You’ve decided to establish a business in Israel and now you are unsure whether to establish a limited liability company or to register a sole proprietorship. In this short survey you will find the answers to your questions.
The significance of establishing a company
A company is an independent legal entity which by law may enter into agreements, open a bank account, file suit, be sued and generally carry out any legal action in the company’s name. It is recommended that business bearing significant exposure, complex businesses etc. incorporate as a company.
An imported of blenders from Germany, one of whose clients loses a finger while using the blender, is exposed to the following dangers:
In the event he has not incorporated as an LLC – he can be sued personally, exposes his property to danger as, should he lose the claim, he will be required to pay it from his personal capital.
If he has incorporated as an LLC – the client filing suit will be entitled to collect from the company’s capital, and the shareholders in the company will not bear any liability.
The idea behind the establishment of a company is the limitation of the liability of the shareholders of the company for the company’s debts to its creditors. The ownership in the company is determined by the distribution of the shares in the company. Control of the company is determined by the appointment of directors by the company’s shareholders.
Note that the exception to the lack of shareholder liability for the company’s debts is in cases where the corporate veil is lifted. Lifting of the corporate veil is done in exceptional circumstances such as violation of the law, use of the company’s identity in order to defraud people or in other exceptional circumstances.
Procedure for opening a company
Opening a company is accomplished by filing an appropriate application with the Israel Companies Registrar. The person requesting registration of the company must submit a number of documents including the company bylaws, declaration of the initial board of directors, shareholders declarations and more. The company bylaws are in fact an agreement between the members of the company and the company. The law requires that the company bylaws include the following:
Name of the company – the law allows the company to register under any name, with the exception of any name which is reminiscent of a company already existing in the market. Thus, one cannot register a company with the name Cellcom (one of Israel’s leading cellular phone carriers). As such, the law sets forth that a company cannot be registered if a name that is likely to be offensive to public sensibilities. Moreover, a company whose members’ liability is limited, an LLC, must include the acronym “Ltd.” at the end of its name.
Purpose of the company – the company allows for the company’s business to be as follows: Any legal business; all legal business except as provided in the bylaws; the types of business set forth in the bylaws.
Details of the listed share capital – a company is required to set forth in its bylaws the share capital in New Israeli Shekels, the number and types of shares.
Details regarding limitation of liability – in the event that the founders of the company wish to limit their liability for the company then they must explicitly set forth in the bylaws that the liability of shareholders for the debts of the company shall be limited.
After filing all of the application documents, and payment of the fee in the (varying) amount of NIS 2,500 and as long as all the documents are correct and meet the requirements of the law, the Registrar will register the company and deliver a certificate of incorporation to the owners.
The Advantages of Managing a Business by Means of an LLC
Better control by shareholders of the company’s operations.
Clear division of control.
Easy to sell parts of the business to third parties or to add new partners.
Relatively low taxation relative to a sole proprietorship – corporate tax for 2011 is 24%, and is expected to decline gradually to 18% by 2016.
Helps the business’ image.
Business is not experience any shakeup with the death of one of its shareholders.
Disadvantages of Managing a Business by Means of an LLC
Annual cost is higher than a sole proprietorship, resulting from bookkeeping costs, payment of an annual fee to the Registrar of Companies, lawyers’ fees and the like.
Not suitable for small businesses with low turnover or limited activity.
There is a risk of lifting of the corporate veil.
Advertising the Company
After completing all the legal and procedural steps, the company may beginning work. However, the establishment of the company in and of itself does not guarantee us income. After the establishment of the company, its shareholders must come up with an advertising program which will include, among other things, marketing strategy, advertising strategy, audience segmentation analysis, pricing policy of the business, potential consumer behavior analysis and more.