Limited Company or Self-Employed?

Starting a business raises many questions. One of the first is whether to operate as a self-employed individual or as a limited company. To help you answer it, let us first understand what a self-employed individual is and what a limited company is.

A Limited Company

A limited company (Ltd.) is a legal entity separate from its owners. A company can carry out actions, sue and be sued. "Limited" means limited liability: the owners' liability for the company's debts is limited to a certain amount, and the owners' assets beyond that amount cannot be reached (except in exceptional cases).

Self-Employed

A self-employed individual is a person who runs the business in their own name. The owner and the business are one and the same legal entity.

So Which Is Better?

It is important to understand the advantages and disadvantages of each alternative, so we have gathered several key points to help you make the right decision for you.

The Separate Legal Entity Principle

As we said, a company is a legal entity separate from its owners, and this is one of its most prominent advantages — the separation between the business and its owners. A limited company therefore gives the owners better legal protection: if the company runs into financial difficulty, debts or lawsuits, not all of its owners' assets can be reached. This separation does not exist in a self-employed business — a licensed dealer (osek murshe). In a self-employed business there is no limit as far as the person's assets are concerned, and in the event of bankruptcy all of the self-employed individual's assets can be reached.

Tax Rates

A self-employed individual pays tax on profits according to the tax brackets. The higher the income, the higher the tax rates. In addition, a self-employed individual pays National Insurance on their income, and a limited company does not.

Companies pay corporate tax. Corporate tax in Israel has come down in recent years to a rate of 23%. If the owner wants to withdraw profits from the company (after tax), there are two ways to do so: drawing a salary, which is taxed at the bracket rates, or drawing a dividend, which is taxed at 30%. That said, if you do not need liquid cash in your bank account, the profits can be left in the company and even used to invest and expand as needed (although since 2025 leaving profits in the company is no longer cost-free — see the section on Amendment 277 below).

Fees

Setting up a limited company involves fees that do not apply to a self-employed individual. When a limited company is opened, a registration fee must be paid to the Registrar of Companies, followed by an annual fee.

Keeping Books of Account

The Income Tax Ordinance provides for two types of bookkeeping: single-entry bookkeeping and double-entry bookkeeping.

In single-entry bookkeeping, only the business's expenses and income are recorded. Its purpose is to give a picture of the business's profit and loss only. Payments and receipts are not recorded under this method. This type of record is simpler and quicker, and therefore cheaper.

In double-entry bookkeeping, all of the business's accounting transactions are recorded. Its purpose is to give a full picture of the business: income, expenses, assets, bank balances and liabilities. This type of record is more complex and therefore also more expensive. On the other hand, it gives a better picture and more accurate, in-depth information about the state of the business.

The Income Tax Ordinance has clear rules on which business must keep single-entry books and which must keep double-entry books. As a rule, though, a self-employed individual (up to a certain turnover and a certain number of employees) can make do with single-entry bookkeeping, whereas a limited company must keep double-entry books from the first shekel.

Partners

When you are thinking of setting up a business with several partners, one point deserves particular attention. When a business is opened as a partnership, the partners guarantee the partnership's debts fully and equally. In other words, if one of the partners causes the partnership financial difficulty, the responsibility falls on both partners, and the assets of both can be reached. By contrast, when operating through a company, there is a separation between the partners and the company itself. In addition, when double-entry books are kept in a company, there is closer information on, and monitoring of, the state of the business and the financial actions of the partners (the shareholders) in the company. Our recommendation, therefore, is that where a business has several partners — set up a limited company.

Customers and Suppliers

The more customers and suppliers the business deals with, the better it is to operate as a company rather than as a self-employed individual. A company's bookkeeping records expenses and income in an orderly and accurate way, so the company's bank statements — receipts and payments included — are tracked, and so is the account with each customer or supplier. In a self-employed business, by contrast, the bookkeeping system records income and expenses only, and payments and receipts are not tracked. There is also the legal protection of the separation between the company and its owners, which does not exist in a self-employed business.

Income Level

Anyone who expects relatively low income in the first years will probably prefer to open a licensed dealer file. As profit grows, a limited company becomes an alternative worth examining seriously — but there is no single income threshold that fits everyone. The break-even point depends on the ongoing cost of maintaining the company, on how profits are withdrawn (salary or dividend), and above all — since 2025 — on the ratio of profit to turnover and the limits on retaining profits in the company (see the section on Amendment 277 below).

Important: Amendment 277 Changed the Calculation

Some of the considerations above — above all, the option of leaving profits in the company and paying only corporate tax on them for the time being — changed materially with Amendment 277 to the Income Tax Ordinance (the 2025 Arrangements Law). Two mechanisms are particularly relevant to anyone considering incorporation:

• Tax on undistributed profits. A company that accumulates profits beyond the cushion the law allows, and does not distribute dividends at the required rate, is liable to an additional annual tax of 2% on the excess profits. This is an additional tax, not an offset against the dividend tax that will be paid in the future.
• The ratio of profit to turnover. In a closely held company whose income derives from personal-exertion-intensive activity — a definition far broader than the name suggests — profit above a 25% profitability margin on turnover may be attributed to the shareholders and taxed in their hands at their marginal rate. In that case, the advantage of the low corporate tax rate is removed precisely on the most profitable part of the business.

This means that rules of thumb — such as a fixed monthly or annual income threshold — no longer reflect the full picture. The answer now depends on profitability relative to turnover, the scale of the activity, the distribution policy and the holding structure, and at times the gap between the alternatives narrows until it is no longer decisive. In light of the new law, we therefore recommend consulting our firm before making a decision — both on setting up a new company and on transferring an existing self-employed activity into a company.

The full guide to the 2025 Arrangements Law →

So Which Is Better: Licensed Dealer or Limited Company?

To determine whether it is right for you to set up a self-employed business or a limited company, you should examine all the information laid out before you and decide which path will be more profitable and more suitable for you. It is worth remembering that this decision is not forever. At any stage you can stop operating as a self-employed individual and transfer the activity to a limited company, and vice versa — stop the company's activity and begin operating as a self-employed individual.

As in any other field, here too each alternative has advantages and disadvantages, and if you are not sure which path to take, contact us — we will be very happy to be at your service, to advise, help and guide.

The above article does not constitute a recommendation, professional advice or a legal opinion. If you have any questions, you are welcome to contact us — we will be happy to advise, accompany and represent you before the Israeli tax authorities.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants