Starting a business in Israel – the legal business entities

 Moshe Kahn, Advocate

The legal entities in the Israeli business world include companies, partnerships, cooperatives, and nonprofit organizations. In addition, individuals may conduct business without establishing any separate legal entity.

Under Israeli law, there are no restrictions on the nationality or residency of persons entitled to establish Israeli legal entities.

The following is an overview of the legal entities recognized under Israeli Law.

The most common form of business entity in Israel is a limited liability company with a capital stock (share capital). The legal activity of Israeli companies, both limited and unlimited by liability, is governed by the Companies Law of 1999 and the various regulations thereunder. In addition, certain aspects of the legal activity of a company (e.g., liquidation, pledges, security bonds) are regulated by the Companies Ordinance (new version) of 1983.

1.1. Establishment of the Company

Establishing a private company in Israel is usually a short and uncomplicated task. A private company may be established by one or more individuals or legal entities. An application for registration should be filed with the Israeli Registrar of Companies. The application shall include, among other documents, the company's Articles of Association and declarations executed by the first directors and shareholders of the company, approved by a local attorney. If any of the shareholders or directors is a foreign citizen or legal entity, a notarized copy of the passport or, in the case of a foreign entity, registration documents are also required to be submitted.

1.2. Registered Capital and Contribution

There is no minimal registered capital requirement under Israeli Law. Furthermore, there is no requirement to maintain or deposit any amounts against the registered capital. Companies often have a 100 NIS (New Israeli Shekel) share capital, divided into 100 shares of 1 NIS par value each.

1.3. Ownership Interest

A private company may have one or more shareholders.

As a default, each shareholder owns an interest equal to the pro-rata amount of the shares owned by him.

However, a company may establish various classes of shares (e.g., ordinary and preferred shares), providing each of the classes with different ownership and voting rights. The different share classes of the company must be stipulated in the company's Articles of Association.

1.4. General Meetings and Voting Rights

Unless otherwise stipulated in the company's Articles of Association, an annual meeting of the shareholders must be held annually. In addition, a special meeting of the shareholders may be convened from time to time by 10 percent of the shareholders or by the board of directors of the company.

Unless otherwise stipulated in the company's Articles of Association, the company may conduct a general meeting through the use of any means of communication, provided all of the participating shareholders can hear each other simultaneously, or by a resolution in writing signed by all shareholders of the company.

Unless otherwise stipulated in the company's Articles of Association, every Shareholder shall have one vote for each share held by him.

Unless otherwise stipulated in the company's Articles of Association, most of the resolutions (including amendments to the Articles of Association) may be approved by the simple majority of the shareholders participating at the meeting. However, approval of certain resolutions requires a special majority of shareholders. For example, resolutions for an amendment of the Articles of Association, requiring a shareholder to purchase further shares or to increase the scope of his liability, shall not bind a shareholder without his consent.

Among other things, the following resolutions must be approved by the general meeting of the shareholders:

(a) Amendments of the Articles of Association

(b) Appointment of the company’s auditor

(c) Approval of transactions with a director or a shareholder of the company who may have a personal interest (e.g., transaction with another company owned by such shareholders)

(d) Merger of the company

(e) Unless otherwise stipulated in the company's Articles of Association, the annual general meeting shall appoint the directors of the company

1.5. Statutory Body and Management of the Company

The statutory bodies of a company are: (i) the general meeting of the shareholders, (ii) the board of directors, (iii) the general manager, and (iv) any person or entity whose acts, in any given matter, are considered by law or by virtue of the Articles of Association to act on behalf of the company with regard to such matter.

General Manager

A private company may appoint one or more general managers. If no general manager is appointed, the board of directors shall manage the company.

The general manager shall be subject to the supervision of the board of directors and perform the ongoing administration of the company, within the scope of the policies determined by the board of directors, and subject to its guidelines.

