Company or Independent

Thinking of Starting a Business?
Not sure what legal status to choose?
Sole Proprietorship or Company Formation?

Before launching your business, you must choose the legal structure that best fits your needs. In Israel, you typically have two main options: Independent (Sole Proprietorship) or Company Formation (LLC – Hevra Baam).

Each structure has its pros and cons, and the best choice depends largely on your expected income and type of activity.

Sole Proprietorship (Independent)

A sole proprietorship is a simple structure involving one individual. It’s quick to set up and doesn’t require initial capital. However, personal liability is not limited, meaning your personal assets may be at risk.

As an independent worker, you must choose between two tax statuses:

1. Ossek Patour

For annual revenue under NIS 107,692 (2023 limit).
Exempt from charging VAT, but cannot reclaim VAT on business expenses.
Suitable for small-scale freelancers or service providers.

2. Ossek Mourché

Mandatory for those exceeding the Ossek Patour revenue threshold.
Required for certain regulated professions (e.g., lawyer, doctor, architect) regardless of income.
Must charge VAT but can deduct VAT on expenses.
Often viewed as more credible by banks and clients, improving loan or contract opportunities.

Company Formation (LLC – Hevra Baam / SARL)

An LLC is a separate legal entity, offering limited liability to its shareholders. However, setup and maintenance involve stricter accounting standards, making it more costly and complex.

Tax Differences

Sole Proprietors are taxed on a progressive scale, up to 50% of income.
LLCs are taxed at a flat 23% on profits (2023 rate).
Additional taxes apply when profits are distributed to shareholders.

New Tax Reforms (Since 2022)

Recent changes have lowered income tax and National Insurance (Bitouah Leumi) contributions but introduced new taxes to maintain fiscal balance.

Holding Companies – Hevra Arnak

This structure is often used by high-earning consultants (earning ~NIS 50,000/month) who set up LLCs to reduce taxable income via business expenses. Here’s how it works:

Profits are taxed at 23-24% within the company.
Shareholders can defer taxes by leaving profits in the company.
When withdrawing, dividends are taxed at 30%, or income can be taken as salary—blending the two methods can optimize the tax burden.

This structure is ideal for those who don’t need to withdraw all profits immediately.

Current Restrictions

The government has tightened regulations on these companies:

If 70% or more of income comes from a single source, profits will now be taxed as personal income.
Example: A doctor working only with Kupat Holim Meuhedet may no longer benefit from the 24% company tax. But if income is split (e.g., 50% from Meuhedet, 50% from Maccabi), this rule may not apply.

What About Existing Retained Earnings?

Companies that no longer meet eligibility had to withdraw retained profits by September 30, 2017.
To encourage this, the dividend tax was temporarily reduced to 25%.
Post-deadline, accumulated profits are taxed as personal income.

Shareholder Loans

Loans taken by shareholders from their companies must be repaid by 30/09/2017.
Failure to repay may lead to taxation as dividends at 30–33%.
Loans under NIS 100,000 may qualify for delayed repayment.

Conclusion

With evolving tax laws and stricter oversight, it’s crucial to consult a professional advisor to assess your situation and choose the optimal business structure.

This document is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified professional for personalized guidance.