The reasons that lead us to decide to start our own business are many and varied: for one, the desire to be one's own master; for another, the need for self-fulfillment; for a third, a revolutionary and unique idea; for a fourth, a spirit of adventure, and so on.
The transition from an employed status to self-employment involves significant risk. However, opening your own business can be an excellent way to fulfill dreams and, in most cases, even increase income.
Every year, more than 40,000 businesses are established in Israel, with 70% of them expected not to survive their first year and 90% of them not to survive their second year.
In order for a successful business to be established that can overcome the hurdles and difficulties of the beginning, attention must be paid, among other things, to the following important topics presented in this guide
1. Business vision
Every successful business needs a successful business idea; the business owner must examine the following points:
Did I understand the business startup process correctly? A business requires diligence, self-management skills, negotiation skills, and a strong stance in front of various people and entities that may even be complex.
Do I have a competitive advantage? Does my business idea have an advantage over competitors? What is the added value I can offer potential customers compared to existing services/products in the market? Have I checked who the competitors are? Who is the target audience?
– Do I have personal resources? Equity, internal or external funding sources? Connections with various parties, such as businesses or suppliers? Have I thoroughly examined with my family, with myself, with the bank, and with all parties the feasibility of establishing the business?
2. Break-even point
The estimated various expenses can be estimated with relative confidence. The big unknown is the income.
Based on the estimated expenses, and properly calculated (the difference between sales price and cost of goods sold), calculate how many sales need to be made so that the gross profit resulting from them equals the estimated expenses. This equation is called the break-even point.
If, according to the forecast, there is no chance of reaching the break-even point immediately, it is necessary to examine after what period it can be reached and to include the coverage of the loss during the transition period in the calculation of the required equity.
Business Plan
Developing a business plan that examines the feasibility and operations of a business during its establishment phase and beyond is a critical and necessary step in starting a new business.
The plan should include revenue and expense projections, define the business's target audience, products or services and their pricing, expected profit margins, and the need for additional funding sources.
A good business plan is the cornerstone of a business. With its help, one can choose the right courses of action for developing and managing the business, examine various alternatives, evaluate and quantify business activity and test what will happen in different scenarios, set goals and objectives, and establish an appropriate financial system for the business that will maximize the achievement of the aforementioned goals.
– When there is no business plan, there is no planning. And when there is no planning, the business operates randomly. Everything that happens in it, for better or worse, remains a matter of luck alone. The owner/manager of such a business acts on "gut feelings" and preconceptions that are not necessarily correct. This approach in terms of time and money is very expensive, and the business will pay a high price for experiments, correcting deficiencies/errors, and changes in the business's operational and management methods.
Who needs a business plan? Every business, without exception!
An existing business that aims to develop and expand must learn and draw conclusions from its accumulated past data and use them as important components in the planning process.
A new business is about to be established – its entire future depends on a plan. It’s not enough to be good at the field you want to operate in. It is recommended to consult a professional for comprehensive business advice. Business consulting, especially during the establishment phase, greatly helps the entrepreneur and the business focus, and also helps turn the entrepreneur's business vision into a practical plan. Furthermore, business consulting helps in building the business plan, assists in dealing with unexpected problems and situations that the new business encounters and has to deal with, and provides professional and emotional support for the establishment and development of a new business.
4. The Legal Structure of the Business
You have decided to open a business after examining the feasibility and concluded that it is worthwhile. First, the legal structure of the business must be determined: sole proprietorship, partnership, or company.
Sole proprietor/Freelancer A sole proprietorship is the simplest and most basic form of business activity. There is a legal identity between the business and its owner for the purposes of various tax laws: the individual is a taxpayer for income tax, a dealer for VAT, and insured for national insurance.
Limited companyIts liability is limited, up to the amount of paid-in share capital. However, it should be remembered that banks and other creditors usually require personal guarantees from shareholders precisely because of the aforementioned limitation.
partnership Regarding partnerships, there is no limitation of liability, and each partner is fully liable for all partnership obligations. This applies even if the partnership is not registered with the Partnerships Registrar, as long as it operates as a business partnership.
There is a limited partnership registered with the Registrar of Partnerships. At least one partner must be a general partner. The condition that the limited partner will not be sued for the partnership's debts is that the partner who is registered as limited will not be active in the business at all.
5. Dealing with Authorities
Opening a VAT file
In VAT, there are two types of businesses: authorized dealers and exempt dealers. The dealer's identification number is a 9-digit number: for an individual, the dealer number is the same as the identity card number, and for a company, the dealer number is the same as the company number in the Companies Registrar. It is not possible to start operating
and report income before VAT registration.
Licensed dealer A licensed dealer reports their transactions to VAT monthly or bi-monthly (the dates are determined according to the annual turnover), they may issue tax invoices and may also offset the VAT paid to various suppliers (called input VAT).
