Guide to Starting a New Business
The article below provides basic information on starting a new business and on the process of incorporation of the business. It is important to emphasize that this is only basic information that is not a substitute for professional advice. Therefore, before opening your business you must seek professional advice from an accountant, in order to understand and decide correctly which form of incorporation is the most suited to the activity of the business.
In Israel, there are several forms of business incorporation, as follows:
• Exempt dealer
• Authorized dealer
• Partnership
• Limited liability company
Notwithstanding the foregoing, under Section 13 of the VAT Regulations, there are dealers that cannot be registered as an exempt dealer even if their annual turnover is less than NIS 100,491.
Below is the list of occupations that may not be registered as an exempt dealer:
• Agronomist, architect, engineering technician, private investigator, rabbinical pleader, technician, dental technician, organizational consultant, management consultant, scientific consultant, tax consultant, economist, engineer, surveyor, bookkeeper, interpreter, insurance agent, lawyer, accountant, appraiser, chemical or medical laboratory owner, physician, psychologist, physiotherapist, veterinarian, dentist or dental practitioner.
• Service provider for artistic performances, including compéring and stage-set building.
• Preparation, checking and proctoring of examinations.
• Lecturing, instruction.
• Typing, shorthand, translation, writing, editing.
• Mediation.
• Driving school owner.
• Real estate trader or broker.
• School or kindergarten owner.
• Car dealer and broker.
• Duly registered company.
• Duly registered cooperative society under the Cooperative Societies Ordnance.
Important points to bear in mind regarding an exempt dealer:
• An exempt dealer does not collect VAT from his customers, and therefore he may not issue tax invoices for his transactions. On receiving payment, an exempt dealer only issues a receipt.
• An exempt dealer cannot offset the VAT he paid on his purchases and current expenses or request a VAT refund. The amount of the VAT he paid is added on the invoice received by him and forms part of his expenses for tax purposes.
• In the event that the turnover of an exempt dealer exceeds the fixed ceiling (NIS 100,491 a year), he must go to the regional VAT office and change his status to that of authorized dealer.
• Conversely, in the event that the turnover of an authorized dealer falls below the turnover set in the law for exempt dealers, he may become an exempt dealer only two years after his income has decreased.
• The income of an exempt dealer (like that of an authorized dealer) is considered personal income and is subject to income tax according to the same brackets that apply to a salaried employee; however, in contrast to a salaried employee, an exempt dealer (like an authorized dealer) may offset business expenses (deductible expense).
• The income of an exempt dealer (like that of an authorized dealer) is subject to payment of National Insurance (social security) contributions.
Below is a description of the stages of opening a file for an exempt dealer with the relevant authorities:
First stage – Opening an exempt dealer file with VAT
To open an exempt dealer file with VAT, you must go to the VAT office nearest to the business and bring the following documents:
• Form 821, fully completed and signed.
• ID card.
The dealer number the business owner will receive during the VAT registration process is his ID number. At the end of the registration process, the business owner will receive from the VAT representative a temporary VAT certificate that will be valid until the permanent certificate is sent to him – usually after several weeks. The certificate must be displayed prominently on the premises of the business.
Second stage – Opening a file with income tax
To open a file with income tax, you must to go to the tax office nearest to the business and complete the file opening form for a self-employed person (Form 5329). The file number that will be assigned is your ID number.
After opening the file with income tax, a request must be submitted to the tax officer to issue a withholding tax certificate and a certificate of keeping of books of account in accordance with the Public Bodies (Transactions) Law.
If the business will have employees, it is also necessary to open a deduction file with income tax. This is an employer’s file that gives you a deduction file number in addition to the regular file number you received from income tax.
After the files have been opened, you will be sent booklets for current tax filings and payments, both as a self-employed person and as an employer.
Third stage – Opening a file with National Insurance
Immediately upon opening the business, you must open a file with National Insurance as a self-employed person. You must go to the “Non-Salaried Persons” department at the National Insurance branch nearest to the business and complete the multiannual filing form (Form 6101). If the business has employees, you must go to the “Employers” department and open a deduction file.
After the files have been opened, you will be sent booklets for current National Insurance filings and payments, both as a self-employed person and as an employer.
Main stage – The most important and most highly recommended stage that eliminates all the previous stages
Simply contact our office, and we will open the files for you with each of the authorities, while also providing you with in-depth advice and guidance. This stage will save you time, resources, money and unnecessary bother. In this stage, you will acquire a much broader understanding of the business and tax world, allowing you to reach a well-founded decision on whether to open a business at all, and if so – what form of incorporation is best suited to your business.
An authorized dealer is a self-employed person registered with VAT, whose turnover exceeds the amount set for an exempt dealer (NIS 100,491 in 2020), unless he engages in one of the occupations listed in Section 13 of the VAT Regulations that requires him to be registered as an authorized dealer.
