Nevertheless, even if a business owner has a fantastic idea and a tremendous potential for success, incorrect decisions at the start of the road may decide the fate of the business already at its infancy. Most of these incorrect decisions in opening a business result from a lack of knowledge of legal and accounting affairs connected with establishing a business. In order to assist businesses at the outset, we hereby submit a complete manual for opening a business:
Location of the business
Throughout the country and in the center of the large cities, there are many areas available for leasing. The prices are lower than at any time and one can choose the most suitable building for the business’s needs. In a new business, it is not recommended to sign a lease for over a year, but to have an option to extend the lease under identical conditions. A short-term agreement will ensure the transferring of the business to another place should the chosen location not be successful from the business’s point of view. When choosing the location of a business, remember that the costs of transferring it are very high and include transport, renovations, etc.; and therefore, it is most important to choose a suitable location.
Bank and credit frameworks
Despite the fact that many self-employed continue to run the business also using their private bank account, this is not recommended. The management of a separate account for the business provide a more precise indication of the business result and makes the management of cash flows in the business easier. In addition, in order to recognize bank expenses and commissions as recognized expenses, the tax authority requires the business to have its own account.
It is recommended that the business account will not be kept in the bank in which the private account is kept. Generally, the bank will see both accounts as one account for the purpose of giving credit frameworks and calculating indebtedness. The opening of a bank account with another bank can increase the credit framework given to the business.
It is very important to see the bank as a partner and to maintain a positive reputation with it. When a problem is expected in cash flows, it is recommended to inform the bank and come to a joint solution. Cooperation with the bank is even more important due to the new regulations which forbid the bank to allow an overdraft without approval as from July 1, 2006. Maintaining good relations with the bank does not contradict that it is recommended to negotiate the amount of interest and commissions, and in this way to save money.
Funds for small businesses
One of the central problems of new businesses and businesses in general is credit difficulties. In Israel, there are many funds that operate and encourage new, small, and medium – sized businesses with the method of granting credit changing from time to time.
Generally, assistance is given to businesses that already exist and operate, but there are also funds that give loans to businesses being established. At the time of taking credit, it is important to ensure that the business can meet the monthly repayment. For businesses that cannot meet immediate repayment, there are loans where repayment is made only after a period which is decided in advance.
Value Added Tax
The business can operate only after registering and opening a VAT file.
There are two types of independent business:
a. An exempt business – where the expected annual turnover will not exceed NIS 65,720 – generally, these are small business and employees who are only starting their activities as self employed. Such a business only reports once a year to the VAT and does not collect and cannot set – off VAT. Businesses such as the liberal professions cannot register as exempt businesses, no matter what their revenues
b. A taxable business – anyone whose annual turnover is expected to exceed NIS 65,720 must be registered as a licensed dealer.
When filing an application to the VAT authorities for opening a business, you should have the following documents: an application to open a business signed by the dealer/partners, a photocopy of an identity card/identity cards, a cancelled bank check / any other document showing details of the bank account and details of the holder of the bank account and the rental contract.
In certain cases, the Value Added Tax Authorities are entitled to demand additional documents such as future engagement agreements etc.
After the change in the law, about a year ago, dealers are required to report to the Income Tax on the opening of a business, and anyone who does not do so is exposed to administrative fines. In order to register an independent business, an application to register one must be made with the assessing officer. Despite the fact that it is possible to open a business with the tax authorities independently, it is recommended to obtain the assistance of a CPA to do so.
Opening a deductions file for employees
If the business employs people, a deductions file must be opened with the assessing officer. The opening of a deductions files with the National Insurance Institute is carried out automatically by obtaining data from the Income Tax Authorities.
National Insurance Institute
In addition to registering VAT and income tax, an independent dealer must register also with the National Insurance Institute. Registration is done by completing the annual report form. The Institute requires that the number of hours expected and the level of expected income. There are two types of self employed in National Insurance:
1) A self employed person who meets the definitions of a self employed person – pays advances on account and insures the income for which he pays advances.
2) An independent who does not meet the definition – a dealer who works in the business less than 12 hours a week and earns less than NIS 3,692 per month. This status generally is suitable for employed people where the business provides him with complementary income. When the business is registered with the National Insurance Institute – the Institute examines whether insurance fees were paid from the age of 18 until the age of opening the business -whether there are periods where the dealer was abroad or did not work – he will be required to pay for these periods.
Keeping books of accounts
Every person who has income from a business or profession must keep books. The method of keeping books changes according to type and size of the business. At the start, it is recommended to keep close contact with a professional person – certified public accountant or tax consultant in order to obtain a detailed explanation of the method of managing the books and the procedures of issuing invoices and receipts. In addition, cooperation with a certified public accountant assists the business in understanding more correctly and releasing its owners from waiting unnecessary time.
Non keeping of proper books causes their disqualification by the tax authorities. This sanction is likely to result in a situation where the assessing officer will determine for himself the annual assessment that the business owes, and its owner will have to prove the exact income according to which the tax is paid.
For additional details regarding the specific requirements of every client, send us your query and we will gladly get back to you with a response regarding your specific needs.
By: Alex Sutovsky
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