A licensed dealer offsets the VAT collected from customers against the VAT paid, and transfers the net amount to the VAT authority or receives it back.
Exempt dealer - Is a dealer whose annual revenue does not exceed NIS 100,000 (this amount is updated periodically). A tax-exempt dealer manages books in the most basic way and is required to report their transactions to VAT only once a year. A tax-exempt dealer does not charge VAT and does not offset VAT, and is not allowed to issue a tax invoice but only a "bill" and only a "receipt". Not every business can operate as tax-exempt. There are businesses, mainly freelancers, that must be licensed dealers regardless of their annual revenue (according to regulations).
The bookkeeping regulations are instructions that dictate which books each business must keep and how to manage them.
- Opening a tax file - Deductions
It is mandatory to open a file with the Income Tax Authority before starting business activities. There is a requirement to open a file with the Income Tax Authority before starting business activities. If you intend to employ workers and/or subcontractors and/or pay rent, you must also open a withholding tax file with the Income Tax Authority (where you will be required to report monthly on income tax withheld due to salaries paid to employees).
– Opening a file for annual reporting
After opening the file, the Tax Authority will send you an advance payment booklet for paying advances on account of the total annual tax. The final tax that will apply to you will be determined only after you submit a report to the Tax Authority at the end of the tax year and report your income. It should be emphasized that various expenses incurred during your business activities for the purpose of generating income can be deducted from the income. If the total tax liability to be paid is higher than the advances you paid during the year, you will be required to pay the difference, and if the total advances you paid during the year exceed the total annual tax liability, you will receive a refund. .
It is possible to work as an employee and self-employed simultaneously. From your income as an employee, your employer will deduct tax according to the tax brackets applicable to personal income, and additionally, you will pay advance payments on account of the annual tax from your income as self-employed. The settlement with the Income Tax Authority and the determination of the final tax liability will be made after the end of the year.
Tax filing of the annual report. It should be emphasized that individuals are not required to use the assistance of an accountant in filing the annual report.
Opening a file with social security
It is advisable and desirable to open a file with the National Insurance Institute very close to the date of opening the business, in order to enjoy insurance coverage according to your expected income. You will be required to report your expected income and expected weekly working hours.
Status as a self-employed worker is determined if one of the following criteria is met:
1. Works at least 20 hours per week on average. 2. Average monthly income is at least 50% from wages
The average. 3. Works at least 12 hours per week on average and the monthly income is
At least 15% of the average salary.
If you are both employed and self-employed, it is advisable to consider which insurance coverage suits your needs.
Business License
It is necessary to ensure in advance that the physical location of the business meets the requirements of the local authority and that there will be no impediment to obtaining a business license from the local authority. Operating a business without a license constitutes a criminal offense punishable by a fine and even imprisonment. In addition, an order to close a business operating without a license may be issued. It is recommended to consult an architect or a permit expediter who is knowledgeable and familiar with the municipal process.
Receiving professional advice from a certified public accountant will ensure that you are complying with legal requirements, and at the same time, it will verify that you are receiving all the rights/benefits you are entitled to.
6. Marketing and Sales
Marketing branding, marketing, and sales are essential and necessary parts of any business that wants to succeed.
Marketing branding is a process that allows for the focusing and marketing advancement of a business. This process will include, among other things, choosing the business name, slogan, logo, designing marketing materials such as business cards, flyers, website, and more. All in accordance with the type of business and its target audience.
Marketing and sales – this is the process that brings in customers and revenue, enabling the business to operate. The business will only continue to exist and profit if you succeed in selling your services and products.
Every business must ensure it has a good, well-oiled marketing and sales system to keep orders and/or customers coming in. If there is a defined target audience, effective advertising channels should be sought, of course within the budget.
It is highly recommended to hire a professional marketing consultant from the very beginning of your business setup, who will guide and support you every step of the way.
Proper infrastructure setup will ensure better business results.
In summary:
Starting a business is not simple: Advance planning is mandatory to ensure the business
The opening will indeed take off and flourish. The business owner must prepare a detailed business plan according to which the business will be managed. There are also laws and requirements that the business owner must comply with, such as obtaining a business license, opening a file with the various authorities, etc.
Receiving professional advice from an accountant will help meet all the complex requirements necessary for the proper management of the business, will help see your business from a professional perspective, will give you peace of mind regarding the owner's obligations and rights, and will allow you to focus more on promoting the business itself and less on bureaucracy.
Starting a new business requires personal vision, enthusiasm, optimism, and readiness to cope with various difficulties (some of which we've mentioned). If you have these qualities, you can handle everything necessary for your business to succeed.
Barzily & Co. CPA, Barzily Business Consulting, and Barzily Strategic and Communicative Marketing Consulting will be happy to assist and support you at all stages of starting your business!
Good luck!
