A foreign company entering Mexico must decide on the form of business entity it will use to conduct its Mexico operations.
There are three options:
- Representative office, which cannot enter into legal transactions in Mexico but can promote the products or services of the foreign company, or conduct activities such as market research;
- Branch office, which is permitted to sign contracts with Mexican counterparts, as well as receive revenue from local entities, but whose actions confer legal liability on its foreign parent company;
- Subsidiary, which is a foreign-invested Mexican company and can conduct all legal and commercial transactions, as long as they are not restricted for foreigners.
The most appropriate legal entity will depend on the parent company’s objectives and activities. Companies that do not expect to engage in commercial transactions with Mexican counterparts and therefore do not expect to have to pay Mexican taxes may be fine with a representative office.
Companies that will need to engage in commercial transactions, issuing and paying invoices and receiving and remitting funds, but do not need to establish a full Mexican legal presence, with its attendant requirements to establish a board of directors and hold shareholders’ meetings, may be fine with a branch office.
Companies that desire maximum flexibility will most likely be interested in establishing a limited liability company (Sociedad de Responsabilidad Limitada, or S. de R.L.), as a subsidiary of the foreign parent. An S. de R.L. can be established with foreign shareholders and directors, and will provide liability protection for the foreign parent company. An S. de R.L. is similar to a US LLC (Limited Liability Company), and like a US LLC, it is usually the best choice for small businesses since it has fewer formalities and is easier to form.
The stock corporation (Sociedad Anónima, or S.A.) is another limited liability option for foreign businesses and investors, and is somewhat similar to a US corporation and, like a US corporation, its strict formalities and flexible share transfers make it well-suited to companies expecting or seeking outside investment.
There are other structures (e.g. civil partnerships, non-profit companies and contractual joint ventures) that fit other purposes for those seeking to enter the Mexican market for the first time.
After deciding on the most beneficial corporate structure, the proposed company name must be submitted to the Ministry of Economy (Secretaría de Economía) for approval. If your preferred name is also a brand name, you should also be sure to register that name as a trademark with Mexico’s Patent and Trademark Office (IMPI-Instituto Mexicano de la Propiedad Industrial).
Next steps are deciding the amount of incorporation capital (the minimum per shareholder/partner is 1 peso) and the creation and approval of Articles of Incorporation, which will include by-laws containing the company name, the corporate purpose, corporate domicile, shareholders’ name(s) and capital structure, appointment of directors and management provisions. With few exceptions, a company incorporation is formalized before a Notary Public or a Commercial Notary Public. It is also registered with the Public Commercial Registry.
To obtain a tax ID, all Mexican companies require a fiscal address. It makes sense to secure a fiscal address that relates to the company’s purpose and activities in Mexico. With a tax ID in hand, the new entity will be responsible for making monthly and annual tax declarations at the Mexican Tax Administration Service (SAT-Servicio de Administración Tributaria).
Once the company is ready to operate and hire employees, it will need to register with the social security agency, the Instituto Mexicano del Seguro Social (IMSS), as well as the National Worker´s Housing Fund (INFONAVIT). The hiring of foreign employees requires a special permit called the Constancia de Inscripción del Empleador, which must be renewed annually.
Finally, when one or more of the business owners is a foreigner, registration of foreign investment capital must be completed at the Ministry of Foreign Investment within 40 days after the business incorporation date.
It typically takes 4-5 weeks to form a business entity in Mexico, and when all the paperwork is complete and all approvals received, the local entity will be able to open a bank account in Mexico. The time it takes to form a Mexican company has increased during the pandemic. In addition to making sure you set up your company properly, it is also important that your company have a good local accountant and a trustworthy banker.
The benefits of forming a company in Mexico are significant. Mexico has no capital controls for repatriation of profits, its judicial system is good at protecting property rights, and the initial capital requirements are minimal.