An authorized dealer is required by law to collect from his customers value-added tax (VAT) on each transaction. In other words, he adds to the amount of the transaction another 17% as output VAT. Since an authorized dealer collects VAT from his customers, he must issue a tax invoice for each transaction made by him, whether for the sale of goods or the provision of a service, specifying in the invoice the customer’s details, the transaction details, quantity, price, and the total amount of the transaction, to which output VAT will be added.
After receiving the payment, the authorized dealer must issue a receipt specifying the customer’s details, the method of payment (bank transfer, check details, credit card details or cash) and the amount received.
An authorized dealer is required to submit VAT returns every month or every two months.
The return must specify the transactions and the output VAT on them, as against the input VAT paid by the authorized dealer on his purchases and current expenses, and he must pay or claim a refund only on the difference between the input VAT and the output VAT.
In terms of accounting costs, registration of a business as an authorized dealer is a more expensive form of incorporation than registration as an exempt dealer.
Important points to bear in mind regarding an authorized dealer:
• An authorized dealer collects VAT from his customers, and therefore he is required to issue a tax invoice for his transactions. On receiving payment, an authorized dealer issues a receipt.
• An authorized dealer may offset the VAT he paid on his purchases and current expenses or request a VAT refund.
• An authorized dealer is required to submit VAT returns and pay VAT every two months (bimonthly filing), if he has an annual turnover of less than NIS 1.5 million. • However, if his annual turnover exceeds NIS 1.5 million, he is required to submit VAT returns and pay VAT every month (monthly filing).
• In the event that the turnover of an authorized dealer falls below the turnover set in the law for exempt dealers, he may become an exempt dealer only two years after his income has decreased.
• The income of an authorized dealer is considered personal income and is subject to income tax according to the same brackets that apply to a salaried employee; however, in contrast to a salaried employee, an authorized dealer may offset business expenses (deductible expense).
• The income of an authrozied dealer is subject to payment of National Insurance (social security) contributions.
Below is a description of the stages of opening a file for an authorized dealer with the relevant authorities:
First stage – Opening an authorized dealer file with VAT
To open an authorized dealer file with VAT, you must go to the VAT office nearest to the business and bring the following documents:
• Form 821, fully completed and signed.
• ID card.
• Professional certificate, in the case of a service provider’s business.
• Photocopy of a purchase/lease agreement for the business premises, if situated outside the home.
• Bank verification letter or a cancelled check.
• Additional documents may be required according to the type of activity, such as a customer contract.
The dealer number the business owner will receive during the VAT registration process is his ID number. At the end of the registration process, the business owner will receive from the VAT representative a temporary VAT certificate that will be valid until the permanent certificate is sent to him – usually after several weeks. The certificate must be displayed prominently on the premises of the business.
Second stage – Opening a file with income tax
To open a file with income tax, you must to go to the tax office nearest to the business and complete the file opening form for a self-employed person (Form 5329). The file number that will be assigned is your ID number.
After opening the file with income tax, a request must be submitted to the tax officer to issue a withholding tax certificate and a certificate of keeping of books of account in accordance with the Public Bodies (Transactions) Law.
If the business will have employees, it is also necessary to open a deduction file with income tax. This is an employer’s file that gives you a deduction file number in addition to the regular file number you received from income tax.
After the files have been opened, you will be sent booklets for current tax filings and payments, both as a self-employed person and as an employer.
Third stage – Opening a file with National Insurance
Immediately upon opening the business, you must open a file with National Insurance as a self-employed person. You must go to the “Non-Salaried Persons” department at the National Insurance branch nearest to the business and complete the multiannual filing form (Form 6101). If the business has employees, you must go to the “Employers” department and open a deduction file.
After the files have been opened, you will be sent booklets for current National Insurance filings and payments, both as a self-employed person and as an employer.
Main stage – The most important and most highly recommended stage that eliminates all the previous stages
Simply contact our office, and we will open the files for you with each of the authorities, while also providing you with in-depth advice and guidance. This stage will save you time, resources, money and unnecessary bother. In this stage, you will acquire a much broader understanding of the business and tax world, allowing you to reach a well-founded decision on whether to open a business at all, and if so – what form of incorporation is best suited to your business.
A partnership is a legal body in which two or more persons carry on any form of business together with a view to profit but without incorporating as a limited liability company.
In other words, if you and several partners wish to form a business as an authorized dealer and not as a limited liability company, you must register as a partnership with the tax authorities.
In addition to registering the partnership with VAT, the partners may be registered as a registered partnership with the Registrar of Partnerships. This registration enables the formulation of bylaws for the partnership and clear rules as to each partner’s percentage of ownership and powers and the extent of their liability, the sharing of profits between the partners, and the procedure for dissolution of the partnership.
