Starting a Business in Mexico
Published by Hector Lopez
Starting a business in Mexico is complex and anything but straight-forward. There can be as many as 13 to 16 different steps involved. The number of steps depends on whether the shareholders are Mexican or foreigners, in what industry the company will operate, and whether the company plans to import or export.
The Government of Mexico exercises very diligent oversight of corporations, involving several different agencies such as the Ministry of Foreign Affairs, the Mexican Tax Authorities, and the Commercial Property Registry.
Each agency has its own separate requirements at the time of formation that require either authorizations and/or licenses. Additionally, the incorporation process in Mexico requires the use of a notary.
A notary is an attorney who is authorized by the government to undertake certain legal actions such as formalizing wills, certifying official documents, and forming corporations.
CORPORATION VS LIMITED LIABILITY COMPANY
The two most common business types in Mexico are the Sociedad Anonima de Capital Variable (S.A. de C.V.) and the Sociedad de Responsabilidad Limitada (S. de R.L.).
These are both corporate entities in Mexico for purposes of the law. However, the S. de R.L. is very similar to a partnership and in most cases will be treated like a partnership for tax purposes in countries like the United States.
In addition to the former, there is the Asociación Civil (Civil Association), Sociedad Civil (Civil Company), Joint-Venture, and Sociedad en Comandita (Limited Partnership). Most companies are overwhelming established as either an S.A. de C.V. or an S. de R.L.
Maintenance costs can be an impediment to forming a business in Mexico. The Mexican IRS (SAT or Hacienda as it is called in Spanish) requires monthly filings for tax purposes.
This does not mean monthly payments, but filings based on income and business for the month… even if zero… must be filed electronically – otherwise stiff penalties are incurred.
These filings may be taken care of by an officer of the company electronically, but in many cases require the retention of an accountant. The taxes to be filed may include income tax, the corporate flat tax, and the value added tax.
In addition to taxes, the government requires companies to contribute to social security and other social welfare programs on behalf of each employee. Mexican has a very robust employee-centered labor and employment law regime. Employees are entitled to certain bonuses, tenure, and profit-sharing among other things. Thought, depending on the size of the business, some of these laws are laxly enforced. Nevertheless, stiff penalties for in-compliance are possible and do occur.
If you are a business owner and you’re looking at starting a business in Mexico, you want to know a couple of things.
First, there are two common types of companies in Mexico, the Corporation and the Limited Liability Company. You can recognize them by their abbreviations S.A. de C.V. and S. de R.L. It does not matter what type of business, big or small, you should operate under a formally organized business, which will offer a variety of protections from liability, while at the same time making it easier to operate in almost any industry.
Second, are you interested in exporting or importing?
Manufacturing in Mexico is booming in industries from auto-parts to consumer electronics. There is plenty of room for your business to get a piece of the market, be it internationally or domestically within the expanding Mexican middle-class. We can get you started.
Third, incorporating can take about three weeks, but we make it simple.Give us a call and we can help you make the right choices about doing business in Mexico. You don’t even have to step foot in Mexico because we can handle everything online in a fast, safe and reliable way.
SHAREHOLDERS AND RESIDENT DIRECTORS
Many clients inquire whether a Mexican director or shareholder is required. Neither a Mexican shareholder nor Mexican resident director are required. Foreigners may own and operate Mexican company’s without limitation in most cases.
However, it is true that as a practical matter, it may be necessary or recommended to authorize your accountant or attorney with a limited corporate power. This is especially necessary when signing import documentation or other documents that may be required from time to time for licensing. Nevertheless, a local shareholder or resident director is not specifically required.
CORPORATE BANK ACCOUNTS IN MEXICO
Mexican bank accounts in many cases are the most difficult part of opening a Mexican Company or starting a business in Mexico. Bank policies often vary from branch to branch slightly, and overwhelming change from bank to bank. The most import consideration when opening a Mexican bank account is the nationality of the signatory and whether or not physical presence is required for signing documentation.
In some cases, the Mexican bank will require that the foreigner or director of the company to physically travel to Mexico for purposes of opening the corporate bank account and signing the banking contracts. This is a major hassle and can present serious problems and delays. It is best to find a bank that will permit the foreign corporate representative to sign the banking contracts and forward originals by mail. This is an essential first question.
Whether or not a foreigner can sign corporate banking documents is therefore also an essential question to ask. The Mexican bank may require that the signatory of the corporate bank account for the Mexican Company be either a Mexican citizen or obtain Mexican residency. In our Firm’s years of experience, this requirement can often vary from depending on the bank. However, to avoid this, some client’s will have their attorney or accountant sign the bank contracts on their behalf. This can make some client’s feel uncomfortable. For other client’s there may be no other option. If this is not possible, you will need to provide your accountant or attorney with a corporate power of attorney limited enough for purposes of executing banking contracts.
It is common for Mexican banks to exercise a great deal of due diligence upon client’s operations given recent issues with security in the country related to money laundering. Client’s may be requested to provide detailed information including corporate organizational structures, tax payer identification numbers for foreign shareholders, invoicing and proof of previous operations in foreign countries.
LOCAL REGISTERED OFFICE AND ADDRESSES
A local registered office is required for all Mexican companies. This requirement is strictly enforced. The Mexican tax authorities will perform in many cases a site visit to confirm the operations of the company. It is therefore necessary for someone to be present at all times at the registered address with knowledge of the company in the case of a visit.
If the company has employees, it must be registered with the Mexican Social Security Institute (IMSS). If the company does not pay its employee contributions, the authorities will visit the registered office to charge outstanding deductions. In either case, the registered address or office requirement should be taken very seriously for a Mexican company. Many clients do not understand this starting a business in Mexico. In jurisdictions like the United States, a simple address associated with the company is sufficient, with a cost of $50 dollars a year in places like Delaware.
In Mexico, the registered office or address may be subject to a lien by the government for amounts due and the company subject to fines if the registered office is not maintained. All changes to the registered office must be made no later than 30 business-days from a change in address or the Mexican Company may face a fine. The above-mentioned points mean that registered offices or address cost a least $200 USD per month as a result of the risk involved.
EMPLOYEES AND PAYROLL
Mexican labor law is complex. Even though most Mexican companies do not adhere to the letter of the law, this can be problematic if the authorities catch you. Mexican companies are bound by the constitution to provide health care, social security, retirement and other extensive benefits to employees. This includes mandatory vacation, holiday’s, overtime, and severance pay if dismissed without cause.
All labor contracts should be executed in Spanish or Dual-Column English/Spanish (or another language alongside the Spanish version). In most cases, the employee should be given a temporary contract which permits employment during a probational period for 30 to 90 days. This is a manner in which Mexican company’s can limit their exposure.
It is also a requirement for the company to profit share with employees after several years of operations. A common way to avoid profit sharing is for companies to either have employees contracted under an external Human Resources company, or for the company to incorporate a separate Mexican subsidiary company that contracts the employees separately. This greatly reduces operational risk and the need to profit share. However, all transfer-pricing rules for related entities would apply in such case.