Incorporating a business: factors to consider
In any business establishment, one of the preliminary decisions to be made is the form of business incorporation. Various factors influence this decision, and we will present the main considerations in this section:
Separate legal personality, nature of the business activity, establishment and operation 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 main considerations in choosing the appropriate form of incorporation is the desire for legal and economic separation between the business and its owners. This is in order to reduce the personal exposure of the business owner and preserve his personal capital. If we choose, for example, to establish a company, then it has a separate legal personality from that of our own. The company can sue and be sued, and if it runs into financial difficulties, its owners do not bear its debts except in the exceptional case of when a piercing of the veil is ordered. On the other hand, a licensed dealer or an exempt dealer does not constitute a separate legal entity and the duties of the business are its own duties.
The nature of the business activity
When it comes to a business that is intended for profit, the relevant form of association will be a company or a licensed/exempt dealer, depending on the scope and type of business activity. On the other hand, insofar as it is a non-profit, the choice is between an association and a public benefit company. The need to define the nature of the activity is also a consideration in choosing the form of association. For example, in the case of a non-profit organization, as opposed to an association, its goals must correspond to specifically defined categories in the law. Also, changing the business activity as defined in the bylaws is different between the two types of association: the bylaws of an association require approval from the registrar of associations only, as opposed to the CIC, in which case the company will be required to go to court.
Construction and operating costs
The different forms of association have different establishment costs as well as other operating costs. Naturally, this is a fundamental consideration that must be taken into account before making a decision. For example, the process of setting up a company involves a higher cost than a licensed/exempt dealer. The operation of the company is also significantly more expensive, among other things due to the company’s obligation to maintain double bookkeeping (compared to a licensed/exempt trader), payment of corporate tax, more extensive reporting obligations that require regular accompaniment by an accountant, and more.
Taxation
This is undoubtedly one of the most important considerations when deciding on the form of business incorporation, due to the financial expense involved in paying taxes.
In this aspect, there is a distinct taxation advantage in favor of a company, compared to a licensed dealer for income tax purposes, when this advantage is preserved on the condition that the owners of the company do not withdraw dividends, but rather invest the profits accumulated in the business. Also, the company has no liability for social security fees, unlike licensed dealers and exempt dealers who are required to pay this tax.
I invite you to a legal consultation where we will examine the best options for your incorporation.
To sum things up, there are many consequences for the form of business incorporation within which the business operates, the form of incorporation has long-term consequences for the way the business is managed, the tax percentages the business will be charged, the level of legal responsibility for the shareholders and many other matters in the field of hiring employees, reporting obligations, regulation and submission to regulators, etc. “B, proper legal advice at the beginning may save and streamline many processes in the future.
Legal advice for entrepreneurs
Our firm is available to assist you with matters relating to business associations.
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