In addition, a partnership agreement can be drawn up which determines the status of each partner, each partner’s percentage of ownership and powers and the extent of their liability, the sharing of profits between the partners, and the procedure for dissolution of the partnership.
There are two types of partnerships:
1. General partnership – A partnership in which each partner is obligated personally and without any limit for the partnership’s debts. In other words, the creditors of a general partnership can sue each partner individually and without any limit for the partnership’s debts.
2. Limited partnership – A partnership in which there is at least one general partner who is obligated without any limit for the partnership’s debts, and at least one limited partner whose responsibility for the partnership’s debts is limited to the amount of his investment in the partnership, meaning that he is at risk for not more than the amount he invested.
Important points to bear in mind regarding a partnership:
• A registered partnership can sue and be sued.
• There is no distinction between the responsibility of the partnership and the partners for the debts of the partnership, in contrast to a limited liability company.
The partners are liable jointly and severally and without any limit for the partnership’s debts, other than the liability of the limited partner in a limited partnership.
• Creditors of the partnership may sue the partners individually to recover the partnership’s debts from them personally.
• The number of general partners may not exceed twenty, but a partnership of lawyers or accountants formed to engage in their occupation may include more than twenty members.
• The partnership’s profits are divided among the partners according to their share of the ownership, as personal income which is subject to income tax according to the same tax brackets that apply to a salaried employee.
• The partnership’s profits are divided among the partners according to their share of the ownership, as personal income which is subject to payment of National Insurance contributions.
• A fee must be paid to the Registrar of Partnerships when registering the partnership, as well as an annual fee each year.
Below is a description of the stages of opening a file for a partnership with the relevant authorities:
First stage – Opening a partnership file with VAT
To open a partnership file with VAT, it is necessary to go to the VAT office nearest to the business and to bring the following documents:
• Form 821, fully completed and signed – the form must be completed for each of the partners.
• The partners must appoint one representative from among them to act on their behalf vis-à-vis VAT and to sign the declaration appearing in Part C of Form 821.
• Photocopies of the ID cards of all the partners
• Certificate of registration of the partnership with the Registrar of Partnerships or a partnership agreement.
• Photocopies of professional certificates, in the case of a service provider’s business.
• Photocopy of a purchase/lease agreement for the business premises, if situated outside the home.
• Bank verification letter or a cancelled check, providing proof of a joint account.
• Additional documents may be required according to the type of activity, such as a customer contract.
The authorized dealer number the partnership will receive during the VAT registration process is the partnership number for VAT purposes. At the end of the registration process, the partnership will receive from the VAT representative a temporary authorized dealer certificate that will be valid until the permanent certificate is sent to it – usually after several weeks. The certificate must be displayed prominently on the premises of the business.
Second stage – Opening a file with income tax
Since the profits of the partnership are divided among the partners according to their share of the ownership, as personal income, each partner must go to the tax office nearest to the business and complete the file opening form for a self-employed person (Form 5329).
After opening the file with income tax, a request must be submitted to the tax officer to issue a withholding tax certificate and a certificate of keeping of books of account in accordance with the Public Bodies (Transactions) Law.
If the business will have employees, it is also necessary to open a deduction file with income tax. This is an employer’s file that gives you a deduction file number in addition to the regular file number you received from income tax.
After the files have been opened, you will be sent booklets for current tax filings and payments, both as a self-employed person and as an employer.
Third stage – Opening a file with National Insurance
Immediately upon opening the business, you must open a file with National Insurance as a self-employed person. You must go to the “Non-Salaried Persons” department at the National Insurance branch nearest to the business and complete the multiannual filing form (Form 6101). If the business has employees, you must go to the “Employers” department and open a deduction file.
After the files have been opened, you will be sent booklets for current National Insurance filings and payments, both as a self-employed person and as an employer.
Main stage – The most important and most highly recommended stage that eliminates all the previous stages
Simply contact our office, and we will open the files for you with each of the authorities, while also providing you with in-depth advice and guidance. This stage will save you time, resources, money and unnecessary bother. In this stage, you will acquire a much broader understanding of the business and tax world, allowing you to reach a well-founded decision on whether to open a business at all, and if so – what form of incorporation is best suited to your business.
A limited liability company is a legal body that carries on business activity with a view to generating profits. The company is a separate legal entity from its owners, thus it can sue and be sued. Ownership of the company is held through shares that reflect the share of each owner in the company’s profits and voting rights. The shareholders are liable for and guarantee the company’s obligations up to the amount of their holding in shares, hence the term “limited liability.”
