When you go into business for yourself in Israel, you have to decide what type of business it will be. You can open a freelance business, called Osek Patur (for up to 120,000 NIS annual revenue) or Osek Murshe (for higher revenue or a business that isn’t allowed to be VAT-free). Alternatively, you can open a Chevra Ba’am, similar to an LTD, which is a registered company. Ba’am stands for B’Eravon Mugbal or limited company, referring to the fact that its owners have limited liability for it.
You aren’t stuck with your initial decision forever. Companies can be closed and switching statuses is also possible, although it is not necessarily immediate. A common scenario is for a freelancer to start with an Osek Patur, graduate to an Osek Murshe and eventually open a Chevra Ba’am.
Advantages of a Ba’am
- In a Ba’am company, there is a legal separation between the owner of the business and the business entity, so the owner is protected and can’t be sued or held liable for business debts (except in cases of illegal activity).
- It’s easier to do business with big firms and work on large projects when you’re a Chevra Ba’am. In some cases, bidding for a project is restricted to registered Ba’ams only.
- A Ba’am can be sold or partially sold, while a freelance business cannot.
- A Chevra Ba’am can be traded on the stock market.
- The owner of the business pays Bituach Leumi only on the salary they draw from the business, not on the entire business revenue.
- The owner of the business is not considered self-employed by the American government. If the owner is an American citizen, Ba’am status removes the obligation to pay US Social Security as a self-employed person.
Disadvantages of a Ba’am
- Setting up a Chevra B’aam is a longer and more complex process than setting up a freelance business and requires the permission of Rasham HaChavarot (Registrar of Companies).
- Accounting expenses for a Ba’am are greater than those of a freelance business. Even if you’re saving on US Social Security, you may find that the expense of running a Chevra Ba’am outweighs the financial advantage of not being self-employed. You may want to consider becoming an employee of an Employer of Record service to avoid both of these expenses.
When to open a Ba’am
The decision to open a Ba’am is dependent on many factors and should be made in consultation with an accountant. However, there are some rules of thumb about when to consider it.
- When your business is bringing in high revenue, since your company will be taxed only 23% on revenue that’s funneled back into the business
- In cases where the business is a partnership between two or more people
How to open a Ba’am
An accountant can help you open your Ba’am with the authorities, ensuring that all the t’s are crossed and the i’s are dotted. The basic process consists of five stages:
- Choose a name. Actually, three. Send three name options to the Rasham HaChavarot, in case the name you want is taken or not authorized.
- List the owners of company stock and the directors of the company. These do not have to overlap.
- Send registration documents signed in the presence of a lawyer to the Rasham HaChavarot and pay the registration fee.
- Once you have a license from Rasham HaChavarot and have been given a license number, use it to open a bank account for the company.
- Open files for the business at the Mas Hachanasa (Income Tax Authority), Bituach Leumi (National Insurance) and Ma’am (Value Added Tax) offices.
Business consulting services
Route 38 now offers business consulting services. Please contact us at info@route38.co.il for help with setting up your business.