Doing Business in the United States: A Legal and Strategic Guide for Israeli Companies
By Michael Ehrenstein, Esq.

For many Israeli companies, entering the U.S. market is a key strategic goal for growth. Yet alongside the opportunities lie significant challenges—from legal entity registration and investor relations to regulatory requirements that differ dramatically from those in Israel. Without careful planning, these gaps can turn a strategic move into an expensive and unnecessary risk.

This article is part of the series Doing Business in the United States: A Legal and Strategic Guide for Israeli Companies—designed to provide Israeli entrepreneurs and executives with a practical introduction to critical issues in entering the U.S. market. Success depends not only on innovation and entrepreneurship, but also on sound professional guidance.

What Type of Entity to Form?

In Israel, setting up and registering a business is relatively straightforward: a sole proprietorship or a limited liability company (Ltd.). The process is standardized, and the implications are clear. In the U.S., however, the first step—choosing a legal structure—can be a confusing and opaque process requiring the business to balance competing priorities against a backdrop of the differing laws of each state.  It is a strategic decision with far-reaching consequences for taxation, personal liability, capital investment, and future growth.

One might compare the business decision of entity formation in the U.S. to a navigator selecting a compass heading at the inception of his journey. . The initial decision on the company structure sets the course for the business.   Choosing the right structure for your circumstances is therefore crucial. For foreign entrepreneurs in the U.S., the three main options are:

• Corporation: Preferred by many institutional investors, it offers strong protection against personal liability and a clear management structure. The main disadvantage is potential “double taxation” for “C” corporations (which can have unlimited shareholders and multiple stock classes)Profits for these entities are taxed at the corporate level and dividends at the shareholder level.  Double taxation can be avoided by making an “S” election, but this places strict limits on the number and type of shareholders permitted (only one class of stock, maximum 100 shareholders, shareholders must be US citizens or residents)
• Limited Liability Company (LLC): Provides significant flexibility. An LLC can be treated as a partnership or a corporation. This structure appeals to many entrepreneurs and permits membership by foreign persons. However, capital investors are usually reluctant to invest in businesses formed as LLC’s because of complications in their tax reporting (particularly with phantom income derived from undistributed profits) and their capitalization.
• Partnership: The simplest and least expensive to establish, but it exposes partners to personal liability. Moreover, this structure is generally not relevant for companies operating in both Israel and the U.S.

Where to Form the Entity?

Thanks to its established legal system and clear corporate laws, Delaware is the most popular choice, signaling seriousness to investors. It is no coincidence that half of the Fortune 500 companies are incorporated there. However, regardless of where the entity if formed, operating in other states  can require additional registration and payment of local taxes.

The Double Tax Trap

In addition to potential double taxation in the U.S. for C corporations, differences in interpretation between U.S. and Israeli tax authorities can lead to significant double taxation of Israeli investments in the U.S.. An improperly structured company may leave an Israeli investor facing taxes from both the U.S. Internal Revenue Service and the Israeli Tax Authority.

Director and Officer Liability

In the U.S., the responsibilities of directors and officers are enshrined in statutes and case law.. Duties of loyalty, care, and sometimes obligations to creditors are not merely theoretical—they are legally enforceable and can pose a challenge for Israeli entrepreneurs accustomed to a less formal management style. These fiduciary obligations can precipitate expensive litigation and enormous liabilities (which entrepreneurs are wise to insure against).

Turning Risk into Opportunity

With proper planning, Israeli businesses operating in the U.S.  can minimize taxes, protect shareholders, and build investor confidence. Strategic planning transforms risks into opportunities. Israeli companies that give careful thought to their first step will be positioned to enter the U.S. market with confidence and secure the stability required for long-term growth.

Michael Ehrenstein, Esq., is the founding partner of the American law firm Ehrenstein|Sager, specializing in commercial law, complex litigation, and high-stakes international arbitration.