Be a Shark in the Sea of High-Tech: Establish Your Israeli Start-Up
Establishing a business in the country with the leading high-tech market in the world is a daunting endeavor. As an entrepreneur develops the objectives for his new business idea, he also must consider the rules and regulations present in the country of incorporation. Avoid the nuisance of fines and penalties from unknowingly breaching Israel’s commerce laws by reading some useful tips we have for establishing a start-up company in Israel.
Our first steps for establishing your company are as follows:
1. Registering your Company
The three types of companies that may be registered in Israel include Osek Patur (sole trader exempt from VAT), Osek Murshe (self-employed), and Private Limited Company. Our focus is Private Limited Companies, which comprise 1-50 shareholders and restrict the transferability of public shares. Myriad benefits accompany the incorporation of your business from Osek Murshe to a Privately Held Limited Company. First, Osek Murshe is a self-employed individual, and therefore no legal separation exists between an individual and the individual’s business. The individual is personally liable for the business and any debts or losses it accrues. Consequently, in a lawsuit a business owner who is Osek Murshe can be sued and lose all his personal assets, such as his house or car. Conversely, Private Limited Companies offer a way for companies to limit the personal liability of its members and provide added security should financial issues arise in the company.
Second, establishing a Private Limited Company as opposed to an Osek Murshe company offers income tax benefits. If one registers as an Osek Murshe, he or she is subject to a progressive tax rate based on income. This means that as a company’s income increases, it will reach higher tax brackets and portions of income will be subject to higher tax rates. A Private Limited Company, however, is subject to a flat corporate income tax rate. In Israel, the 2023 corporate income tax rate is 23%. A Private Limited Company can then pay the 23% corporate income tax and its directors can then pay their own income tax on the salary drawn from the company. Furthermore, the business owner can then pay his or herself a low salary and leave the rest of the profits in the business, subjecting his or herself to a reduced tax liability. The business owner can then reimburse his or herself in the form of dividends, which do not attract insurance.
A Private Limited Company should create a Shareholder’s Agreement to outline the various duties and responsibilities of shareholders in the event that disputes arise as well as to protect the rights of shareholders. A written Agreement will aid in resolving potential conflict in the company, and Aviv Lazar&Co. offers top tier services for drafting Shareholder’s Agreements that ensure the fair treatment of all shareholders.
2. Funding your Company
Myriad ways exist to secure funding for your business, and investors can serve as the driving force for a start-up, whether the investor is active and seeking short-term profit or whether the investor is passive and buying a long-term security. The most experienced types of investors include Angel Investors, Peer-To-Peer (“P2P”) Lenders, and Venture Capitalists. Angel Investors use their own net worth to invest in a company that they deem to be successful, whereas P2P Lenders and Venture Capitalists draw from investment funds. P2P Lenders are more commonly known as crowd lenders, and this type of lending eliminates the need for a financial institution, such as a bank. P2P Lending websites connect companies directly to investors, with the terms and interest rates of the transaction set by the website according to the loaner’s assigned risk category. Venture Capital is a private equity-based form of financing from well-off investors, investment banks, and other financial institutions, and Venture Capitalists invest in companies that have the potential of becoming extremely successful. Lastly, Friends & Family Investors encompass close friends and family members who do not possess strategic industry knowledge but want to passively invest in the entrepreneur himself rather than in the success of his start-up. Consequently, entrepreneurs should clearly disclose the risks of investment to Friends & Family Investors in the event the company is not successful.
Regardless of the form of funding or type of investor a company uses, it is important to properly document all terms of the investor-company relationship to avoid potential conflict, especially tension that damages intimate relationships with relatives and close friends. Therefore, companies receiving funding from investors should enter into an Investment Agreement that explicitly outlines the structure, length, purpose, form, equity share, and the parties’ rights of an investment. Here at Aviv Lazar&Co, we can help you formalize your investor-company transaction and identify the proper type of Investment Agreement for your company.
3. Staffing Your Company
Reduce burnout and stress by properly staffing your company with a small, empowered team. As an entrepreneur it is crucial for the success of your company to recruit professional, hardworking employees. Attract top talent by promoting career paths for both managerial and non-managerial oriented team members. Utilize a talent recruiting strategy that exploits myriad channels to find top tech talent, such as hackathons, job sites, and curated sites. Prevent high employee turnover by entering into an Employment Agreement that locks employees into a set term of employment.
Furthermore, ensure sufficient control over employees by addressing aspects of the employer-employee relationship including but not limited to employee pay, duration of employment, details of the employee’s job responsibilities, grounds for termination of employment, employee benefits, non-competition clauses, and confidentiality of the company’s trade secrets in a written Employment Agreement.
4. Protecting Your Clients' Privacy
A stand-alone risk sector for high-tech companies is compliance management, and it is important because the penalties of non-compliance with cybersecurity regulations are costly, becoming even more severe depending on the sensitivity of stored customer information. Avoid cyber breaches by preventing the misuse of technology and by appointing a Data Protection Officer (“DPO”) to oversee the data protection strategy. Entrepreneurs can also minimize the risk of data breaches by enhancing mitigation with the implementation of cybersecurity risk management frameworks. Israeli businesses operating in the EU are subject to General Data Protections and Regulations (“GDPR”) in addition to cybersecurity regulations. GDPR was enacted in the EU to protect the personal data of all people.
Our law firm offers unparalleled services ensuring GDPR compliance, and if you hire us we will eagerly help guide you to entrepreneurial success. We tailor our services to accommodate the business needs and provide personalized attention to our clients. Please feel free to contact us today for further consultation so we can take the next step toward successfully establishing your high-tech start-up company.