A Company – What Is It?

A company is a legal fiction, an invention of the legal system designed to streamline business activities and increase social wealth. In reality, people perform actions, while a company has no physical existence. However, when a person acts on behalf of a company, the responsible entity for those actions is the company itself, not the individual.

For example, if an individual takes out a loan on behalf of a company, the company will bear the responsibility for repaying the loan. Only in rare and exceptional cases will the individual be held personally liable for the debt (such an action, where the company’s debts are attributed to its controlling person or shareholder, is called piercing the corporate veil).

As stated, a company has a separate legal personality, meaning it has the capacity to hold rights and obligations under the law. This means it can sue and be sued, enter into contracts, own property, and more.

Why Would One Want to Establish a Limited Liability Company?

A company is an entity that is easier to manage from an operational and business perspective. Corporate law provides a separation between ownership and management, allowing for the appointment of professionals to manage the company without interference or with minimal intervention from shareholders.

When dealing with a limited liability company (Ltd.), there is the advantage of limited legal liability, meaning that under normal circumstances, a shareholder is not personally liable for the company’s losses if they occur.

Private Company

A private company is essentially any company that is not a public company.

Public Company

A public company is one whose shares are listed for trading on a stock exchange or have been offered to the public under a prospectus as defined in securities law, or have been offered to the public outside of Israel under a public offering document required by foreign law, and are held by the public.

Sometimes, companies issue bonds that are also traded on the stock exchange, but such companies are not considered public companies—they are bond companies. This has become an increasingly relevant issue in recent years and has received specific legislative treatment. However, since this is not a common concern in the venture capital sector, I will not discuss it here.

When Should a Company Be Established?

A company should be established immediately before significant financial investments are made into it or when the founders have substantial assets (including intellectual property). This is primarily because no investor will invest without a clear ability to divide ownership.

Additionally, a company should be formed when it begins engaging with third parties to whom it holds any form of legal responsibility (contractual, tortious, etc.). This ensures that liability falls on the company rather than on the founders, in accordance with the principle of separate legal personality (hence the term “limited liability”).

The principle of separate legal personality means that the founders are not personally liable for the company’s debts, except in extreme cases where a court applies a process called piercing the corporate veil (i.e., attributing the company’s debts to its shareholders—this is done only in very limited and extreme circumstances, typically involving fraud).

There are also tax advantages to operating as a company (corporate tax rates rather than direct taxation on the founders, as in sole proprietorships or partnerships) as well as certain tax regimes and benefits that are available only to companies (such as acknowledgement as a Preferred Technological Enterprise (according to the Law for the Encouragement of Capital Investments)).