When entrepreneurs embark on their business journey, one of the key decisions they face is choosing the appropriate business structure. This choice is more than just an administrative step; it shapes the financial and legal future of your business.
The main options available are a privately-owned business (self-employed or "Osek") and a limited liability company. Understanding the differences between each option can guide you to make an informed decision that matches your business goals.
Limited Liability Company:
Legal Structure: A company is a separate legal entity from its shareholders. This structure offers legal protection to shareholders as their personal assets are generally protected from the company's business liabilities.
Tax Implications: The corporate tax rate stands at 23% for 2023, and it applies to all company profits (from the first NIS). When profits are distributed to shareholders (dividends), an additional tax of 25% applies if the shareholder is not a significant shareholder and 30% if they are.
Privately-Owned Business:
Personal Liability: The business owner is directly liable to all taxes and legal obligations, with personal assets potentially at risk.
Taxation: The business owner is subject to individual national insurance (Bituach Leumi) and income tax rates, with rates varying according to income levels. For smaller activities with an annual turnover below 107,692 ₪ (as of 2023), one can request to be considered as exempt for VAT purposes ("Osek Patur") and as a minor business for income tax purposes ("Esek Zair"), thereby further reducing the bureaucracy involved in managing the business.
Upon opening your business, you must report it to the tax authority. Therefore, from the onset, it's important to consider the preferred form of incorporation. This decision should reflect the size of the business, the target market (and the legal exposure in that market), as well as your business's future financial goals.
So, what is the right choice?
Typically, small businesses or those operated as a 'part-time job' register with the authorities as an "Osek Patur" and "Esek Zair", thereby reducing the bureaucracy required in dealing with the tax authority.
Entrepreneurs establishing rapidly growing businesses or businesses with high risk (relative to the customer profile) usually operate the business as a limited company, which offers extensive legal protection to its shareholders. Limited companies are also suitable for complex transactions and international businesses, due to the flexibility this form of incorporation provides.
New businesses looking to reduce costs and the complexity of managing a limited company often operate as a privately-owned business, and over time, assess the need and advantages of transferring the operation to a limited company structure.
It is recommended to consult with an accountant before choosing the form of incorporation, given the complexity around tax planning, ongoing costs, and mandatory legal responsibility, expert advice is essential.
Ready to make an informed decision for the future of your business? Contact me today for comprehensive advice.