized to be a Legal Entity, then there will be a separation between personal assets and assets belong to Legal Entity.

  1. What are the types of Legal Entities?

There are 3 (three) types of Legal Entity, which are:

  1. Limited Liability Companies

Based on Article 1 section 1 Law Number 40 of 2007 (“Law 40/2007”), Limited Liability Company is a Legal Entity consisted of capital alliances, formed based on agreements and conducting business activities which assets divided into shares, and fulfill the requirements of regulations. The Limited Liability Company could be established by 2 (two) or more individuals based on a notarial deed drawn up in Indonesian Language. In principle, Limited Liability Company is formed to seek profits, which implementation has 3 (three) important organs, namely General Meeting of Shareholders (GMS), Board of Directors, and Board of Commissioners. Every Organ has rights and obligations to do, for example:

  • The GMS has the authority to take decisions or to amend the Article of Association based on forum provisions based on Law 40/2007;
  • Board of Directors have the authority to manage the Limited Liability Company for the interest of the company and responsible for its management. Board of Directors are also obligated to make a list of shareholders, a special register, minutes of GMS, and minutes of the Board of Directors’ meetings;
  • Board of Commissioners are obligated to supervise the company and have the authority suspend members of Board of Directors temporarily by stating the reasons.
  1. Cooperative

Cooperative, based on Article 1 section 1 Law Number 17 of 2012 concerning Cooperative (“Law 17/2012”) explain that Cooperative is a Legal Entity established by an individual or a Cooperative Legal Entity, with separation of the assets of its members as capital to operate the business, which fulfill the aspirations and needs in economic, social, and cultural fields in accordance to Cooperative’s values and principles to seek profit in order to improve the welfare of Cooperative’s members and society in general. Cooperative’s establishment is divided into two groups, Primary Cooperatives which is formed by at least 20 (twenty) individuals with a separation for the assets of the founders or members as the Cooperative’s initial capital, and Secondary Cooperatives which is formed by at least 3 (three) Primary Cooperatives.

The Cooperative consists of 3 (three) organs, namely Members’ Meeting, Administrators, and the Supervisors. The Cooperative’s organs have rights and obligations, which are:

  • Members’ Meeting has the authority to determine general Cooperative policies, amend the Articles of Association, and to make decisions which limited by Law 17/2012;
  • The Administrators have the authority to represent Cooperative inside and outside the court and are fully responsible to manage the Cooperative for its interest. Also, the Administrators are obligated to submit an annual accountability report;
  • The Supervisors are obligated to carry out their duties in good faith and full of responsibility for the Cooperative’s interest. Also, the Supervisors have the authority to accept or to reject new member and to dismiss a member accordant to the Article of Association’s regulation.
  1. Foundations

Foundations are legal entities consisting of assets separation, and allocated to achieve certain objectives in social, religious, and humanitarian fields, which has no member. A foundation has 3 (three) important organs, consist of Patrons, the Executives, and Supervisors.Each organ has rights and responsibilities as stated in Law Number 16 of 2001 (“Law 16/2001”), for example:

  • Patrons have the authority to make decisions on amendments to the Articles of Associations, and is obligated to hold a meeting at least once in a year;
  • The Executives have the right to represent the Foundation inside and outside the court and have full responsibility to manage the Foundation;
  • Supervisors have the authority to suspend members of the Executives temporarily with a reason, and in charge of supervising and providing advice for the Executives in performing the Foundation’s activities.

A foundation could be established by one or more individuals with assets separation of the founder’s assets as initial assets. Fundamentally, a foundation is not formed to seek for profits, but Foundation could still get profits by forming business fields under the Foundation, considering the main goals of the Foundation only focuses on social, religious, and humanitarian goals.

  1. How can an association obtain the “Legal Entity” status?

The title “Legal Entity” could only be obtained by an association if it gets approval by the authorized Minister. For instance, Based on Article 7 paragraph (4) Law 40/2007, The Limited Liability Company may obtain the status of Legal Entity on date the Decree of Minister concerning the Company’s ratification as a Legal Entity is issued. The authorized Minister in this field is the Minister whose tasks and responsibilities are in the field of law and human rights. Meanwhile, based on Article 10 paragraph (4) Law 17/2012, Cooperative could obtain the “Legal Entity” status when the Cooperative submit the application of Cooperative Establishment Deed in written by the founders jointly or their proxies to the Minister for getting an approval as a Legal Entity. The authorized Minister in this case is the Minister who is in charge in government affairs on Cooperative’s field. It is different from a Foundation, which could obtain the “Legal Entity” status by an approval towards its Deed of Incorporation of Foundation, from the Minister of Justice and Human Rights, as stated in Article 11 paragraph (1) Law 16/2001.

  1. What are the consequences after an association validated as a Legal Entity?

Essentially, the title “Legal Entity” is an effort to obtain legal protection in order to simplify a Legal Entity’s business activities. The validation of an association as a Legal Entity will have impact on the assets owned by the Legal Entity, which will become separate from personal assets of its founder, so that the liability of the Legal Entity is limited to the capital or assets owned by the Legal Entity.

It is stated in Article 3 paragraph (2) Law 40/2007 that Shareholders of Limited Liability Company are not personally responsible for the agreements made on behalf of the Limited Liability Company, and are not responsible for the Company’s losses in excess of their prospective shareholdings, so that they could not personally responsible for the legal actions taken by the Company. Unless, there are matters which qualified in the Article 3 paragraph (2) Law 40/2007.

  1. What is the exception to negligence in the implementation of a Legal Entity?

Based on Article 3 paragraph (2) Law 40/2007, there are some exemptions for the founder and/or the organ who may be personally responsible if qualified into these following matters:

“a. The requirements for the Company as a legal entity yet to be fulfilled or are not fulfilled;

b. The relevant shareholders, either directly or indirectly, with bad faith, exploits the Company for their personal interest;

c. The relevant shareholders are involved in illegal actions committed by the Company; or

d. The relevant Shareholders, either directly or indirectly, illegally utilizes the assets of the Company, which result in the Company’s assets become insufficient to settle the Company’s debt.”

In conclusion, if the founder and/or the organs of a Legal Entity take an action outside the provisions of the Article of Association or collective agreement, the founder and/or the organ can be stated as negligent and can be requested to take responsibility down to the personal assets of the founder and/or the organ, or commonly known as the principle of “Piercing the Corporate Veil”.



-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------This Article is generally made for the purpose of ANR Law Firm publication only and should not be treated as legal advice for your legal problem. Shall you have any further questions regarding this topic, you may contact the Advocate who authored this article at anrlawfirm@anr-lawfirm.com.

Author : Anita Khoirunisa, S.H.

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