Startup and Accounting — Your Entrepreneur's Guide

Who Is This Guide For?

If you are an entrepreneur in the first or second year of your startup, you are likely dealing with dozens of decisions — which services to develop, how to reach your first customers, what to charge. But while you focus on growth, accounting and taxation tend to organize themselves — and usually not in the best way.

This guide is right for you if:

• You have opened an exempt trader or licensed trader status and worry you are not doing it correctly.
• You are unsure what you need to file with the tax authority and when.
• You want to understand how income tax and national insurance affect your profits.
• You are planning to scale your business and wondering whether you may need to register for VAT.

Essentially — if you are a startup that wants real guidance on accounting matters, you are in the right place.

What is a Startup from an Accounting and Tax Perspective?

From the perspective of the Tax Authority and National Insurance, a startup is not a legal category — it is simply a new business. It can be a self-employed individual, a private company (Ltd.), or even a non-profit organization if it is a social project. What matters is that it must report income, expenses, and pay taxes — exactly like any other business.

Most startups we see at the beginning typically choose to register as an exempt trader. This is the simplest in terms of reporting — you do not need to file a detailed annual report, only a simplified annual report. However, as the business grows, typically a transition occurs: they move to an licensed trader status or establish a private company (Ltd.) to provide themselves with more flexibility in tax planning.

The point is that you should not wait until the business explodes to start thinking about this issue. Start today.

First Steps — What Should You Do in the First Months?

When starting a startup, there are usually two approaches: either you open a business as a sole proprietor, or you hire an accountant to help. We generally recommend the second approach, but let's go through each step.

1. Choose a legal structure: exempt practitioner, licensed practitioner, or private company (Ltd.)? This depends on your expected revenue scope, whether you want to pay taxes, and your investment plans. An exempt practitioner is simpler at the beginning, but if you plan to grow quickly, a private company may be more tax-efficient.
2. Registration with National Insurance: Every new business owner must register with the National Insurance. This is not optional. You will receive a National Insurance number, and it will be the basis for all your reporting. If you hire employees, you must also register as an employer.
3. Bookkeeping from day one: Don't wait until the end of the year. From day one, keep every receipt, every expense, every income. If you use accounting software (and there are many good options available today), this becomes automatic. If you work with an accountant, they will help you organize this.
4. Understand your tax advance payments: If you are a licensed practitioner or a private company, you typically make tax advance payments throughout the year. This is not an additional tax — it is an advance payment of part of your tax obligation. If you don't pay them, you will end up with a large debt at the end of the year.
5. Periodic reporting (if applicable): If you are subject to VAT, you must file periodic reports (usually every two months). Even if you are a licensed practitioner, there are certain reports you must file. It's not complicated, but it must be done on time.
6. Annual report at the end of the year: At the end of the year, every business must file an annual report with the tax authorities. An exempt practitioner files a shortened report; a licensed practitioner and a private company file a full report. This includes all your income, expenses, and taxes.

What You Need to Know About Taxation and Startups

When you are self-employed or operating a startup, you pay taxes on your profits. This is different from an employee whose tax is deducted directly from their salary. You are responsible for calculating the tax, making advance payments, and filing reports.

Your profit = income minus permitted expenses. A permitted expense is an expense incurred to generate income. If you are engaged in software development, for example, expenses for servers, tools, even part of your home office rent—these are permitted expenses. An expense not directly related to your business, such as vacation or purchasing a private vehicle, will not be recognized.

The tax rate depends on the amount of profit. Generally, if you are an exempt or authorized business owner, you pay income tax at a progressive rate—meaning the higher the profit, the higher the rate. Additionally, you pay national insurance contributions, which are a fixed amount or a percentage of profit (depending on your choice).

One point that is not always clear: if you are a startup that has not yet made any profit, or you incurred a loss in your first year, you still must file an annual report. The loss can be carried forward to future years, which provides you with tax relief in the future when you generate profits.

Common Mistakes Startups Make — and How to Avoid Them

• Failure to Keep Receipts and Documentation: This is the biggest mistake. You spend money, but you don't keep receipts. At the end of the year, when your accountant asks "Where's the receipt?", you can't prove the expense. The tax authorities won't believe you without evidence. Solution: Every receipt, every expense — into a folder or software. One day it takes 30 seconds; at the end of the year, it saves you hours.
• Mixing Personal and Business Funds: Many self-employed individuals use a personal bank account for their business too. This creates confusion. When an audit or annual report comes, it's difficult to separate what was business income and what was personal money. Solution: Open a separate business bank account. It's cheap, simple, and saves a lot of trouble.
• Ignoring Tax Advance Payments: Generally, registered self-employed individuals must pay tax advance payments during the year. Some self-employed people ignore this, thinking they'll handle it at the end of the year. By year-end, they discover they owe the tax authority a large sum and are unprepared. Solution: Plan your tax advance payments in advance and pay them on time. It's much less painful than a surprise at the end of the year.
• Misunderstanding the Difference Between Revenue and Profit: Revenue is the money that comes in. Profit is what remains after expenses. You pay taxes on profit, not on revenue. Many startups think that if they earned NIS 100,000, they pay taxes on NIS 100,000. They don't. If their expenses were NIS 50,000, the profit is NIS 50,000, and taxes are calculated on that. Solution: Understand the difference and report accurately.
• Opening a Business and Then Forgetting About Updates: When you open a business, you must notify National Insurance, the tax authority, and possibly other agencies. But if your circumstances change — for example, you hire employees or your income increases significantly — you must report it. Many self-employed individuals don't do this and discover during an audit that they failed to update something important. Solution: When there's a significant change, speak with an accountant or contact National Insurance directly.

When Should You Consult with an Accountant?

That's a good question. Some self-employed individuals think they can handle it themselves, and in some cases, they're right. But there are critical points where professional advice is worth its weight in gold:

Early in the process: When you're in the planning stages of your startup, even before you open a business, it's a good idea to speak with an accountant. They can help you choose the right legal structure — exempt business, licensed business, or private company (Ltd.). This choice affects taxes, national insurance, and your flexibility in the future. A mistake at this stage could cost you significant money.

When income grows: If your income was small in the first year, but grew substantially in the second year, it's a good time to check whether your structure is still appropriate. Maybe you should switch to a licensed business, or establish a private company. An accountant can help you calculate the tax implications of each option.

If you're hiring employees: This becomes complex. You need to manage payroll, deductions, national insurance reports, and more. This isn't something you should try to do yourself without experience. An accountant can handle all of this, or at least help you understand the procedures.

When you're unsure about reporting: If you're not sure what needs to be submitted to the tax authority, when, or how — that's a sign you should seek professional help. Incorrect reporting can lead to fines, duplicate work, and issues with the authorities.

In short: If you're a startup that wants to grow with confidence, without worry about taxes or reporting, consult with an accountant early on. It's not an expense — it's an investment in peace of mind and healthy growth of your business.