Archive for Corporations in Mexico

Starting a Business in Mexico: Taxes, Immigration and Incorporation

May 5, 2012 / Solomon Freimuth / No comments

This article was originally published in November of 2011 on the Calderón & Asociados website, but as I am no longer part of that firm I am just now getting around to adding it to this site. Enjoy.

So you want to pack up and move to paradise? Before you put your house on the market and start selling off your ski gear, you may want to spend some time investigating your options as to moving to Mexico. Starting a business has worked for thousands of foreigners in Mexico, but the expat business-owner life is not all sitting on the beach sipping margaritas and hopping from cantina to cantina singing along with the Jimmy Buffet impersonators. In fact, most business owners in Mexico, unless they own a bar or beach club, are far too busy or tired to take part in these activities. This article is a very basic, very general, look at a few of the things you need to consider before you embark on your tropical dream.

What Sector?

One of the things you have to decide before you start the whole process of creating your enterprise is what type business are you going to do. You need to have your plan well laid out and determine beforehand if it is a business that you can take part in as a foreigner in Mexico. The Mexican Constitution reserves exercise of some commercial activities for the government and some others for Mexican citizens, you will need to make sure that the business you want to create is something you are allowed to do.

There is a long list of businesses that are reserved exclusively for exercise by the federal government, some make a lot of sense, because of their nature as publicly necessary, while others are nationalized as an attempt to keep the country’s wealth in the hands of Mexican citizens. The federal government has exclusive rights to: harvesting and processing petroleum, generating electricity and nuclear power, processing and handling of radioactive minerals, telegraph/radio-telegraph, mail, the creation of money and supervision of ports, airports and helipads.

As well as industries that are exclusively performed by the government, the Foreign Investment Law specifies some businesses that can only be performed by Mexican citizens and still others that can only have limited participation of foreigners. The businesses reserved exclusively for Mexican citizens are broadcast television, terrestrial transport, and distribution or sale of gasoline. As for businesses that allowed limited foreign participation: Production cooperatives are allowed 10% foreign participation; airlines which fly routes inside of Mexico may have up to 25% foreign participation; insurance companies, suppliers of bonds, exchange houses, financial institutions, firearm and ammo manufacturers, newspapers, commercial fisheries, harbor pilots, interstate shipping, port management and telecommunications companies may have up to 49% foreign participation; and finally, tugboat operators, marinas, boat ramps, private airfields, private schools, law firms, insurance brokers, cell phone service companies, oil pipeline builders, petroleum drillers and railroad builders need a special permission from the government if their foreign participation is more than 49%.

One more consideration about restrictions for business type is that while the law only limits the previous activities, by custom some businesses are only performed by members of certain unions or syndicates. If you are not a member of a particular syndicate it can be extremely difficult to obtain a business license or sellers permit in certain fields, therefore you will need to research local customs in respect to unionization as well.

What Structure?

You have your idea; you have checked that it is possible for you to perform. Now you need to look at the way in which you want your business to run. The most common way of starting and running a business, at least for foreigners, in Mexico is through a corporation, although it is possible to run your business in Mexico as a sole proprietorship in many circumstances.

Everyone who has ever mentioned starting a business in Mexico will get the standard expat advice that you must start a corporation to run your business, which can be true in some cases. There are a wide variety of corporate structures available in Mexico, the most common of them being the S.A. de C.V. or Anonymous Society with Variable Capital, which is very similar to the Inc. in many English-speaking legal systems. Even though the S.A. de C.V. is the most commonly used, in this author’s opinion the S. de R.L. or Limited Responsibility Society fits better with the needs of small business owners. Without going into too much depth, basically the S. de R.L. has more of a small business feel, allows restrictions on transfer of ownership and has a lower required startup capital. The most notable advantage of using a corporation to run the business are the corporate veil which limits liability to the owners/partners, but the drawbacks of a corporation are that start up costs will be increased and you, of course, a corporation requires partners.

Sole proprietorship is a great option if you want to go it on your own. Expat legend tells us that foreigners cannot run businesses through sole proprietorships, but the reality is that this is just not true. Sole proprietorships have big tax advantages, avoiding the classis double taxation incurred by corporations. Many will say that the major disadvantage of the sole proprietorship is that it will not offer the limitations on personal liability that a corporation would give, but in this author’s opinion that might not really be a big concerns considering that the biggest liability risk is labor-related, which is not protected under corporate shielding anyway.

What Do I Need To Be Ready?

You will need to get yourself legally ready to do business in Mexico, not just your corporation but also your personal documents. Before leaving your home country, it is a good idea to ready some of your pertinent documents for use overseas, then after arriving in Mexico you will need to have these documents translated into Spanish. Finally, once in Mexico you will need both a permit from immigration and a personal taxpayer ID number. Both of these can be obtained personally or with help from a consultant or attorney.

Most documents issued by foreign governments are not valid for use in Mexico, at least how they are issued. Your birth certificates, school records and/or professional degrees, as well as your marriage licenses or divorce decrees will all need to receive a special certification from your home government, and depending on which country you hail from you might also need to get the Mexican government to authorize the use of the document in Mexico. Once the documents have been properly authorized for use in Mexico, the will also need to be translated into Spanish by a translator who has been authorized by the Mexican government.

