The #1 Best Legal Move For New Business Success in Israel
by Aviram A. Goldstein from Hait Family Law
A note from Jay Hait – Are you making Aliyah? Wish you knew the #1 best legal move for new business success in Israel? Many of us who’ve moved to Israel have had to reinvent ourselves in order to make a living. I personally only had to make a small adjustment. I practiced securities law in New York and switched to family law when I got to Israel. But I know attorneys who’ve become technical writers; nurses who have gone into non-healthcare areas; teachers who are now life coaches. I’ve even met a molecular biologist who became a restaurateur! For many immigrants, whether by choice or necessity, moving to Israel has given them the opportunity to become entrepreneurs.
I meet these trailblazers in my family law practice as they go through their life-cycles; getting married and/or divorced; making their wills; planning for their senior years and retirement; making healthcare decisions for their futures. These are clients who have shared their need for legal advice associated with their businesses. Up until recently we’ve referred them to commercial attorneys outside of our firm. But many have expressed the desire to stay on with us. So, we’ve expanded our legal services to include a commercial law division headed by Aviram A. Goldstein. Aviram is focused on empowering entrepreneurs. Here, he shares his take on the #1 best legal move for new business success in israel.
The Start Up Nation
Israel is known as The Start Up Nation. We are a country of entrepreneurs and we celebrate innovation and creativity. So, you are in excellent company when you make Aliyah and decide to open your own business. Did you know that over the last three years the intention of the adult, non-entrepreneurial population in Israel to start a new business, increased to 31.9%? This is partly due to the desire to be independent and partly because of very supportive government initiatives. There is an entire department called The Israel Innovation Authority Division here in Israel. In 2020 it approved 615 requests by new tech companies for support.
And people from all areas of our population are getting in on the growth. Women, the orthodox community, the Arab sector. 35,000 new businesses opened in 2021! Our culture glorifies the status of the entrepreneur. Maybe it’s because even though the rewards are great, it’s not an easy undertaking and those who are successful are revered.
Setting Up a Business
Congratulations! You’ve come up with a great idea for a business. Created a business plan. Scouted out locations (even if that means setting up your home office.) Lined up funding. If you’ll be taking on a partner, you’ve outlined your partnership agreement. It’s exciting and daunting at the same time. And now you have a very important decision to make. Knowing the best legal move for business success will help you.
Sole Ownership vs Registered Company
There are differences in both accounting and legal liability when choosing the way you’ll open your new business. First, let’s take a look at the accounting differences between the two and then we’ll examine the legal implications.
Sole ownership (עוסק מורשה, in Hebrew) is the simplest and most common structure when starting a new business. This means you own a company privately and that you can run it from home. You are able to have an office as well as employees, and you can make a modest profit.
There are two ways to set up your company if you go this route. Neither require any costs or complicated balance sheets that need to be managed by a chartered accountant. (You might want to consider hiring an accountant anyway).
The first is called an Osek Patur – עוסק פטור – (exempt from taxes dealer). This is for companies with a maximum annual turnover of 99,000 NIS (re-evaluated annually). You’re not required to make any VAT (value added tax) declarations nor can you recover VAT on expenses or investments.
The second way to set up your company under sole ownership is called an Osek Murshe -עוסק מורשה- (authorized dealer). Here you are required to pay taxes. This is for companies with a turnover of over 100,000 NIS yearly. In this case you make VAT returns every one or two months and you are able to get back the VAT on purchases and collect it on revenue.
While you can take care of all the accounting yourself with a sole ownership company – עוסק מורשה – (we do however recommend you do) and there is very little if any tax to pay, it also means you have unlimited personal responsibility for all the activities of your company. In contrast, if you open a registered company, a Chevrat Baam – – חברת בעם – the accounting is far more complicated and there are more taxes to pay as well. But you have almost no risk if you are a separate independent shareholder in your company.
Legal Differences Between Sole Ownership & Registered Company
It’s my experience that few people appreciate the significant legal advantages of setting up a Chevrat Baam – חברת בעם (registered company). When the owner (or shareholder) is a separate, independent legal entity from the business, he or she is protected against all claims against the business. In situations where finances get complicated or even if the business collapses, the owner is protected.
As soon as a company is registered it receives an identity number (called CO – the abbreviation symbolizes a “private company”). Once the company opens its own bank account, it may enter into any agreement or legal obligation. Since the company is a body without “arms and legs” as it were, all its actions are performed by an authorized person (usually the owner) on behalf of the company. And it’s as if the actions were taken by the company itself.