1.6. Supervisory Board

A private company must have a board of directors. The board may consist of one or more persons or corporate entities. The board of directors shall outline the policy of the company and shall supervise the performance of the functions and acts of the general manager within that framework, and:

1. Shall determine the company’s plans of action, principles for funding them, and the priorities between them;
2. Shall examine the company’s financial status, and approve the annual financial reports the company provided by the company's auditor;
3. Shall set the credit limits that the company be entitled to operate;
4. Shall determine the organizational structure of the company and its wage policy;
5. May resolve to issue registered share capital and debenture series;
6. Shall report to the annual general meeting on the position of the company’s affairs and on the outcome of its business activities;
7. Shall appoint and remove the general manager;
8. Shall decide on acts and transactions requiring its approval under the articles of association or pursuant to the provisions of the law;
9. May allot shares and securities convertible to shares up to the limit of the registered share capital of the company; and

1. 10.

 

As illustrated above and pursuant to explicit provisions of the law, the directors are required to be involved in the company's business and approve the material business decisions and acts. Therefore, it is usually advisable that the board of directors of a company consists of persons actually available for the task.

In addition, since certain official documents, which must be executed by a director, must be prepared in Hebrew, it is usually convenient that at least one of the directors is fluent in Hebrew. This is not a mandatory requirement, however.

1.7. Accounting

A company is obliged to keep accounts from the day of its incorporation. The accounting period is one year. The company is obliged to prepare its financial statements for every accounting period. The financial statements must be approved by the company's auditor and by the board of directors and then be presented at the general meeting of the company.

The balance sheet included in the annual financial statements must be filed with the Registrar of Companies (and consequently become public) unless the company meets all of the following conditions:

1. The Articles of Association of the company limit the right to transfer its shares;
2. The Articles of Association of the company prohibit a public offer of shares or debentures of the company; and
3. The Articles of Association of the company limit the number of shareholders of the company to 50 (employees and consultants holding securities of the company are not taken into account for the purpose of this condition).

It should be pointed out that most of the local private companies choose to meet the above conditions, and not to file their financial statements with the Registrar of Companies.

1.8. Auditing Requirements

As set forth above, a company must appoint an auditor, who is a local CPA. The auditor is appointed by the shareholders' general meeting. The auditor must approve the company's annual financial statements before the board of directors approves them.

1.9. Other Relevant Issues

Limitation of Liability

Most of the local private companies choose to limit the liability of their shareholders. The limitation of the liability must be stipulated in the company's Articles of Association. The name of a limited liability company must include the initials "Ltd".

Reports to the Registrar of Companies

According to local law, an Israeli private company must notify the Registrar of Companies regarding any change of its corporative aspect, including a change in the members of the board of directors, change of shareholders, amendment of the Articles of Association, change of registered address, etc. Usually, such notice must be filed with the registrar within 14 days of approval of the relevant decision.

In addition, a private company is required to file an annual report with the Registrar of Companies. This must include information regarding shareholders and directors but not financial statements.

The registrar has the authority to enforce the notification requirements and to impose fines on companies that do not fully comply with the requirements of the law.

Dividends

A company may distribute its profits, or any part thereof, to shareholders by way of dividends. The distribution of dividends is subject to fulfillment of two criteria: (i) a profitability test and (ii) the ability to meet all existing and future contingent liabilities, based on audited and reviewed financial statements.

A public company is a company whose shares are listed for trading on a stock exchange or have been offered to the public pursuant to a prospectus, and are held by the public.

With certain exceptions, the Companies Law of 1999 and other legislation governing the activity of private companies, as generally overviewed above, also applies to public companies. However, the public company's activity is governed also by additional legislation, especially by the Israeli Securities Law of 1968.

Israeli public companies may be traded on the Tel Aviv Stock Exchange (TASE) or on any other stock exchange. However, the rules set forth below reflect the requirement of the Tel Aviv Stock Exchange.

Under Israeli law, a private company can become public and vice versa. A company becomes public by accomplishing the initial public offer procedure.

The Tel Aviv Stock Exchange requires that a company (with certain exceptions) has a minimum share capital of 25 million NIS.

The transfer of a public company's shares or other securities shall not be restricted by the company.

A public company may not vary its shares.

If a public company's stocks are traded on the Tel Aviv Stock Exchange, the company is required, among other things, to fulfill the following:

 

(a) Publish annual audited financial statements and quarterly non-audited (but reviewed by a CPA) financial statements.

