The Blogs: Law: Start-ups in Israel

You are poised to establish a business in Israel. You have the concept, considered any intellectual property rights issues, conducted a market survey, know your target customers, investigated financing opportunities and are ready to proceed. Before taking that next step, however, you need to decide what legal form your business will take. If you have not yet consulted with a lawyer and an accountant, now is the time to do so.

A start-up enterprise will have several structural decisions to make which may likely have long term ramifications on the business. The main considerations will be a combination of the type of legal entity to be the vehicle for the business, tax issues and financing opportunities.

Domestic Branch Office

If you are already operating a business outside of Israel you may consider establishing a presence inIsraelin one of three forms: (a) a local representative/agent, (b) a local branch office which is not a separate legal entity or (c) forming or acquiring an Israeli entity. Accountants have of late advised clients to consider multi-jurisdictional structures depending upon location of management and operations of the business. The UK has been a preferred jurisdiction for forming parent corporations of Israeli subsidiaries due, in part, to tax considerations.

Israeli Entity

Israeli entities can be characterized as they are in many Western countries: (a) sole proprietorship, (b) partnership, (c) company (a.k.a. “corporation” in other countries) and (d) joint venture.

Joint Ventures reflect contractual relationships among business partners which, in and of themselves, do not necessarily create independent, legal entities. The venture itself has many of the characteristics of an unregistered partnership. Often, the joint venture agreement, which governs the relationship, rights and responsibilities of the parties, calls for the formation of a legal entity (typically, a company) at some point in the future – once the company is formed, the business relationships established in the venture are transferred to the corporate entity. The parties will operate cooperatively in accordance with the delineation of rights and obligations set forth in the joint venture agreement while they plan for the formation of the separate, legal entity. The joint venture agreement will provide the details of the parties’ interests, obligations, funding/capital undertakings and dispute resolution procedures with respect to the venture.

Companies. Corporations tend to be the business vehicle most in demand for 3 primary reasons: (a) limited liability of shareholders, (b) the ability to shift revenues to the working capital needs of the business by retaining earnings rather than distribute them via dividends to shareholders (at which point they are taxable again) and (c) the corporate form is the one most frequently encountered by prospective investors thereby making the capital raising process somewhat smoother.

Israeli companies are established by submitting to the Israeli Companies Registrar, the Articles (signed by the founders), affidavits of initial shareholders and directors in which they attest to being qualified to serve in their capacities, an application form and a filing fee. An Israeli company’s records at the Companies Registrar, include its corporate information (such as address, registered purpose, share capital, shareholders’ names, ID numbers, addresses and shareholders’ holdings in the company, directors’ names, addresses and ID number, registered liens, outstanding registration fees and corporate resolutions) are accessible to the public.

Some law firms will have shelf companies available to clients. Law firms will also form a new company on behalf of a client while the lawyers will serve as initial shareholder/director in order to accelerate the process.

Partnerships. Partnerships which are registered at Israel’s Partnerships Registrar are legal entities which provide a pass-through of income to their partners (i.e. owners) from a tax perspective but generally do not insulate their partners nor managers from liability. Investors who are no concerned about liability and who consider it to be advantageous to have the pass-through of revenues from a tax perspective, will favorably consider registered partnerships as the business vehicle.

Sole Proprietorships. Sole proprietorships are closely held by their individual owners and do not establish a separate legal entity – the owners are individually liable and enjoy all of the rights of the business. While typically the owners of sole proprietorships have the most flexibility with respect to transferring ownership interests, they are not an effective vehicle for businesses which will seek investors nor for those concerned about personal liability of the business.

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Israel has extensive domestic and foreign resources including skilled labor, is an attractive location for the establishment of new businesses as well as the transplantation of existing enterprises. There are various funding programs available to new businesses – both from government and private sources. The particulars of these programs will be the subject of a future column. You will find that Israel welcomes and supports new ventures. We look forward to welcoming you among its ranks.

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This article is not to be considered as a legal opinion. For legal advice, we suggest you contact legal counsel directly

Russell D. Mayer is senior partner at the Jerusalem-based law firm of Livnat, Mayer & Co.