Opening a new business in Israel presents entrepreneurs with one of the most important decisions: which business structure to choose? The right decision will impact taxation, bureaucracy, legal liability, and even your business's reputation. In this guide, we'll review the four main types of businesses in Israel and help you choose the one that's right for you.
Micro-entrepreneur – The new path for small businesses
The micro-entrepreneur reform represents significant news for small business owners. This is a new income tax track
designed to ease the burden on self-employed individuals with annual turnover of up to 120,000 ₪.
Under this track, a micro-entrepreneur is entitled to an automatic deduction of 30% of income as recognized expenses, without the need to keep receipts or prove actual expenses. Additionally, they are exempt from filing a full annual report, paying advance income tax payments during the year, and filing a capital statement.
It's important to understand that micro-entrepreneur status is an income tax status only, and it can apply to both exempt and authorized practitioners. Registration is voluntary and is done through the Tax Authority website.
Exempt practitioner – For small and startup businesses
An exempt practitioner is a self-employed individual exempt from collecting VAT from their clients, and is the simplest type of business to establish and manage. To register as an exempt practitioner, annual income turnover must be up to 120,000 ₪, and you cannot engage in professions required to register as an authorized practitioner, such as doctors, lawyers, architects, engineers, accountants, and lecturers.
The main advantage of an exempt practitioner is simplicity. There is no need for ongoing VAT reporting, accounting costs are low, and the track is especially suitable for employees seeking additional income. On the other hand, an exempt practitioner cannot deduct VAT on expenses, is limited in annual income, and is sometimes perceived as less professional by business clients.
Authorized practitioner – For growing businesses
An authorized practitioner is suitable for self-employed individuals whose annual income turnover exceeds 120,000 ₪, or for those in professions required to have this status by law.
Advantages and disadvantages
Operating as an authorized practitioner allows unlimited income growth, deduction of input VAT from business expenses, and broader recognition of recognized expenses. Professional reputation is higher and many businesses prefer to work specifically with authorized practitioners.
The main disadvantage is bureaucracy. An authorized practitioner is required to file monthly or bi-monthly VAT reports, collect VAT from clients, and maintain organized accounting. Additionally, there is full personal liability for business debts.
Taxation
Income tax is determined by brackets and ranges from 10% to 50% depending on income level. National insurance stands at 7.7% up to annual income of approximately 90,000 ₪, and 18% above that amount. Additionally, an authorized practitioner collects and transfers VAT at a rate of 18%.
Limited liability company – For legal protection and growth
A limited liability company is a separate legal entity from its owners. This means the owners' assets are separated from the company's liabilities, providing significant legal protection. Corporate tax is fixed at 23% only, and professional reputation is particularly high.
A limited liability company is especially suitable for those planning to raise investors or partners, or for businesses with high legal exposure. However, establishment and management costs are higher, there is a requirement for double-entry bookkeeping, and an annual fee to the Companies Registrar. When withdrawing profits from the company, dividend tax applies at a rate of 25%-30%.
Comparison of business types
Criterion | Exempt practitioner | Authorized practitioner | LTD |
|---|---|---|---|
Income ceiling | 120,000 ₪ | Unlimited | Unlimited |
VAT collection | No | Yes | Yes |
VAT deduction | No | Yes | Yes |
Legal liability | Personal | Personal | Limited |
Management complexity | Low | Medium | High |
How to choose the right business type?
The choice depends mainly on expected income volume, level of legal risk, and growth plans. Turnover up to 120,000 ₪ allows you to start as an exempt practitioner, while businesses with high legal exposure or plans for significant expansion should consider a limited liability company from the outset.
It's important to remember that some professions require authorized practitioner status regardless of income, and you can combine micro-entrepreneur status with exempt or authorized practitioner status to enjoy income tax benefits.
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