I Started a Business and Don't Know Where to Begin — A Practical Guide

Who Is This Guide For?

If you are just starting out — whether you are a self-employed individual who opened a business last month, a small business owner who wants to understand your accounting obligations, or even an employee who is beginning to earn additional income from self-employment — this guide is for you.

Most self-employed individuals we see at Ben Or Kook's office come to their first meeting with similar questions: "How exactly does this work?", "How much will it cost me?", "What happens if I don't report on time?". In the first months, having the correct order of things saves time, money, and worry. When you organize early, every subsequent report becomes much simpler.

On this page you will find:

• The first steps you need to take when opening a business
• The difference between an exempt business and an authorized business — and which one is right for you
• Reporting and tax obligations you need to know about
• Common mistakes we will help you avoid
• When is the right time to contact an accountant

Let's get started.

What is a Self-Employed Business and Who Does It Concern?

In Israel, when we talk about a "self-employed" person, we generally mean someone who works for themselves — not as an employee of an employer. This could be a consultant, graphic designer, contractor, plumber, technician, or any other profession you operate independently.

When starting a self-employed business, the tax authorities require you to register as a "business operator" — and there are two main options:

• Exempt Business Operator — if your annual income is below a certain threshold, you can be "exempt" from full bookkeeping and VAT reporting requirements. This is much simpler, but only under certain conditions.
• Registered Business Operator — if your income is higher, or if you choose to register as a registered operator, you must maintain accurate accounting records and report VAT (where applicable).

Regardless of which category you fall into — you must report to income tax on your profits in an annual report, and you must pay tax advance payments accordingly.

First Steps — How to Start a Business

When opening a self-employed business, there is a certain order of steps. If you do them on time, everything runs much more smoothly.

1. Registration with the Tax Authority — this is the first step. You need to submit a registration form (usually through the Tax Authority website or with the help of an accountant) and specify the type of business activity. It is not complicated, but if you forget — it could lead to fines later.
2. Obtaining a Business Number and Tax Code — the Tax Authority will provide you with a business number (or business license). This is your number in the eyes of taxation. Keep it safe.
3. Registration with National Insurance — if you are self-employed, you must register with the National Insurance as a business owner. This ensures you have rights such as an old-age pension, unemployment benefits (under certain conditions), and more. The National Insurance will collect monthly payments from you.
4. Opening the Books — List of Expenses and Income — from day one, you need to start tracking your income and expenses. If you are an exempt business owner, this can be simple — just a list in an Excel spreadsheet. If you are a licensed business owner, you need something more precise.
5. Invoices and VAT Reporting (if applicable) — if you are a licensed business owner and required to file VAT reports, you must issue invoices for each transaction and customer. It is not difficult, but you need to be organized.
6. Annual Report at the End of the Year — each year, by a set deadline (usually by the end of April), you must submit an annual report to the Tax Authority. This summarizes all the income and expenses of the year and calculates the tax you need to pay (or a refund if you are entitled to one).

Important note: if you are unsure which category you belong to (exempt or licensed), it is advisable to check this early on. It affects all the other steps.

Exempt Business or Authorized Business — What's the Difference?

This is a question we hear often: "Can I be exempt?" The answer depends on several factors.

Exempt Business — If your annual income is below a certain threshold, you can be exempt from VAT reporting and full bookkeeping. This means:

• You do not need to report VAT in periodic reports
• You are not required to issue invoices with VAT
• Reporting is simpler — just a annual report at year's end

Authorized Business — If your income exceeds the threshold, or if you choose to register as authorized (even if not required), you must:

• Maintain accurate accounting books
• Report VAT in periodic reports (typically every two months)
• Issue invoices with VAT
• File a more detailed annual report

Sometimes, even if you can be exempt, it's worthwhile to register as authorized — for example, if you need to reclaim VAT on your expenses, or if it affects your business reputation. In short, it depends on your circumstances. If you're unsure, it's advisable to consult with a certified public accountant.

What You Need to Know About Income Tax and Reporting

As a self-employed person, you are required to report your profit to income tax. This is not something you can ignore — the Tax Authority monitors every business operator.

Reporting works as follows:

• Annual Report — Each year, you file a report that summarizes all income and expenses. Based on this report, the tax owed is calculated (or a refund if applicable).
• Tax Advance Payments — During the year, the Tax Authority may demand "advance" tax payments from you. This is essentially their estimate of how much you will earn in the current year, based on the previous year. If your profit differs significantly, you can request an adjustment.
• Allowable Expenses — Not every expense is permitted. For example, if you are a self-employed person working from home, you can deduct a portion of rent, electricity, and telephone. However, if you purchased a luxury car "for business," this is not necessarily fully deductible. Every expense must be "reasonable" and "related" to the business.
• Health Insurance Deduction — If you are self-employed, you pay for health insurance yourself. Part of this can be deducted in your report.

