The article was written in collaboration with Bank Leumi
Self-employed people should choose their type of business
As of 2023, approximately 660,000 independent businesses operate in the State of Israel. These businesses differ from each other in a huge variety of parameters - starting from the fields of activity and ending with income and expenses. However, the initial difference between the different types of businesses in the State of Israel is already in the definition of the business, or the type of business. We are, of course, talking about the difference between the three main types of businesses, the main difference between which concerns taxation and reporting - exempt dealers, licensed dealers and limited liability companies. Even before you start a business, it is important to know the differences between these types of businesses.
An exempt dealer - what it means and what he is exempt from
Exempt dealers are defined this way because they are exempt from VAT. More precisely, they are exempt from monthly and bi-monthly reports to the Tax Authority, and for that reason they do not collect VAT from their customers. Accordingly, they also do not receive a refund for the VAT they pay on business expenses. This option is suitable for those who establish a small business, which in many cases does not even constitute the main income component of the business owner's monthly income (then tax coordination is required).
The main limitation on exempt dealers is the level of income - as of 2024, the annual revenue cycle of an exempt dealer cannot exceed NIS 120 thousand. A revenue cycle that exceeds this amount (note that this is not profit but gross revenue), requires a different solution and accordingly There is also a different reporting obligation for this.
Authorized dealer - for businesses that want to increase the level of income
If an independent dealer earns more than NIS 120,000 a year, and does not wish to establish a limited liability company for his business, the legal solution is a licensed dealer. Unlike an exempt dealer, a licensed dealer is required to report monthly (or bi-monthly) to VAT, and this requires close work with an accountant and not just the reporting of an annual report. Licensed dealers are liable for VAT, and accordingly they can deduct VAT from their monthly expenses.
However, it is important to note that even if the annual revenue cycle is less than what is stipulated by law, a licensed dealer is still required to report to the VAT. Licensed dealers are required to open a bank account defined as a business savings account (and not conduct business activity in a private account).
Limited company - separation between the dealer and the business
A limited liability company is a separate legal entity from the business owner, and thus it actually creates a separation between the business and the person who operates it. When it comes to businesses that carry out higher-risk economic operations, or are more exposed to lawsuits of various types, a limited liability company is a required financial instrument .
As a legal and economic entity separate from the business owner, a limited liability company requires the opening of a separate account, through which the company's economic operations will be carried out. In terms of bookkeeping and auditing, a limited liability company is the most complex option, and it must report monthly and regularly to the tax authority on its operations.
Make a decision that suits your needs
In the world of independent businesses, you can say that no two businesses are exactly the same. Accordingly, the needs of each business can also be quite different, and their definition can be significantly different from each other. Whether it is a small exempt dealer, a larger licensed dealer or a limited liability company that serves as a separate entity from the business owner for all intents and purposes - it is important to make every decision in setting up your business in the most careful and correct way. If necessary, you should also use expert advisors to understand what is most appropriate for your business.
This publication is intended for marketing purposes only, and does not contain any advice and/or invitation to make any investment or purchase and/or any substitute for advice that takes into account the data and the special needs of each person.