The decision to establish a private company (Ltd.) is a significant step. It is important to know and understand what is the right timing to transition from the status of a self-employed person or partnership to establishing a company? Is it only when the business is large enough, or are there additional considerations? In the article before you, we will explain what are the main considerations you should focus on when choosing the appropriate incorporation method for you and your business.
What is a Private Company (Ltd.)?
A private company (Ltd.) is a separate legal entity under the Companies Law, 5759-1999.
Section 4 of the Law establishes that a company is "a legal entity capable of all rights, obligations and actions consistent with its character and nature as a corporate body". This means that there is a legal separation that protects the personal assets of the company owners and shareholders, since the company is an independent entity that can sue and be sued, sign contracts, receive loans, acquire assets - all in the name of the company and not in the name of the personal owner.
When is it advisable to open a Private Company (Ltd.)?
1. Limitation of Personal Liability
As self-employed persons or partners, you are personally and unlimitedly liable for business debts. Creditors can sue your personal assets - your apartment, savings, vehicle.
In a private company, your liability is limited only to the value of the shares you own. If, heaven forbid, the company incurs debts, your personal assets are protected.
** Except in exceptional cases of piercing the corporate veil - a legal doctrine that allows attributing company debts or liabilities to shareholders, if and when the company's separate legal personality is misused.
Particularly suitable for -
Businesses with high risk or potential for legal exposure
Businesses required to enter into significant contracts or obtain credit
When you have personal assets you wish to protect
2. Capital Raising and Bringing in Partners
A private company allows a flexible ownership structure with clear share distribution. This creates a streamlined and simple process for capital raising and bringing in investors. According to Section 23 of the Law: "The articles of association shall be signed by the first shareholders and shall specify the shares allocated to them as well as the name, address and identification number of each shareholder"
The flexible structure allows, with great ease, clear distribution of ownership among multiple partners, bringing in new investors through share sales, exit of partners while maintaining business continuity, and distinction between types of shares with different rights
3. Tax Planning
A private company allows tax flexibility, the option to distribute dividends at strategic times, and broader expense deductions.
4. Professional Image and Credibility
Large companies and organizations prefer to work with private companies, a private company enjoys greater ease in obtaining credit from financial institutions, private companies have the ability to participate in government tenders, many of which require a registered company, the ability to offer shares to employees (options) as part of a compensation package
5. Continuity and Separation Between Owners and Business
A private company exists independently of its owners and therefore: in the event of the death of a shareholder, the company continues to exist, shares can be sold or transferred without dissolving the business, the company can continue to operate even if one partner leaves, and it is significantly easier to arrange inheritance and estate planning
When is it not advisable to open a Private Company (Ltd.)?
In cases involving a freelancer with low income, or an operator of a one-time short-term project, the bureaucracy and costs may prove to be uneconomical, since a private company is required to pay annual registration fees, complex accounting management, and has an obligation to file annual reports with the Companies Registrar. Therefore, it is sometimes preferable to start as a self-employed person and only when the business is sufficiently established to transition to a private company.
How do you open a Private Company (Ltd.)?
Choosing the company name and verifying that it is not a duplicate of an existing registered company name
Determining the ownership structure and defining the company's objectives
Appointing directors (at least one)
Preparing documents such as the company's articles of association - the founding document and signature of shareholders on the articles of association
Registration - submitting an online request to the Companies Registrar, receiving a certificate of incorporation and company number, registering with the VAT authority as an authorized business, opening a bank account in the company's name
Important Points to Know
Separation between the company and owners - using the company's bank account for personal expenses may lead to piercing the corporate veil in which the court imposes personal liability on the owners.
Reporting Obligations - a private company must file an annual report with the Companies Registrar, hold annual meetings, keep minutes, and pay an annual fee. Failure to comply with requirements may result in the company being declared a "law-breaking company".
Summary
Opening a private company is a step particularly suitable for businesses with legal risk, for businesses interested in raising capital, or for those who want to protect their personal assets. It is important that the decision be well-considered and dependent on the size of the business, type of activity, level of risk, and plans for future growth. Despite the costs and administrative commitments, benefits such as limitation of liability, tax flexibility, and professional image often carry significant weight.
We are here to make the process simple and fast - from initial consultation to receiving the certificate of incorporation.
*This article was written for general informational purposes only and does not constitute legal or tax advice.