The Difference Between a Exempt Business Operator and an Authorized Business Operator

What is an Exempt Business Owner and What is an Authorized Business Owner?

When you start a business in Israel, one of the first and most important decisions is choosing your tax status. The two main statuses are exempt business owner and authorized business owner, and the differences between them affect every aspect of managing your business — from bookkeeping and tax reporting to the rights and benefits you can utilize.

An exempt business owner is a person who operates a business at a relatively low level, whose annual revenue does not exceed a certain amount (subject to regulatory updates). This business owner is exempt from the obligation to register for VAT and periodic VAT reporting obligations, but is still required to file an annual report to the income tax authority.

An authorized business owner, on the other hand, is a business owner who is registered for VAT and has the right (and obligation) to report VAT transactions on a periodic basis. This status is suitable for businesses with higher revenue or for businesses that want to take advantage of the VAT deduction right.

Choosing between the two statuses is not something you need to decide on your own. An experienced accountant can help you assess the expectations from your business and recommend the most appropriate status. At Ben Or Kook, we help self-employed individuals and business owners understand the implications of each choice and plan their taxes wisely.

Key Differences Between Exempt and Authorized Business Owners

To decide which status is right for you, it is important to understand the key differences between the two statuses:

• VAT Registration: An exempt business owner is not registered for VAT, while an authorized business owner must be registered and report VAT transactions on a periodic basis.
• VAT Reporting: An exempt business owner does not need to file periodic VAT reports, while an authorized business owner must file reports (usually every two months or every three months).
• VAT Deduction: An authorized business owner can deduct VAT paid on purchases and materials for business purposes, while an exempt business owner cannot benefit from this right.
• Bookkeeping Obligations: An exempt business owner generally needs to maintain records in a simpler manner, while an authorized business owner must maintain more detailed records.
• Annual Report: Both are required to file an annual report to the income tax authority, but the administration and filing process differ slightly.

Advantages and Disadvantages: Exempt Business Owner

Advantages of Exempt Business Owner:

• Reporting Simplicity: You are exempt from periodic VAT reporting obligations, which significantly reduces accounting administration burden.
• Lower Costs: Generally, accounting for an exempt business owner is less expensive than for a registered business owner, as periodic VAT reports are not required.
• Simpler Process: Managing required records is simpler and can be handled digitally with ease.
• Fewer Audits: Generally, exempt business owners are subject to fewer tax audits than registered business owners.

Disadvantages of Exempt Business Owner:

• No VAT Deduction: This is the greatest disadvantage. If you pay VAT on purchases, you cannot deduct it from the VAT you charge your customers (in fact, as an exempt business owner, you do not charge VAT at all).
• Revenue Turnover Limitation: If your revenue turnover exceeds the maximum permitted amount, you must transition to registered business owner status.
• Fewer Business Opportunities: Some clients (particularly large companies) prefer to work with registered business owners because they can recover VAT on their purchases.
• Limited VAT Registration: If you wish to expand your business, you may need to become a registered business owner to compete in the market.

Advantages and Disadvantages: Registered Business Owner

Advantages of Registered Business Owner:

• VAT Deduction: This is the greatest advantage. You can deduct all VAT you pay on purchases and services related to your business, which can lead to significant savings.
• No Revenue Turnover Limitation: You can grow your business without limit, without needing to transition to another status.
• Broader Business Opportunities: Clients (particularly companies) will prefer to work with you because they can recover VAT on their purchases.
• Credibility and Business Status: Registered business owner status is perceived by clients as more professional and trustworthy.
• Business Model Flexibility: You can adapt your business model to your clients' needs more easily.

Disadvantages of Registered Business Owner:

• Periodic Reporting: You must file periodic VAT reports (typically every two or three months), which requires more rigorous accounting management.
• Higher Costs: Accounting for a registered business owner is more expensive because periodic reporting and more detailed documentation are required.
• More Frequent Tax Audits: Generally, registered business owners are subject to more frequent tax audits than exempt business owners.
• Higher Legal Obligations: A registered business owner must comply with stricter regulations regarding reporting and record-keeping.

Comparison Table: Exempt Business Operator vs. Licensed Business Operator

Which Business Operator Status is Right for Me?

Choosing the correct status depends on several factors:

Choose Exempt Business Operator if:

• Your annual revenue turnover is low (typically up to the amount limited by regulations).
• You want bookkeeping to be simple and inexpensive.
• You don't need to deduct significant amounts of VAT on purchases.
• You operate in a sector where most clients are end consumers (not businesses).
• You are in the startup phase of your business and want to begin simply.

Choose Licensed Business Operator if:

• Your revenue turnover is high or has significant growth potential.
• You pay substantial amounts of VAT on purchases and materials.
• Most of your clients are businesses or companies (who can reclaim VAT).
• You want higher business opportunities and flexibility in adapting your business model.
• You plan to expand your business in the near future.

The Process: How to Change Status or Register as a Business Operator

If you decide to become an exempt business operator or licensed business operator, you will need to go through a registration process. Typically, registration is conducted through the Tax Authority's online portal (customer service system of the Israel Tax Authority) or through an accountant. If you are already an exempt business operator and want to transition to a licensed business operator (or vice versa), this also requires a new registration process.

At Ben Or Kook, we assist freelancers and business owners through every stage of the process — from the initial selection of status, through registration, to day-to-day bookkeeping management. We understand that every business is unique, and we provide personalized consulting tailored to your specific needs.

How Ben Or Cook Can Help You

Choosing the correct status between an exempt business operator and an authorized business operator is an important decision that can impact your business for years to come. At the office of Ben Or Cook, we specialize in guiding freelancers and business owners through these critical decision points.

We provide:

• Personal Consulting: We assess your specific situation, expected revenue cycle, and client structure, and we provide a tailored recommendation regarding the most suitable status.
• Full Accounting Management: Whether you choose to be an exempt business operator or an authorized business operator, we handle all your accounting, from recording daily transactions to submitting your annual report.
• Periodic VAT Reporting: If you are an authorized business operator, we handle all periodic VAT reports, so you can focus on your business.
• Tax Planning: We help you plan your taxes wisely, so you pay only what you owe.
• Digital Service: We use advanced digital tools to make accounting simple, fast, and accessible.

We are located in Petach Tikva and the Ramat Gan area, and we serve freelancers and small and medium-sized companies throughout the country. Our first meeting with each client is at no cost, so you can experience our service and decide if it's right for you.