Many freelancers begin their journey without fully understanding the difference between an exempt business owner and a licensed business owner, and at what point the law requires them to change their status. Although the subject sounds technical, choosing the correct business status directly affects the amount of taxes, dealings with authorities, and the ability to grow.
This is precisely why it's worth understanding the limits, amounts, and stages at which it's important to stop and examine the way forward.
From what amount is a licensed business owner defined?
Israeli legislation distinguishes between three main types of business frameworks:
Someone starting as a freelancer will usually choose the status of an exempt business owner due to its simplicity and less bureaucracy, but this status is limited by an annual income ceiling that changes from time to time. Once you exceed the income permitted for an exempt business owner, the law requires you to transition to the status of a licensed business owner.
A licensed business owner is not limited by an income ceiling in terms of regulations and therefore allows for broader and freer business activity. However, it should be taken into account that a licensed business owner is required to file regular reports, collect VAT, and maintain more extensive accounting compared to an exempt business owner.
Is there an income ceiling for a licensed business owner?
There is no official ceiling limiting the income of a licensed business owner, and therefore it is possible to continue and increase activity without needing to change the business structure due to income level alone. Nevertheless, once profits reach significantly high levels, it's worth considering whether the current status is the most economically efficient.
Freelancers who reach monthly profits of around twenty-five thousand shekels and above may discover that establishing a private company (Ltd.) is more worthwhile. A company allows for a different tax route, opportunities for tax savings, and a separation between the individual and the business, which can provide peace of mind and more organized management in the long term.