(b) Appoint at least two directors, known as "independent directors," who have no economic affiliation to the company or substantial relationship with its business management. Regulations published in 2000 concern compensation and expense payments to an independent director. These regulations classify companies according to different levels, based on their capital, and they also determine the amount of compensation and expense payments to which the independent director is entitled.

(c) If all the directors are of the same gender, directors of the opposite gender should be appointed as independent directors.

(d) Appoint an audit committee composed of at least three directors. All independent directors must be members of the audit committee.

(e) Publish a prospectus in respect of any public offering.

(f) Report immediately on any material event.

(g) Report on any potential conflict of interests between the company and its controlling stockholders.

(h) Disclose information regarding exposure to market risks, including quantitative information.

(i) Publish information with respect to the number of directors who possess accounting and financial skills. Each company should assign a minimum number of such directors, bearing in mind its size, operations, etc., and disclose this number in its annual reports and whether the current board of directors complies with it.

(j) Attach to their financial reports each valuation applied to determine the value of an asset, liability, engagement, capital, or activity considered to be of significance to the company's business. Furthermore, there is a requirement for disclosure regarding the work contracted to the appraiser and the method and information forming the basis of the valuation.

A non-profit company is a company whose Articles of Association state that the company's purposes are for public interests and prohibits any distribution of profits to the shareholders.

Any private company can become a non-profit company by a resolution of the shareholder's meeting approving the required amendment of the company's Articles of Association. Unless otherwise set forth in the Articles of Association, such a resolution would require unanimous consent of the shareholders. The change will enter into effect only after its approval by the Registrar of Companies.

The reverse procedure, when a non-profit company desires to become a regular private company, is much more complicated.

A non-profit company must appoint an audit committee. Each audit committee member is appointed by the shareholder's meeting and must not have any other position in the company. In addition, a non-profit company in which annual turnover exceeds a certain amount (approximately 10 million NIS) must also appoint an internal auditor, which shall report to the chairman of the board.

A shareholder of a non-profit company is not allowed to transfer the shares of the company for consideration unless such a transfer is approved by the court. In addition, the shares of a non-profit company cannot be transferred by a will or pursuant to the laws of descent, liquidation, bankruptcy, and distribution. Upon liquidation or death of the shareholders, his shares become a part of the treasury stock.

The reporting requirements applicable to a private company apply also to a non-profit company. In addition, a non-profit company shall comply with most of the report requirements applicable to a non-profit association (see below).

The Partnership Ordinance (New Version) of 1975 governs the activities of partnerships. Under Israeli law, a partnership may be unlimited or limited. A limited partnership is a partnership that includes at least one unlimited partner.

4.1. Establishment of a Partnership

A partnership is established by a partnership agreement among its partners. An unlimited partnership agreement may be written, oral, or implied. A limited partnership agreement must be made in writing.

If a partnership is established for the purpose of conducting business in Israel, it must be registered with the Registrar of Partnerships at the Israeli Ministry of Justice. Registration requires, inter alia, furnishing the Registrar of Partnerships with the partnership's name, activities, and address, as well as the partners' names and identifying details.

4.2. Registered Capital and Contribution

No registration of capital is required.

4.3. Ownership Interest

A partnership may include unlimited or limited partners. The unlimited partners, jointly and separately, bear unlimited liability for the debts of the partnership. The limited partners bear no liability for the debts of the partnership. A partnership must include at least one unlimited partner and may not include more than 20 unlimited partners. The number of limited partners is not restricted.

The ownership interest of a partner is pro-rata to his initial investment in the partnership.

4.4. General Meeting and Voting Rights

Limited partners are prohibited from taking part in the management of a partnership. A partnership does not establish any special corporate decision-making body. Decisions of a partnership on any matter are adopted by its partners; the consent of all partners is needed to approve a certain matter unless the partnership agreement provides that the consent of only a majority of the partners is needed.

4.5. Statutory Body and Management of the Company

Each unlimited partner is entitled to act on behalf of the partnership and is held to be its agent. Each partner's activities and actions are binding on the other partners.

4.6. Supervisory Board

A supervisory board is not required. However, each partner is entitled to examine all of the partnership’s documents and review the data contained therein, and to require information about the partnership from the partners designated to manage the business of the partnership.

