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When would establishing a company help us saving taxes?

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Many 1st time residents, ie, “Olim Chadashim” or returning residents, ie, “Toshavim Chozrim”, open a business in Israel or become self-employed, ask about the option of incorporating in order to save taxes (mostly the 10% Social Security payment in the US).

However, before opening a company in IL, one should have a broad perspective of the advantages and disadvantages of such a move.

Besides tax saving aspect, one should consider other aspects such as legal protection, branding, better control of the financial transactions, operation costs etc.

Here are the main aspects to consider when thinking about Establishing a company:

 

Company LTD. Sole proprietor / self employed
Legal protection Assets worth of the company No protection. The business owner is fully exposed.
Branding Higher prestige Lower prestige
Reputation and intangible assets Belongs to the company Belongs to the individual
Financial Control Better since all bank account transactions are recorded in the books Lower since the bank account transactions are not recorded in the books.
Bookkeeping 2 sides bookkeeping (Credit-Debit) 1 side bookkeeping (only incomes & expenses)
Tax liability Up to 23% (if profits remain in the company and aren’t distributed) Up to 50% (including Bituach Leumi)
Costs Higher (requires governmental annual fee payments, CPA’s audit, 2 sides bookkeeping etc.) Cheaper

 

As we can see, there are advantages and disadvantages for incorporating, and only after examining and considering all of them separately and together, the decision should be made.

On the tax aspect, it is important to make sure that the company is able to save a significant amount each year (net profit) in order of it to be worthwhile.

However, there are all kinds of restrictions (“wallet” company prohibition, high debit balance of the control shareholders etc.) that may weaken the profitability of incorporating as well and should be examined accordingly beforehand.