Legal Guide for UMKM Businesses to Gain More Trust

Micro, Small, and Medium Enterprises (UMKM, or Usaha Mikro, Kecil, dan Menengah) play a vital role in Indonesia’s economy. They account for over 60% of the national GDP and provide employment to millions of Indonesians. However, despite their contribution, many UMKM still operate informally without proper legal recognition.

Ensuring business legality is crucial for UMKM to gain access to financing, participate in broader markets, and protect themselves from legal risks. This article serves as a guide to understanding the importance of legality, the types of permits required, and the steps UMKM must take to become fully compliant.

Importance of UMKM Legality

1. Access to Financing

Banks and financial institutions require legal documentation before granting credit. With proper permits such as a Business Identification Number (NIB) and Taxpayer Identification Number (NPWP), UMKM can access working capital loans, micro-credit schemes (KUR), and other financing opportunities.

2. Customer Trust

Consumers are increasingly aware of product safety, quality, and authenticity. A business with proper legal permits signals professionalism and reliability, enhancing brand reputation and loyalty.

3. Market Expansion

With legal status, UMKM can participate in:

• Government procurement projects, which often require registered companies. 
• Online marketplaces, where product legality is mandatory for certain categories. 
• International trade, especially when supported by certificates such as BPOM registration for food or Halal certification for consumables. 

4. Legal Protection

A legalized business enjoys the protection of Indonesian law. This includes:

• Enforceable contracts with suppliers and partners. 
• Protection against unfair competition. 
• Ability to register intellectual property, such as trademarks. 

5. Sustainability and Growth

Operating legally ensures long-term stability, reducing risks of closure due to sanctions or fines. It also makes UMKM eligible for government incentives, training, and grants.

Types of UMKM Permits

UMKM must obtain several key permits to operate legally in Indonesia. The most common include:

1. Business Identification Number (NIB)

• Issued via the Online Single Submission (OSS) system under Government Regulation No. 5 of 2021. 
• Serves as the basic permit and company identity. 
• Functions as an import/export license and automatic registration for social security programs (BPJS). 

2. Taxpayer Identification Number (NPWP)

• Required for tax reporting and compliance. 
• Enables UMKM to engage in official financial transactions. 

3. Sector-Specific Licenses

Depending on the business sector, additional permits may be required:

• BPOM License – For food, beverages, cosmetics, and traditional medicine. 
• Halal Certification – Required for consumable products under the Halal Product Assurance Law. 
• Environmental Permits (UKL-UPL) – For businesses with potential environmental impact. 

4. Trademark Registration

• Provides legal protection for business names, logos, or product brands. 
• Essential for UMKM aiming to expand and build a recognizable identity. 

Legal Guide for UMKM Businesses to Gain More Trust

The Indonesian government has simplified the licensing process through the OSS Risk-Based Approach. Below are the general steps UMKM must follow:

Step 1: Prepare Basic Documents

• Valid identity card (KTP) of the owner. 
• Tax documents (NPWP, if available). 
• Proof of business address (domicile certificate). 
• Bank account statement (for financial verification). 

Step 2: Register through OSS

• Create an OSS account online. 
• Submit business data and supporting documents. 
• Obtain the Business Identification Number (NIB) as the first step toward legality. 

Step 3: Apply for Sectoral Licenses

• Depending on the industry, apply for additional permits such as BPOM registration or Halal certification. 
• Provide product samples, labeling information, and supporting documents as required. 

Step 4: Fulfill Tax Obligations

• Register or activate NPWP. 
• File regular tax reports (monthly or annually). 
• Comply with UMKM tax schemes, such as the 0.5% final income tax rate for small businesses under Government Regulation No. 23 of 2018. 

Step 5: Protect Intellectual Property

• Register trademarks to secure business identity. 
• Prevent unauthorized use of names, logos, or product packaging. 

Estimated Timeline and Costs

The timeline and costs vary depending on the type of permit:

• NIB via OSS: Usually completed within a few working days. 
• NPWP: 3–5 working days at the Tax Office. 
• BPOM registration: ± 20 working days, depending on product complexity. 
• Trademark registration: Several months, as it involves examination and approval. 

The cost of legalizing a UMKM starts from basic administrative fees but may increase with sector-specific permits. Government programs often subsidize certain fees to encourage UMKM compliance.

Common Challenges for UMKM

Despite simplification, UMKM often face challenges:

• Limited knowledge of online systems (OSS). 
• Incomplete documentation, leading to delays. 
• Financial constraints in paying registration or certification fees. 
• Misunderstanding of legal requirements, particularly for export-oriented products. 

Best Practices for UMKM Owners

• Seek guidance from local government agencies, chambers of commerce, or business associations. 
• Leverage free training offered by the Ministry of Cooperatives and SMEs. 
• Use professional services for complex permits such as BPOM or trademark registration. 
• Plan finances to cover both legal costs and compliance expenses. 

Conclusion

Legalizing UMKM businesses is not just about compliance—it is about building trust, credibility, and long-term sustainability. With proper permits such as NIB, NPWP, BPOM registration, and trademarks, UMKM gain access to financing, broader markets, and legal protection.

By following the steps outlined in this guide, UMKM owners can ensure their businesses operate on a strong legal foundation, ready to grow and compete in Indonesia’s evolving economy.