In order to work in Mexico as a foreigner you will need a special permission from the National Institute of Immigration (Instituto Nacional de Migración or INM in Spanish). These permits are widely given to entrepreneurs, investors and professionals who have migrated to Mexico, but obtaining one of these documents can be taxing on the patience, usually requiring multiple trips to the INM office and a plethora of documents pertaining to your personal, academic and financial background. Immigration law in Mexico is currently in the process of reform; apparently the new laws will make the migratory process more agile.

The Mexican Treasury Department, also known as Hacienda, issues to all taxpayers in Mexico a unique taxpayer ID that is based on your name, birthdate and a few random numbers and characters. The taxpayer ID is commonly known as the RFC, which stands for Registro Federal de Contribuyentes or Federal Registry of Contributors in English. If you are opening the business as a sole proprietor, you will use this number for tax purposes. If you are opening your business with a corporation, you will still need a personal taxpayer ID number in order to be the legal representative of the corporation. Getting your taxpayer ID is very simple, much of the inscription process is online and the people in the Hacienda office are usually very efficient.

Other Considerations

Doing business in Mexico has its own unique style and flavor; many people never adjust to the pace and therefore struggle unnecessarily in their business. Most people that are able to run a business in Mexico for any long period of time have an accountant and an attorney that they trust and use regularly for advice and help on various issues that they face.
Tax laws are different in Mexico than in other parts of the world, many foreigners find the tax system in Mexico frustrating and confusing. A good accountant can help you sort through what taxes have to be paid and when, giving advice and helpful reminders which can keep your business out of trouble in the long run.

Labor law, contract law and other aspects of the legal system in Mexico are very different from those we are accustomed to in our home countries. Mexico’s laws tend to be favorable towards the employee, the renter or the customer, although this tendency is progressive and humanistic, it can also be very frustrating for individuals trying to conduct business in Mexico. A good attorney will help new business owners by orienting them in the laws and customs of Mexican businesspeople, explaining the importance of good labor practices, rental contracts, etc.

In conclusion…

Mexico can be paradise for the expat business-owner, but preparation and patience are keys for anyone thinking of taking this life path. If after reading and contemplating the ideas mentioned here, you still are interested in setting up shop “South-of-the-border”, Mexico will welcome you with open arms.

Category: Blog, Corporations in Mexico, Investment and Business in Mexico, Running a Business /

Starting a Corporation in Mexico

December 27, 2010 / Solomon Freimuth / No comments

So you have your great business idea and you are a ready to take it to the hotel zone, you are going to need to decide which structure you are going to use to do business in Mexico.  Most people go for corporations of some sort, there are other options, but this is by far the most used.

The first thing that you will need to open a corporation is a partner, its not much of a “society” if its just you.  Many people use their Mexican corporation as a DBA and therefore are registered as 99% owner and a third party (sometimes their accountant) as the other 1%.

Many people are under the impression that you need a Mexican citizen involved with your Mexican corporation, this is not completely true.  Having a Mexican citizen with administrative powers in the company is useful in the beginning in the life of your company because of issues related to immigration.  When your company is constituted, any powers that you, as a foreigner, have in the company will be limited with the clause “upon receipt of the proper migratory document”.  Until you have an FM3 that says you are allowed to do business with your company, many government agencies and banks will not allow you to do so.  A Mexican citizen will not have these limitations on the powers they may possess in the company, therefore while you are waiting on your migratory documents to be processed, the Mexican representative of your company can be opening bank accounts and getting basic business chores done.

While you are thinking about who your partners and representatives are going to be, lets decide what type of corporation you are going to want to open.  Here are some of the basic options as laid down in the General Law of Mercantile Societies and the Civil Code:

Sociedad Anonima (S.A.)  – This is the most commonly used corporation, some say overused even.  This is a typical corporation like we know it in the US or Canada: it has stocks and shareholders, is run by shareholder meetings and has a typical CEO-board of directors-shareholders power structure.  The minimum you will need to invest to start an S.A. is $50,000 pesos (about $4000USD).  This type of corporation, like almost all of the others, removes personal liability from the owners of the company for all but the amount that their stock is worth.

Sociedad de Responsibilidad Limitada (S. de R.L. – This corporation is like the typical LLC back home, its a partnership of two or more people who are personally involved in the corporation.  The partner´s contributions are by percentages in the company and not by shares, their must be fewer than 50 partners, and the corporation is run by a manager who answers to the partners by means of partner assemblies.  This type of corporation requires a minimum investment of $3000 pesos.

These first two are the most common types of societies used by foreign investors in Mexico, but there are others that are worth examining and discussing with your lawyer.

Sociedad Civil (S.C.)  – This is a standard partnership and is regulated under different legislation than the rest of the societies I mention here.  Typically this type of partnership is used more for law firms, accountants offices or medical clinics, where the partnership is dependent on the contribution of a skill or proffessional service of the partner more than his or her monetary contribution.  This doesn´t mean that there is no monetary contribution, but its along the lines that you cannot have a law-firm without lawyers or a doctors office without doctors.