4.7. Accounting

A partnership is not required to file annual reports of any kind. Profit or loss should be added to the financial reports and income statements of the individual partners.

4.8. Auditing Requirements

Auditing is not required.

4.9. Other Relevant Issues

Reports to the Registrar of Partnerships

The partnership must notify the Registrar of Partnerships regarding any amendment of the matters originally subscribed to the registrar.

Liquidation of a Partnership

In contradiction to a company, a partnership may be easily liquidated. Subject to the partnership agreement, any unlimited partner may terminate the partnership by notice to the other partners stating the same. Further, the partnership may be terminated upon any of the various triggers stipulated in the partnership ordinance, i.e., death or insolvency of one of the partners, the commercial failure of the partnership, lack ability to conduct the partnership business due to permanent disagreements among the unlimited partners, etc.

Foreign companies and partnerships wishing to conduct business in Israel are required to register with the Registrar of Companies or the Registrar of Partnerships as applicable.

Registration and termination of companies are usually simple and straightforward tasks, provided that a local attorney provides sufficient counsel.

An association is the most common form of a non-profit organization, used in a wide variety of non-profit applications, such as an organization for the distribution of donations, social groups, private schools organized by parents, sports organizations, etc. An association's activities are governed by the Associations Law of 1980 and the regulations thereunder.

6.1. Establishment of an Association

An association (In Hebrew, עמותה or amuta) may be established by two or more individuals or legal entities (members) that wish to incorporate for a lawful purpose not aimed at the distribution of profits to its members.

An association must be registered at the Registrar of Associations. Its registration will indicate the association's name, objective(s), and address in Israel, as well as the names, addresses, and identity numbers of the association's founders.

An association will not be registered if any of its objectives negate the existence or democratic character of the State of Israel or if there are reasonable grounds for concluding that the association will be used for illegal activities.

Every association shall have articles. An association may submit articles with the Registrar of Associations or adopt the standard articles, stipulated in the Associations Law. The articles may be amended by a resolution of the general meeting approved by a majority of votes. Any changes to the association's articles or name will have effect from the date of its registration date by the registrar.

6.2. Registered Capital and Contribution

These are not required.

6.3. Ownership Interest

Any corporate entity or person over the age of 17 may qualify as an association member. The minimum number of members is two. Membership is personal, non-transferable, and non-inheritable. Each association shall keep a register of members, including the information regarding every member, his address and identity number, dates of commencement, and termination of membership.

A member may terminate his membership in the association by sufficient prior notice. Membership can be also terminated by the association pursuant to the provision of the articles.

The association must not share any profits with its members.

6.4. General Meeting and Voting Rights

The general meeting of an association shall be held at least once a year according to the articles. An extraordinary meeting may be needed. Unless stated otherwise in the articles, each member has one personal and non-transferable vote.

An association that has more than 200 members may hold the meeting by elected representatives of the members, all in accordance with its articles.    

6.5. Statutory Body and Management of the Company

Each association shall have a general meeting, a committee, and an audit committee, as well as additional agencies as set forth in the association's articles.

6.6. The Committee

The committee shall manage the association's ongoing affairs and has every power not allocated by the law or the articles to other association agencies.

Unless otherwise set forth in the articles, the members of the committee shall be elected at the general meeting. Only natural persons being members of the association can serve as committee members.

Until the constitution of the first committee, the founders of the association shall perform the duties of the committee.

The general meeting may approve the payment of salary to the members of the committee.

6.7. The Audit Committee

The audit committee is responsible for the ongoing audit and review of the association's financial and business affairs as well as its accounts. The audit committee shall present the outcome of the auditing made it to the general meeting.

The members of the audit committee should be natural persons, elected by the general meeting. Only members of the association can serve as audit committee members.

A person cannot serve on both the committee and the audit committee simultaneously.

The general meeting may adopt a resolution stating that an auditor will perform the duties of the audit committee.

6.8. Accounting

An association shall keep accounting records that fully and faithfully reflect its transactions and financial situation. These records may be inspected by any member of the committee or the audit committee at any time.

The maximum amount that the association may spend on salaries and other management costs is supervised by the law and regulations.

