Incorporating a Business in Israel: Key Factors to Consider
One of the first and most consequential decisions when starting a business is choosing the right form of incorporation. Several key factors shape this decision, and we outline the main considerations below: separate legal personality, the nature of the business activity, establishment and operating costs, and taxation.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
The Principle of Separate Legal Personality
One of the primary considerations in choosing a form of incorporation is the desire for legal and financial separation between the business and its owners. This separation limits the personal exposure of the business owner and protects their personal assets. For example, if you choose to establish a company, it has a separate legal personality from that of its owners. The company can sue and be sued, and if it encounters financial difficulties, its owners are generally not liable for its debts — except in exceptional cases where a court “pierces the corporate veil.” In contrast, operating as a licensed dealer (osek murshe) or exempt dealer (osek patur) does not create this separation: the business owner is personally liable for all of the business’s obligations, and creditors may pursue the owner’s personal assets to satisfy debts.
The Nature of the Business Activity
For a for-profit business, the relevant forms of incorporation are a company or a licensed/exempt dealer, depending on the scope and type of activity. For a nonprofit organization, the choice is between an association (amuta) and a public benefit company (CIC). Defining the nature of the activity is itself an important consideration. For example, a public benefit company’s stated objectives must correspond to specifically defined categories under the law, whereas an association’s objectives are more flexible. The process for changing the organization’s defined business activity also differs: amending an association’s bylaws requires only the approval of the Registrar of Associations, while a public benefit company must obtain court approval for such changes.
Establishment and Operating Costs
Different forms of incorporation carry different costs, both at the establishment stage and during ongoing operations. Establishing a company involves higher upfront costs than registering as a licensed or exempt dealer. The ongoing costs of operating a company are also significantly greater, due in part to the requirement to maintain double-entry bookkeeping (as opposed to simpler bookkeeping for a licensed/exempt dealer), corporate tax obligations, and more extensive reporting requirements that necessitate regular involvement of an accountant.
Tax Considerations
Taxation is one of the most important considerations when choosing a form of business incorporation, given the significant financial impact of tax obligations. There is a notable income tax advantage to operating as a company compared to a licensed dealer — provided the company’s owners reinvest accumulated profits in the business rather than withdrawing them as dividends. Additionally, a company is not subject to National Insurance (Bituach Leumi) contributions, unlike licensed and exempt dealers, who must pay these contributions on their business income.
We invite you to schedule a legal consultation where we can evaluate the best incorporation options for your specific business needs.
In summary, the form of business incorporation has far-reaching consequences for how the business is managed, the tax rates it faces, the level of personal liability for shareholders, and many other areas — including employment practices, reporting obligations, regulatory compliance, and oversight requirements. Sound legal advice at the outset can save time, reduce costs, and streamline processes for years to come.
Mor & Co. Law Firm’s Commercial Law Department has extensive experience representing entrepreneurs, businesses, and corporations from Israel and abroad across a wide range of legal areas. Whether you are launching a startup, restructuring an existing business, or exploring your incorporation options, our attorneys are here to help. Contact us by phone at 02-595-3322, via WhatsApp at 050-441-1343, or through the online contact form below.