Sociedad en Comandita – These are interesting, I have talked to notaries who have said that they have never created one of these corporations, but I imagine somebody still uses them.  It is likened most to a silent partnership, their are at least two partners and they have different roles in the partnership:  one is the silent partner and one is the working partner.  The silent partner or partners provide the working capital and step aside, then the working partner or partners perform the day-to-day tasks of the company.  Be careful with this corporation, the working partner is financially liable for the corporation´s losses, while the silent partner is only responsible for his original contribution to the company.  The name of this company must be a combination of the working partner´s names and words like “and company”, “y associados”, etc.

Sociedad en Nombre Colectivo – This is the oldest type of corporation that exists, its roots springing from Ancient Rome.  This corporation is generally useful for family businesses, the partners are responsible for the losses of the company and the partners get a percentage of their return based on their contributions.

Now that you have gotten an idea of what kind of corporation you would like to form, it is time to talk to your attorney.  Explain to him your idea.  Tell him what kind of corporation you are thinking about opening and see what he thinks about the idea.   Remember that if your attorney doesn´t want to share information and provide assistance and advice, you can get another attorney that does.

Your attorney will need a copy of your  and your partner´s identifications and migratory documents, as well as a proof of address for the fiscal address of the company (or where the company´s office is).

Another thing you will have to decide is, who is going to run your company?  Are you going to be doing the administration or do you have a shop manager that you trust and want to take care of the day to day?  These considerations are important to define now, because to make changes to the company structure after its creation is going to cost more money and time.  You also want to define what roles you and your partners play in the management of the business, who has access to the bank accounts, who is going to appear in court if you have legal problems, etc.  I like to add my accountant´s name to the paperwork, giving him the power to take care of administrative tasks, so that he can do a lot of the basic paperwork related to taxes or social security without my intervention.

You will need to be specific in the paperwork about what kind of businesses the corporation is going to do, but also think hard about what you might be interested in doing in the future.  Your company´s business may change and expand in the future, so try to think of as many business possibilities as you can now, changing them in the future is costly.  Many lawyers have a boiler-plate list of activities that the company will be authorized to do, look it over and make any additions that you find necessary.

At this point the lawyer will start to draw up the constitution papers and will also need you to choose a name for your company, he will ask for a list of options to verify that their are not other companies with that specific commercial name.  The name that your company uses in it´s constitution papers is not necessarily the name you have to use in your advertising, you can call your company “Inmuebliaria Maximiliano y Asociados” but your ads can say “Max´s Homes”.

I have some suggestions for choosing the name of your company, not so much legally based, but more based on my experience doing business in Mexico:

1. Use words in Spanish that are easy to say, spell and remember.  People will need to know your business name when issuing fiscal receipts, so its better to have it be a name that is easy.  In one of the companies that I work with I have the english word “Management”, which I always have to spell letter for letter.

2. Try not to use numbers in your name, I worked for a company with “5ta” in it, which is pronounced “quinta, and I constantly had to be careful that it wasn´t spelled out.

3. Initials are a good idea, I work with a company that uses the first initials of each partner in its name, its easy to say and easy to remember. A great name would be “ABC Casas” or something along those lines.

After your lawyer receives your list of names, he must submit them to the Secretaria de Relaciones Exteriores for approval and at this point notify this Secretaria that your corporation will allow foreign investors (you).  This transaction has a fee of about $1000 pesos, payable to the government, anything you pay more than that is being paid to your lawyer.

Your lawyer will receive approval from the SRE and then will have to submit all the paperwork to a notary to have it registered in the public records and later in the Public Registry of Commerce.  This is going to be the most expensive step in the process, the notary charges will be anywhere from $8000 to $12,000 pesos, depending on the notary.  At this part of the process, ask your lawyer how much the notary is charging, if it seems to be high you can check other notaries.  The business of being a notary in Mexico has become competitive, some are willing to lower their prices in order to attract more business.

After you, and your partners, have all signed the proper documents for the notary to register the creation of your society, you will receive a certified copy of the constitution paperwork with notary stamps on all the pages and a letter (also stamped and signed by the notary) stating that the paperwork has been registered with the Public Registry of Commerce.  This certified copy is important, you will need copies of it for many other transactions.

Your next step will be to get registered as a taxpayer in Mexico, by registering with Hacienda and receiving an RFC number.  The last time I registered a society, the notary who I used was able to register the tax-payer ID right there in his office, through a special agreement that some notaries now have with the tax bureau.  This saves a lot of hassle, talk to your lawyer about this possibility.  When you have this step done, you will receive your RFC number and some paperwork called the “Alta de Hacienda” which will be used for proof of inscription of your tax-payer ID.

Now that you have done all this, you or your representative will want to open a bank account, get facturas printed  and get all your immigration paperwork done.  These additional steps are crucial for the operation of the corporation,  all require copies of all the paperwork that you obtained in the rest of the article, as well as an updated proof of address (electricity or water bill) from the fiscal address of your company.

This process should take one to three months, though I have had experience with it taking up to a year.  Please remember, this article shouldn´t replace qualified legal advice, but gives you a place to start so that you do not go into the process blind.

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