If you are going to start an independent business or establish a business partnership
You should consider whether it is worth operating as a limited liability company or as an independent contractor with the status of a licensed dealer. Every decision you make will have an impact on the future of your business, in terms of income tax payments, National Insurance, in terms of personal liability and the expected costs of establishing a business or establishing a company and operating it down the road.
Before you decide under what status you should open your business, it is worth consulting with professionals, a tax advisor or accountant, but sometimes even they will not be able to give you a clear answer as to when the line between the economic viability of opening a business under the status of a licensed dealer and establishing a company is crossed.
Only you can know when and whether it is worth opening a limited company, but only after you have thoroughly studied the subject and become familiar with the advantages and disadvantages of each status. In this article you will receive a lot of information that will help you decide when and whether it is worth opening a company. Read it carefully, study the subject, consult with professionals, and set off successfully!
Just before you start a company, there are a few concepts you must know!
A limited liability company is an organization with a legal entity that is established for a defined and common purpose, in most cases to generate financial profits. The basis for establishing a company is the need to minimize as much as possible the economic risks that people take on when starting a business. While the exempt or licensed trader is personally exposed to economic risks in operating the business, the situation is different in a company.
A limited liability company is a legal entity that is separate from its owners. The owners of the company are the shareholders, they have the right to participate in the company’s profits, but when the company runs into financial problems and some party has financial claims against it, that party cannot sue the owners of the company personally, but only the company. On the other hand, a business owner operating as a licensed dealer will be required to bear all debts and all claims against the business.
There are cases in which it is possible to claim debts from the company’s owners through veil lifting. Veil lifting is a procedure that allows the court to lift the veil of incorporation over the company and attribute the debts accumulated by the company to the shareholders or directors of the company.
A veil is lifted when the court is convinced that the company’s directors took an unreasonable risk in economic terms, when fraud was committed, when the company’s creditors were deprived, when the company’s directors did not properly supervise the company’s conduct, or in cases where there is no clear separation between the private assets of the company’s owners and the private assets of the shareholders.
Licensed dealer and exempt dealer are definitions that define the status of a business before the Value Added Tax authorities. The differences between an exempt dealer and a licensed dealer are in the amount of turnover, VAT reporting obligations, and the nature of the hand delivery.
An exempt dealer is a small business with a turnover not exceeding NIS 99,003 per year, as of 2018. Above this turnover, a licensed dealer file must be opened. The transactions of an exempt dealer are exempt from VAT, and therefore the exempt dealer does not collect VAT from his takings and is not permitted to offset the VAT from the business purchases he has made.
There are a number of professionals who, although their turnover is small, cannot be defined as an exempt trader. These professionals include lawyers, doctors, real estate brokers, and more. On the VAT Authority website, you can see the full list of professionals who are not permitted to operate as an exempt trader.
An authorized dealer is a business owner whose annual transaction turnover is greater than NIS 99,003 per year. An authorized dealer collects VAT from his customers on each transaction and must remit it to the tax authorities once a month or every two months. The exempt dealer is entitled to offset the VAT on all purchases and current expenses he makes for the business.
Unlike company owners, a licensed dealer and an exempt dealer are obligated to stand behind their business obligations, and the level of risk placed on their shoulders, especially the licensed dealer, is high.
When should you consider starting a company?
Astute businesspeople look to the future when they start a new business, and prepare for the difficulties that may arise in any business.
Businesses do not always encounter difficulties due to improper financial management. Sometimes there may be external factors that will lead to the collapse of the company, a large customer who went bankrupt and owed the company a lot of money, a lawsuit against the company due to a defective product, a sting carried out by crooks, and more. Establishing a limited liability company is a better way to prevent a bad blow. Opening a company ensures that in cases where the business encounters difficulties, the shareholders in the company will not be required to repay the debts from their personal assets. A company can benefit from lower tax payments than a licensed dealer. Unlike a licensed dealer who is required to pay income tax and national insurance according to the business’s income, the owners of the company can withdraw a salary of a certain amount and only have to pay income tax and national insurance. The owners of the company can withdraw the remaining money through effective tax planning that will allow them to pay minimum tax and national insurance payments.
The tax rate imposed on a limited liability company is twenty-five percent; for a licensed dealer, the tax rate can reach fifty percent.
It is easier for a limited company to recruit investors and transfer control to the next generation. Transferring the company to foreign hands is done through a short process of transferring the shares to the new owners.
A limited liability company conveys an image of prestige, and many business owners prefer to establish business relationships with businesses that operate under the status of a company.
Running a business by establishing a company is more expensive than running a business as a licensed dealer. While a licensed business owner can do the accounting himself, the company owner must hire an accountant and pay an annual fee to the Registrar of Companies.
In conclusion
- In principle, it can be said that as long as the monthly business profit exceeds twenty-five thousand shekels per month, it is worth considering opening a business as a company.
- The higher the risk level of the business, the more likely it is to consider opening a business as a company.
- As you will need to leave larger profits in the business for purchasing equipment, investing in inventory, and more, it is recommended to operate as a company.
Relevant links:
The advantages and disadvantages of forming a limited liability company
As with any business decision, there are advantages and disadvantages to consider. Let’s start with the advantages:
- Protection of personal assets: Owners of a limited company benefit from protection of their personal assets, in the event of bankruptcy or legal action.
- Tax planning: Company owners can plan their withdrawals more intelligently, allowing them to pay less tax.
- Ability to raise capital: It is easier to raise investors when it is a limited liability company.
- Professional image: A limited liability company conveys a more professional image, which can help in business relationships.
Disadvantages of forming a limited liability company
- High costs: Establishing a company involves higher costs, including an accountant and fees to the Registrar of Companies.
- Regulatory requirements: Companies are subject to more regulatory requirements, which requires more orderly management.
- Management complexity: Managing a limited company can be more complex, especially if there are multiple shareholders.
When should you start a company?
As we mentioned, if you expect your business to grow and become profitable, and if you plan to raise investors, you should consider establishing a limited liability company. Also, if you are engaged in a high-risk field, a limited liability company can be a good solution.
summary
In conclusion, the decision whether to establish a limited liability company or operate as a licensed dealer is an important decision that can affect the future of your business. It is important to consider all the advantages and disadvantages, consult with professionals, and choose the most appropriate path for you.
Good luck with your business!