A point that is not always clear: the annual report does not have to be complicated. If you are an exempt business operator with simple income, it can be a short report. If you are a authorized business operator or have significant expenses, more detail is required.

Common Mistakes to Avoid

In years of working with new freelancers, we see mistakes that repeat themselves. Here are the most common ones:

• "I'll start keeping accounts at the end of the year" — This always turns into chaos. When April arrives, you don't remember which expenses were in May, and which income was in November. Monthly maintenance saves days of work at year's end.
• Non-reporting or late reporting — If you don't report on time, the tax authority can impose penalties. These penalties can be severe. Check deadlines and mark them on your calendar.
• "I don't need invoices because I'm small" — Precisely because you're small, you need to be more organized. Invoices not only help you track expenses, but also protect you if there's a tax audit.
• Failure to report small income — "It's just 500 shekels from work I did for a friend." If it's income, you need to report it. Every income changes the overall picture.
• Undocumented expenses — "I remember buying materials for 200 shekels." Without a receipt, it's almost impossible to prove. Keep every receipt, even small ones.
• Mixing personal money with business money — If you withdraw money from your business account for personal needs, it complicates reporting. Buying something for the business? Pay from the business account. Something personal? Use your personal account.
• "I don't need national insurance because I'm self-employed" — You do. It's not optional. National insurance protects you in the future, and labor laws require it.

What's important to remember: all these mistakes are easy to avoid if you plan ahead.

When Should You Consult an Accountant?

Perhaps you're thinking: "Why do I need an accountant? I can do this myself." And the answer is: you can. Absolutely. But there are situations where it's exactly the right time to get help.

You need an accountant if:

• Your income is growing — When you start a business, income is small and easy to manage. As it grows, reporting becomes more complicated. An accountant knows how to do this efficiently from a tax perspective.
• You have complex expenses — If you're purchasing equipment, a mortgage, or something that affects your reporting, an accountant knows how to handle it.
• You're starting to employ workers — It's no longer a one-person business. When you have employees, you need to manage payroll, national insurance payments, and various reports. It's complicated. An accountant is essential.
• You opened a business in the last six months — If it's new, it's worth getting guidance early on. This prevents mistakes later.
• You're unsure whether you're an exempt business owner or licensed — This decision affects everything. An accountant knows what's right for you.
• You received a notice from the tax authority — If the tax authorities are calling you, it's time to bring in professional help. Don't try to handle it alone.

Ben Or Kook offers a free initial consultation. In this meeting, you can ask any question, understand your situation, and decide whether it's worth continuing with an accountant. No obligation, no tricks.

Annual Report — What Exactly Is It?

The annual report is the document in which you report to the Income Tax Authority all your business profits for the year. This is not something you can avoid — it is mandatory.

The report includes:

• Total business income
• Total allowable expenses
• Profit (income minus expenses)
• Tax calculation based on profit
• Payments already made (advance payments, withholdings from other employment, etc.)
• Calculation of final tax owed (or refund if applicable)

If you are an exempt business operator, the report is simpler. If you are a licensed business operator, it is more detailed and includes VAT information.

The filing deadline is generally by the end of April of the following year. That means the report for 2025 has until the end of April 2026. If you are late, you will have to pay a penalty. If you pay early, you save fees and worry.

Practical Tips for Self-Employed Beginners

Let us go over a few things that will help you along the way:

1. Open a separate business bank account — it is not a legal requirement, but it helps a lot. When income and expenses go through one account, it is easy to see what is happening. When everything is mixed together, it is chaos.

2. Invest in accounting software — there are programs that cost next to nothing (or even free for small operators). They save hours of work. Even an organized Excel spreadsheet is better than "I will remember at the end of the year."

3. Update the tax authority about life changes — if you got married, had a child, or anything else that affects your taxes, report it. This is not an inspection — it is an update that can help you.

4. Set reminders — for reporting deadlines, advance payment dates, and more. If you do not keep track, it is easy to miss. Mark it on your calendar.

5. Keep every receipt — even if it is small. A receipt is your proof. Without it, it is hard to prove an expense.

6. Do not be afraid to ask questions — if something is unclear, ask. A good accountant knows that new self-employed individuals do not always understand the terminology. It is okay.