Nevertheless, in certain cases, the owners of a limited liability company may be obligated to repay the company’s debts to its creditors. Thus, where the court is persuaded that the company acted fraudulently or discriminated against its creditors, or where the company’s managers put its repayment capacity at risk or did not properly oversee the company’s conduct, and so forth, the court will order the “piercing of the corporate veil,” which is a legal tool enabling the attribution of the obligations and rights of a limited liability company to its shareholders.
Every company has bylaws which constitute a contract between the company and its shareholders, as well as among the shareholders. The bylaws include the company’s name, its purpose, details of its share capital, information about the limitation of the shareholders’ liability, as well as other information, such as the shareholders’ rights and obligations and the company’s management procedures.
To form a company there must be least one shareholder but not more than 50 shareholders. The formation of a company requires registration with the Registrar of Companies Unit, which operates within the Ministry of Justice. Additionally, when registering a company a registration fee must be paid, and each year the company is required to pay the Registrar of Companies an annual fee.
Important points to bear in mind regarding a limited liability company:
• In accordance with the Companies Law, a company must appoint an independent auditor to audit its annual reports.
• The company is a separate legal entity, thus it can sue and be sued.
• The company serves as a barrier between business assets and personal assets and protects its shareholders’ personal assets in the event of claims against the business.
• Nevertheless, in certain cases, the owners of a limited liability company may be obligated to repay the company’s debts to its creditors – for example, if the court orders the “piercing of the corporate veil,” or if the shareholders are required to sign a personal guarantee (such as by banks when opening a bank account for the company).
• A limited liability company presents a more serious and substantial image than an authorized dealer and enjoys a branding advantage.
• It is easier for a company to build up goodwill with third parties than for an individual operating as an authorized dealer.
• The cost of maintaining a company is higher than for an authorized dealer and involves paying an annual fee to the Registrar of Companies, keeping double-entry accounts and appointing an independent auditor to audit the annual report.
• The income of a company is subject to corporate tax at a flat rate of 23% (as of the 2020 tax year). Any dividend taken by the shareholders (from the company’s profits) is subject to tax at a flat rate of 30% (as of the 2020 tax year).
• The income of a company is not subject to National Insurance contributions.
Below is a description of the stages of opening a file for a company with the relevant authorities:
First stage – Registration of a company with the Registrar of Companies
• You must turn to a lawyer who specializes in corporate law to prepare the documents required for registering the company: company registration application, directors’ declaration, shareholders’ declaration, company bylaws, documents submission form.
All the documents must be certified and signed by a lawyer.
• A one-time registration fee must be paid when registering the company, amounting to NIS 2,650 if paid at the post office or to NIS 2,180 if paid online.
Second stage – Opening a company file with VAT
To open a company file with VAT, it is necessary to go to the VAT office nearest to the business and to bring the following documents:
• Form 821, fully completed and signed.
• Certificate of incorporation.
• Company bylaws.
• Minutes of authorized signatories.
• Photocopies of the ID cards of all the shareholders.
• Photocopy of a purchase/lease agreement for the business premises, if situated outside the home.
• Bank verification letter or a cancelled check.
• Rubber stamp of the company.
• Additional documents may be required according to the type of activity, such as a customer contract.
The authorized dealer number the company will receive during the VAT registration process is a private company number that is recorded at the Registrar of Companies (certificate of incorporation). At the end of the registration process, the company will receive from the VAT representative a temporary authorized dealer certificate that will be valid until the permanent certificate is sent to it – usually after several weeks. The certificate must be displayed prominently on the premises of the business.
Third stage – Opening a file with income tax
It is necessary to go to the tax office nearest to the business and to complete the file opening form for a corporation and/or deductions (Form 4436).
If the business will have employees, it is necessary also to open a deduction file with income tax (Form 4436, Section C). This is an employer’s file that gives you a deduction file number in addition to the regular file number you received from income tax.
After opening the file with income tax, a request must be submitted to the tax officer to issue a withholding tax certificate and a certificate of keeping of books of account in accordance with the Public Bodies (Transactions) Law.
After the files have been opened, you will be sent booklets for current tax filings and payments, both as a company and as an employer.
Fourth stage – Opening a deduction file with National Insurance
A deduction file at National Insurance will be opened automatically immediately upon the opening of a deduction file at income tax.
After a deduction file has been opened, you will be sent booklets for current National Insurance filings and payments as an employer.
Main stage – The most important and most highly recommended stage that eliminates all the previous stages
Simply contact our office, and we will open the files for you with each of the authorities, while also providing you with in-depth advice and guidance. This stage will save you time, resources, money and unnecessary bother. In this stage, you will acquire a much broader understanding of the business and tax world, allowing you to reach a well-founded decision on whether to open a business at all, and if so – what form of incorporation is best suited to your business.
