When founding an Israeli non-profit organization (of the type included in the ‘third sector’), the Israeli law currently enables two main operating configurations: a non-profit organization (called in Hebrew an ‘amutah’ or ‘amutot’ in plural) or a public benefit company (PBC).
The main dilemma facing volunteers in organizations that have not yet been incorporated is deciding which of these two statutory formats is appropriate considering the nature of the organization’s activities.
At the outset, we note that the differences between these two types of organizations are immaterial in most cases. But, since they do exist, it is advisable that you familiarize yourself with them in order to reach an informed decision regarding the appropriate mode of incorporation.
The shared characteristics of amutot and PBCs are basically those that anchor each one’s status as a non-profit organization. Firstly, amutot and PBCs are both prohibited by law from distributing profits (to shareholders in the PBC and to members of the amutah). Secondly, as long as they fulfill particular criteria, both are entitled to receive Certificates of Proper Management (amutot from the Registrar of Amutot and PBCs from the Registrar of Endowments) and, subsequently, also a certificate recognizing the corporation as a public institution pursuant to the Israeli Income Tax Ordinance, both for income tax purposes (under section 9(2) of the Ordinance) and for the purposes of receiving donations (under section 46 of the Ordinance). Additionally, the law requires both amutot and PBCs to appoint an audit committee (and an internal auditor, if the financial turnover exceeds NIS 10 million), as well as enables both to pay reasonable remuneration to their managers for participation in meetings.
However, in addition to the shared characteristics between amutot and PBCs, there are also several differences between them. The table below presents the main differences:
|Registration||Registrar of Amutot||Registrar of Companies|
|Regulatory authority||Registrar of Amutot||Registrar of Endowments|
|Applicable legislation||The Non-Profit Organizations (‘Amutot’) Law||The Companies Law|
|Objects||Non-profit; and for any legal purpose||Non-profit; and for public purposes, pursuant to a closed list specified in the Companies Law (or according to a specific approval from the relevant minister)|
|Proprietary interest||No proprietary interest; solely membership, which is personal and not transferrable or bequeathable||Shares held are not deemed an asset having economic value, but rather reflect membership in the PBC; shares are not transferable or bequeathable|
|Corporate institutions||General assembly of the amutah members, executive board and audit committee||General assembly of the company shareholders, board of directors, and audit committee|
|Number of directors / executive board members||At least two executive board members||At least one director|
|Independent management||Only a member of the amutah is eligible to be elected to serve as a member of the executive board (and of the audit committee)||An external person (other than a shareholder) is also eligible to be elected to serve as a member of the board of directors (and of the audit committee)|
|Interested-party transactions||The Amutot Law does not address this issue (except in relation to remuneration of members for participation in board and audit committee meetings and in relation to reimbursement of expenses)||Court approval is required for an interested-party transaction, in addition to all other requisite approvals in this regard pursuant to the Companies Law|
|Appointment of a CPA||Compulsory above a particular annual turnover||Compulsory in any case|
In addition to the traditional types of corporations included in the third sector (Amutot and PBCs), activities constituting a “social enterprise” (called the ‘fourth sector’) are gaining momentum all over the world and in Israel in particular. These corporations are also supported by government policy.
A social enterprise is basically a hybrid of the third sector and the second sector (business sector). It strives to generate profit (but not to maximize profit) for the purpose of achieving social objectives. A social enterprise relies less on philanthropy for financing and more on the profits generated by its business activities.
Since, to date, there is no official express recognition of social enterprises in the current legislation, social enterprises are usually founded by third-sector organizations (Amutot and PBCs) as a strategy for advancing their social objectives in channels that do not depend on philanthropic contributions, or by independent entrepreneurs looking to advance a social vision using business strategies to generate revenues.
A draft bill was proposed recently to amend the Israeli Companies Law (preparation for a first reading is underway), with the objective of creating a unique legal structure be tailored to the needs of social enterprises. According to the draft bill, social enterprises will be permitted to incorporate in the format of a company to be called a “social enterprise company.” A social enterprise company will be allowed to distribute dividends to its shareholders at a ratio not exceeding 50% of its profits, while the balance of its profits will be used to advance its social objectives. In addition to creating a legal structure for a social enterprise company, the draft bill also contains a proposal to amend the Partnerships Ordinance so that it includes a “social enterprise partnership”.
Today, there are already a number of social venture funds investing in social enterprises that were founded with government support. The creation of a unique legal structure for social enterprises will definitely help to attract investments in social enterprises, by generating incentives for investing in these enterprises, such as those already existing in preferred fields, for instance high-tech innovations for social change.