Israel has become a hub for extensive international business activity in recent decades. Israel’s economic growth, coupled with state encouragement (including acting to reduce the regulations and taxation on corporations), enable local and international businesses to engage in business activity easily and with relative efficiency.
There are several alternatives for incorporating an entity in the State of Israel. The most common alternative is forming a limited liability company. In this article, we present an overview of the legal procedure for forming a limited liability company in Israel. We also cover the important things to know before you initiate a process of forming a company.
Limited Liability Company
The formation of a corporation enables an individual, a corporation, a group of people, a group of corporations, or any combination thereof to operate through an entity constituting a separate legal entity. This entity operates separately from its owners and has its own rights, obligations, and actions. The corporation will be subject to the laws and regulations that apply to it, depending upon the type of corporation, and will enable its owners to achieve common goals. There are several types of corporations in Israel— a registered company, a partnership, an NPO, a cooperative society, and a statutory corporation.
When one or more people or corporations want to conduct business activity in Israel, the best alternative available to them is to form a registered company. The Companies Law prescribes two alternatives for forming a registered company. The first is forming a company in which the shareholders’ liability for the company’s debts is limited (a limited liability company). The second is forming a company in which the shareholders’ liability is not limited. The first alternative is the most common and accepted in the business activity in Israel.
Shareholders and Equity
Any person, including a corporation, may form a company. The Israeli Companies Law allows the formation of a company with a single shareholder and demands no initial minimum equity to form it, apart from paying a formation fee.
There are no statutory restrictions on foreign corporations and foreign citizens forming a company in Israel, and they can register as shareholders of an Israeli company. When forming a company, the founders must complete company formation forms and draft the company’s articles of association. The company’s articles of association must include the following details: the name of the company, the company’s objects, the company’s share capital, and details regarding the limit of the shareholders’ liability. All other rules prescribed in the articles of association are optional. The articles of association are tantamount to a contract between the company and its shareholders. Therefore, they are of utmost importance for the management of the company, and supersede (with respect to the company) any other arrangement between the shareholders.
Directors
Any person, including a corporation, may serve as a director in a limited liability company. The minimum number of directors in a limited liability company is one. There is no limit on the maximum number of directors, unless otherwise prescribed in the articles of association. The Companies Law does not prescribe any restriction on foreign corporations and foreign citizens holding office as directors of a company.
Classes of Shares
When forming a company, the company’s registered share capital is determined, including the number of shares and the classes of shares. Shares of the company may have a par value, or all of them may be no-par-value shares. The shareholders’ principal rights are the right to vote, the right to receive a dividend, the right to limited information, and the right to peruse the company’s documents.
Upon forming the company, it is customary to decide that the company’s share capital will consist of only one class of shares (ordinary shares). However, a company may decide on several classes of shares (for example, ordinary shares, preferred stock, or management shares), where the holders of a particular class of shares enjoy additional or different rights in the company. As a rule, a right prescribed in the articles of association regarding a particular class of shares will apply to all holders of that class of shares.
Procedure for Forming a Limited Liability Company
The procedure for forming a limited liability company is relatively simple. The process takes a few days to complete and upon submission of the documents to the Israeli Registrar of Companies, it is possible to receive a certificate of formation of the company within four business days. For the most part, receipt of the certificate happens earlier than this, assuming the submission of all necessary documents to the Registrar of Companies.
To form a company, the founders must complete the following documents in Hebrew only (apart from the articles of association, which they may submit in Hebrew or English):
- Company formation form, including details such as the company’s name, the shareholders’ personal details, address, the composition of the company’s share capital, and the allotted share capital.
- First directors’ declaration form.
- The articles of association, signed by all of the shareholders.
The company must submit the company formation forms to the Registrar of Companies signed by its directors and shareholders, who attest there is no obstacle to their registration as shareholders or directors, as the case may be.
Foreign Citizens as Shareholders and Directors
When signing company formation forms in a foreign country, a notary and apostille must authenticate the signature and the Registrar of Companies must receive the originals for registration.
When all directors and shareholders of a limited liability company are foreign citizens or corporations, the Israel Tax Authority requires the appointment of a local representative for tax purposes. Furthermore, sometimes directors must sign forms and attestations before an Israeli attorney (requiring face-to-face signature verification and not via technological means) in order to perform various actions during the routine management of the company (such as opening a bank account). Therefore, we recommend appointing at least one Israeli director in order to enable the company to operate easily and efficiently.
Actions Subsequent to the Company’s Formation
In order to initiate business activities, after the Registrar of Companies certifies the company’s formation and upon receipt of a certificate of incorporation, it is customary to carry out several additional actions. These include opening a bank account and opening a file with the Israeli tax authorities (VAT and income tax). These actions require the completion of additional documents and various procedural actions, which sometimes require the physical presence of a representative (director) of the company.
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Yuval Lazi leads the M&A practice group in Barnea Jaffe Lande, and Dana Ben-Yehuda is an associate in our firm’s Corporate Department
Barnea Jaffa Lande Law firm is at your service if you have any questions about establishing business activities in Israel or about any other commercial issues.
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