How to Form a Legal entity in Mexico
June 27, 2019
Important considerations and steps to take to launch a new legal entity in Mexico
A strong foundation is important when starting any business, and that’s particularly true when launching a legal entity in another country. Varying regulations and different processes for incorporating can stall the launch of a new operation in Mexico for foreign companies unfamiliar with the process. So, it’s important to go into the process knowing what to expect.
Fortunately, the process of forming a company in Mexico has greatly improved in recent years, in terms of the clarity and response time from the various government agencies involved. Working with an experienced partner helps ensure this process is easily completed, speeding along the final goods’ ultimate entry to market.
Considerations before incorporating a company in Mexico
Before going into the details of how a foreign company can establish a legal entity in Mexico, it’s important to first understand if this step is necessary. The foreign company may not need to form a company depending on the types of business activities it plans to carry.
Most notably, foreign companies planning to manufacture goods in Mexico that are subsequently exported from Mexico do not need to establish a separate legal entity in Mexico. However, when a foreign company intends to manufacture goods or services in Mexico and intends to invoice the sale of those goods and services to companies within Mexico, then it must have a Mexican entity.
In addition, before rushing into forming a new company foreign companies should clearly understand the implications and obligations of owning and operating a business in Mexico, such as:
- Corporate taxes (including income tax, VAT and payroll taxes).
- Employment laws.
- International trade laws.
- Transacting in Mexico.
- Shareholder liability.
- Shareholder profits or losses.
- Immigration laws.
- Regulatory compliance requirements applicable to the business activity.
By incorporating the above factors into a simple table or matrix that addresses the costs and risk of each element, foreign companies have a higher likelihood of achieving their business objectives in Mexico.
Steps for a successful corporate entity setup in Mexico
Foreign companies that find establishing a legal entity in Mexico to be the right choice will need to do some research to establish the right structure to meet their needs. Consider the following steps to success.
- Connect with an expert. The foreign company should first engage with an experienced person or company who can help do much of the legwork on gathering information, submitting it to various government agencies and ultimately seeing this process through to completion. This may be a law, consulting or accounting firm.
The more experienced and reputable the company or individual handling the process on the foreign company’s behalf, the greater likelihood that the process will have fewer delays due to incomplete or incorrect information. Fees for these services may range from USD $4,000 to $15,000, not including regulatory charges. The final cost will vary depending on whether you are using an international or local firm, as well as the complexity of the business ownership and operating structure.
- Decide upon the type of company to form. The most common form is known as “S.A. de C.V.” which, literally translated, means “anonymous corporation of variable capital.” This is somewhat equivalent to U.S. Corporations or Incorporated entities. Another common option is “S. de R.L.,” which can be loosely translated as a limited liability corporation, or LLC. Choosing between these two or other types of company legal structures requires an understanding of how taxes, shareholder profits, and general liability will be handled.
- Have your name approved. Submit three company names in an order of preference to the Department of External Affairs, or SRE. The SRE will check to make sure the first name is not taken. If it is, it checks the second name’s availability and, if necessary, the third name. The response time from the SRE is approximately one business week.
- Draw up articles or bylaws. Once the SRE approves a company name, a notary will draw up the articles of incorporation or corporation bylaws. Depending on the nationality of the owners of the new Mexican company, the notary may require apostille powers of attorney from the foreign company acting as owner of the Mexican entity.
The new company’s articles or bylaws will describe the ownership structure, business activity, and powers given to individuals that represent it in various capacities. For example, a person will need to be appointed the legal representative in Mexico. This is not to be confused with the statutory agent in the United States, who is typically the attorney that represents a company. In Mexico, the legal representative is the go-to person for all issues related to the company’s legal and regulatory obligations.
Notaries take approximately ten business days to complete the company articles or bylaws. These documents will then need to be signed by the owners of the new company, who may or may not need to be physically present when signing. It’s important to note that if a foreign individual is signing the articles of a new Mexican company, that person will need to enter Mexico with the proper immigration status to enter the country for that purpose (not a tourist visa). In addition, the new company will need to have a physical address upon its formation, even if the address will subsequently change.
- Obtain identification, permits and registrations. Once the articles or bylaws are signed and registered with the applicable government agencies, the new company can request a federal tax ID number. Upon receiving the federal tax ID number, the company can proceed in obtaining other pertinent registrations and permits from various government agencies.
Depending on the business activities of the new company, it may need to obtain registrations and/or permits through one or more of the following agencies:
- Department of the Treasury (SAT)
- Social Security (IMSS)
- Department of Commerce and Trade (ECONOMIA)
- Mexican Customs (ADUANAS)
- Department of Environmental Health and Safety (SEMARNAT)
- Department of Labor and Social Provision (STPS)
The length of this process may vary depending on the types of registrations or permits that the new company must obtain, but in general it takes between 30 and 60 days. One notable exception is the VAT Certification. This is for manufacturers that wish to be exempt of VAT tax on the import of raw materials and equipment entering their Mexican factories. VAT Certification may take more than six months to obtain.
Strategies to start strong
While the process of forming a legal entity in Mexico can be relatively straightforward, as with any business activity, the more familiar one is with the process the easier it is. Unexpected delays and questions are a normal part of doing business. By working with a trusted advisor like Tetakawi, foreign companies can ensure a smooth process and strong foundation for their Mexico-based entity.