Why do I need a company?
Why not start a business as an individual when I can save formation and compliance costs?
These are very basic and very important questions that anyone starting a business should assess.
In this post I will tell you why you need a company to do business, what is the best type of company that you should use when doing business in Mexico and the activities that you will have to carry out to form the company.
Doing business as an individual or as a company.
You may certainly start to do business as an individual. In fact, most Mexican SME’s are individuals and they operate in many ways as a company would. They are also capable of doing most activities a company normally would, such as owning or leasing an office space or warehouse, hire and train employees, import, export or manufacture products, and perform many other activities in an individual capacity.
So getting back to our main question, why would I need a company?
A company works as a shield between you as an individual and all third parties you will get in business with.
So for example, let’s say you are importing products into Mexico, like smart phones or tablets. Then, a customer that bought one of your tablets suffers an injury from a manufacturing defect; for example, the tablet got extremely hot and caused her second-degree burns. If you sold that tablet as an individual, then your customer may go after you and your personal assets, like your car, your home, or even your future earnings. On the other hand, if you sold that tablet through your company, then that customer would have a hard time going after you personally or any of your assets, because your company is your shield, or in legal terms it gives you limited liability.
What if I do not want a “shield” and prefer to assume the risk using an insurance policy?
If you are not a Mexican citizen, there are some scenarios where you would be able to open and run your business as an individual. Such would require an analysis of what would be the best immigration status and the tax consequences (more not this on a separate post).
If you are a Mexican citizen, then you may assess the pros and cons of doing business as a company or individual. The latter has tax advantages and benefits that are not given to a company. We shall discuss this topic more on a separate post.
Sociedad Anónima v Sociedad de Responsabilidad Limitada
Not all companies provide the same level of liability protection. Both a Sociedad Anónima (SA) and a Sociedad de Responsabilidad Limitada (SRL) limit a shareholders’ liability up to the amount of their contributions in the entity.
In other words, a shareholder with a contribution of X amount cannot be held liable for more than that amount.
What is the difference between an SA or an SRL?
Many people find that an SA resembles a US corporation and an SRL resembles a US limited liability company.
One of the main differences is that an SA may grant different rights to different shareholders (e.g., drag-along and tag-along rights) that an SRL cannot. It is also well known that an SA would require more compliance activities than an SRL would.
The chart below will walk you through the main differences.
Can I be the only shareholder of a company?
In principle, no. The only type of company that allows an individual to own 100% of its capital is a Sociedad por Acciones Simplificada (SAS). A different post will cover this subject. Note, for the moment, that a SAS is for Mexican residents only that are registered with the tax revenue office (SAT).
Both an SA and an SRL, and all other types of business entities, require at least 2 shareholders.
To overcome this, it is common that a 99.99% to 0.01% structure is used.
What is the best type of entity that I should use: SA or SRL?
If your business will be comprised of many shareholders with different roles and that may want to have exist strategies, use an SA.
If your business will be a closed company controlled by a few persons use an SRL. You may also want to use an SRL if you want to use it as a “flow-through” entity for your US parent, which is not allowed for SA entities (I am not a US tax advisor so better double check with one; this is just what we have heard so much from our colleges practicing in the US).
How is an S.A. de C.V. different from an S.A.; or an S. de R.L. de C.V. different from an SRL?
C.V. stands for Capital Variable or Variable Capital, which means that when the company increases or decreases its corporate capital it does not need to amend its charter of incorporation (Charter of incorporation = Acta Constitutiva: the public instrument that evidences the company’s existence and contains its articles of incorporation and bylaws). Amending a charter of incorporation would entail an extraordinary procedure and multiple filings. As such, adding a C.V. to either your SRL or SA is encouraged, unless you need to do a business that would not allow it (e.g., banks).
What do I have to do to form a company?
You should start by reserving a name for your company via the Ministry of Economy’s website. Thereafter, you should hire a lawyer to help you draft your bylaws and formalize with a Mexican public attestor, which is a lawyer with a license to form companies and do other legal acts that are reserved for public attesters (e.g., purchase and sale of real estate, mortgages, appraisals, among others). Please check our post on public attesters for more on this subject.
How long does it take?
It is not as fast as Delaware, where you may form a company in 24 hours, but not as long as mainland China, where you may take months to form a company as a foreigner. The average time is 4 weeks to be good and running (disregarding bank account timeframe).
How much does it cost?
Depends where you want to incorporate and operate. Mexico City is likely the most expensive jurisdiction to incorporate and operate, followed by larger cities located at the US-Mexico border. While these are more expensive they also offer more business oportunities.
The formation expenses may also vary substantially depending on the type of firm that you engage. Some firms will charge by the hour while others use a fixed-fee approach.
Unlike other countries, no matter where you form your company you will be allowed to operate nationwide, subject to local filings and compliance.
Make sure to check back on this post for updates and follow up on the topics that we will cover on later posts.