I’m going to use a fictitious case with exaggerated circumstances to illustrate all the legal advantages of setting up a registered company or Chevrat Baam. So, let’s follow Motti on his hypothetical business journey to see how he utilizes what I believe is the #1 best legal move for success in a new business.
One Man’s Hypothetical Business Journey
Motti was just an ordinary guy who wanted to build modern kitchens. So, he decided to open a carpentry shop to produce them. First, he consulted with an accountant who suggested that he open his company as a sole proprietorship (עוסק מורשה). The accountant told Motti that he should take advantage of not paying taxes and keeping his accounting to a minimum the first year, since he would not likely turn a very big profit. And he could always rethink it after a year if he made more than 99,000 NIS.
After seeking advice from a business lawyer the very next day, Moti did the opposite and opened his company as a Chevrat Baam – חברת בעם (registered company). And “Motti Modern Kitchens Ltd” was born.
At the beginning the company took out loans to finance the start of operations. Motti, by virtue of being the CEO, signed the loan agreement, on behalf of the company. (He was the arms and legs as mentioned before.)
Motti liked to do everything in a big way, so he (the company) rented a building on a half-acre with hopes that it would serve as a modern carpentry shop. He also purchased expensive, modern, sophisticated production equipment. Since he wanted to create a high-tech atmosphere, he recruited 12 employees, committing to high salaries and a leased car for each one. He made sure that the company paid him a respectable salary as well. After all, he was the CEO.
Over-Extended
Unfortunately, the company’s coffers emptied pretty quickly. That, however, did not stop Motti from ordering huge quantities of goods. The payment terms in the industry were “current +90” meaning, Motti would have to pay for the goods he now received, in three month’s time. Motti hoped that in the meantime, the company would have enough goods to produce modern kitchens and they would sell quickly.
Ultimately, things didn’t work out as Motti had planned. The company had to pay the current expenses; rent; property taxes; salaries to employees, etc. but it had no funds. Since Motti’s personal accounts (as opposed to the company’s account) had quite a bit of money accumulated over the years, he decided to lend money to the company himself. (This is called an “owner loan”).
Motti contacted his lawyer again to help him set up a loan agreement between himself and the company. On the one hand, Motti signed as a lender, and on the other hand, he signed on behalf of the borrower – the company of which he is the CEO.
Shortly afterwards, the company simply collapsed. Lawsuits began to arrive from every direction. The workers had not received their wages. The car leasing companies did not receive their money. Customers who didn’t get their kitchens and suppliers who didn’t get paid both tried to sue. In a short time, liens were taken on the bank accounts of the company (in which there was no money to seize) and against the company’s property. (In fact, the company had no property).
Company In Trouble
The employees filed a liquidation claim against the company (what was formerly, popularly called “bankruptcy”), and a receiver was appointed to liquidate the company’s assets. All of the company’s debtors had to file a debt claim, with the goal being that the receiver would sell the company’s assets, and pay each debtor the proportionate share from any remaining funds (a complex and cumbersome procedure).
Surprisingly, among the creditors was also Motti!
Motti demanded from “Motti Modern Kitchens Ltd” the full amount of the loan he gave to the company because it was made as a secured loan and had priority against the assets it was secured against. The rest of the debt holders got a relative share of what remained from the liquidation of the assets of the company (i.e. from nothing).
A really outrageous situation was created. Motti Kitchens Ltd. was disbanded, the suppliers did not receive the value for their money, the workers did not get their full rights, and Motti? Well, Motti bought a Mercedes.
Minimizing Your Own Risks
Starting a business in Israel involves considerable risks. In practice even the owners of a company have risks – as when a personal guarantee is required. But as the story illustrates, in the end, if a company is a separate legal entity from its owner, the owner minimizes his risks.
If Motti had set up the carpentry shop as a sole proprietorship – עוסק מורשה – the business number would have been his ID number. The agreements he signed with the suppliers and with the employees would have been with Motti personally and directly. The lawsuits would have been filed against Motti. The liens would have been made on his savings, on his vehicles, on his private home. All his property would have been taken from him.
The #1 Best Legal Move For New Business Success
There are differences in the manner of taxation between a limited registered company, a Chevrat Baam – חברת בעם – and a sole ownership, Osek Murshe -עוסק מורשה. So, from an accounting point of view, it will usually be worthwhile to run the business as a registered company only after it has achieved a certain amount of revenue and profits.
But legally? Of course, each case should be determined independently. For risk-takers the #1 best legal move for new business success will usually be to start a business as a registered company in order not to leave themselves vulnerable.