6.9. Auditing Requirements

The annual financial reports of an Association shall be executed by at least two committee members and approved by the general meeting.

An association with an annual turnover exceeding a certain amount set forth by law (approximately NIS 1,000,000) must appoint an auditor. The financial reports of such an association must be audited.

The annual financial reports, approved and audited as set forth above, along with the committee's annual report, shall be filed with the Registrar of Associations (i.e., become public).

6.10. Other Relevant Issues

All associations must file with the Registrar of Associations the minutes of their annual members' meetings, as well as their annual financial statements.

An association must report to the Registrar of Association every claim filed against it.

Many non-profit associations, upon complying with the stringent standards prescribed by the Registrar of Associations and the Israeli Ministry of Finance, may be entitled to generous government grants.

In addition, associations may seek to obtain the status of a "public institution" with the Israeli tax authorities. If such status is granted, donors of the association would be entitled to deduct a portion of the funds donated from their taxable income.

This type of legal entity is not very common and serves businesses mainly in the transportation and agriculture sectors. In addition, some cooperatives historically hold and manage real estate properties.

The Cooperatives Ordinance of 1933 governs the activities of cooperatives. Please note that the legal structure of the cooperatives is quite archaic and can hardly support modern business needs.

The law applies certain provisions to certain types of cooperatives, in accordance with the specific cooperative's purpose and activity. 

7.1. Establishment of a Cooperative

A cooperative may be established by seven or more individuals or legal entities that are not cooperatives. Alternatively, a cooperative may be established by one or more other cooperatives.

A cooperative must be registered at the Registry of Cooperatives. The cooperative may not carry out any business until dully registered.

A cooperative must have articles. A cooperative may submit specific articles to the Registrar of Cooperatives or adopt the standard articles, stipulated under the law (the law stipulates different types of standard articles for different types of cooperatives). If the founders choose to draft the articles, the articles must comply with detailed requirements set forth in the law.

7.2. Registered Capital and Contribution

There are no requirements for registered capital. However, certain types of cooperatives must reserve a certain portion of their profits annually.

7.3. Ownership Interest

A cooperative must not limit the number of its members. Membership in a cooperative may be reflected by shares or by other means set forth in the cooperative's articles (e.g., member's portions).

No individual member may hold more than 20 percent of the cooperative's membership rights.

The membership rights are usually transferable only upon approval of the general meeting. 

7.4. General Meeting and Voting Rights

The articles may be amended by a resolution of the general meeting approved by at least a majority of the members of the cooperative. However, the amendment of the articles will come into effect only upon its submission to the Registrar of Cooperatives.

Unless otherwise stipulated in the cooperative's articles, the general meeting of the cooperative's members shall be held only upon the requirement of one of the members or of the registrar.

Each member of a cooperative shall have one voting right.

7.5. Statutory Body and Management of the Company

The management body of the company shall be as set forth in the cooperative's articles.

7.6. Supervisory Board

The supervisory board of the cooperative is the committee.

7.7. Accounting

A cooperative is obliged to keep its accounts. The accounting period is one year. A cooperative is obliged to prepare its financial statements for every accounting period.

The balance sheet included in the annual financial statements must be filed with the Registrar of Cooperatives (and consequently become public).

7.8. Auditing Requirements

The cooperative's financial books and its annual financial statements shall be audited by an auditor at least once a year. The auditor shall be appointed by the general meeting of the cooperative.

The audit must be conducted in accordance with the regulations of the Registrar of Cooperatives.

7.9. Other Relevant Issues

In order to be entitled to government grants, the cooperative shall receive, among other things, a "Due Management" certification from the Registrar of Cooperatives.

Unlike the Registrars of Companies, Partnerships, and Associations, the Registrar of Cooperatives does not belong to the Ministry of Justice, but to the Ministry of Industry, Trade, and Labor. The Registrar of Cooperatives has relatively broad powers with regard to cooperatives. Among other things, the registrar has powers usually given only to the court, such as the right to settle disputes, the right to provide the cooperative with exceptions from certain requirements of the law, and the right to order a liquidation of a cooperative and be the supervising authority over liquidation procedures.