Mexico’s robust economic landscape and hospitable business setting establish an appealing choice for investors aiming to make their mark in the Latin American market. Understanding the various corporate legal entities available in Mexico is essential for making an informed decision when setting up a business from a U.S. and a Mexican perspective.
This article will address the types of Mexican corporate legal entities, namely the Sociedad Anónima, Sociedad de Responsabilidad Limitada, Sociedad Anónima Promotora de Inversión, and Sociedad Civil to guide investors through their characteristics, benefits, and legal requirements.
The Sociedad Anónima, is the most common corporate entity structure used in Mexico for business purposes. It is designated as “S.A.” for those with fixed capital. This structure is governed by the Ley General de Sociedades Mercantiles (“LGSM”). Depending on its capital structure, it may be identified as “Sociedad Anónima de Capital Variable” or “S.A. de C.V.” or for those with variable capital. Shareholders own its negotiable or non-negotiable shares, representing the company’s stock.
The defining features of a S.A. in Mexico offer a blend of flexibility and structure, catering to a wide range of business needs. These characteristics include:
- The S.A. does not impose a ceiling on the number of shareholders, allowing for extensive capital accumulation and diversified investment opportunities.
- Shareholders enjoy protection from personal liability, meaning their risk is limited strictly to the amount they have invested in the company’s shares.
- Shareholders hold the preferential right to purchase new shares before the general public, granting them the opportunity to maintain or increase their stake in the company when additional capital is introduced.
- Shareholders are empowered to craft agreements outlining specific rights and responsibilities, including mechanisms for buying and selling shares, creating special categories of shares that may carry no voting power, thus allowing for tailored corporate governance that fits the unique needs of the shareholders.
- A robust management framework is led by a board of directors or possibly just a single administrator, with the latter taking on strategic oversight while officers manage the company’s daily operational duties.
- An S.A.’s legal and operational foundation is laid out in detailed documents such as the articles of incorporation, bylaws, stock certificates, and various ledgers that record stock ownership, shareholder meeting resolutions, board of director actions, and changes in capital structure.
- New corporations may be formed by shareholders, or shares may be acquired from existing ones, facilitating dynamic ownership and investment opportunities.
- The S.A. faces corporate taxation on its profits, while shareholders are separately taxed on dividends they receive, aligning with a classic corporate tax structure.
These provisions and structures ensure that an S.A. can adapt to various investor needs while providing a stable and regulated framework for conducting business in Mexico.
Under the Mexican provisions, if there is foreign investment in the capital of an S.A. de C.V., it is mandatory to register with the National Registry of Foreign Investments and submit an annual report to the agency, detailing the year-end financial statements from the preceding year.
The “Sociedad de Responsabilidad Limitada” (“S. de R.L.”) is a form of business organization in Mexico similar to a limited partnership, and it ranks as the country’s second most utilized commercial entity type in Mexico, governed by the LGSM. This entity can be established with either fixed or variable capital, which is denoted by equity interests (“partes sociales“) held by the partners. These equity interests are typically less liquid, with conditions placed on their transfer.
In specific circumstances, particularly under U.S. tax regulations, the S. de R.L. might be recognized as a pass-through entity, potentially offering tax benefits.
This entity stands out for its unique approach to investment and liability, providing a variety of features tailored to its partners.
- The S. de R.L. can accommodate up to 50 partners, each contributing to the entity’s capital through equity interests rather than shares. These equity interests are non-negotiable instruments, meaning they are not typically traded on public exchanges and have limitations on their transfer.
- Partners within an S. de R.L. are shielded from personal liability, safeguarding their personal assets from the debts and obligations of the entity.
- In the event of the entity’s decision to increase its capital, partners possess preemptive rights to acquire and finance new equity interests. If a partner plans to sell their equity interest, other partners are given a preferential right to purchase them before a third party.
- The documents to create an S. de R.L. include the articles of incorporation and bylaws, as well as ledgers that meticulously record partnership changes, partner meetings, board actions, and capital modifications.
- A board of directors or, in some cases, a sole administrator, bears the responsibility for the entity’s overall management, while officers are tasked with the entity’s day-to-day operational management.
- At the corporate level, the S. de R.L. is taxed on its earnings. Partners, similarly, are taxed on any dividends they receive.
Under Mexican Federal Law, if there is foreign investment in the capital of an S. de R.L. de C.V., it is mandatory to register with the National Registry of Foreign Investments and submit an annual report to the agency. This report should include the financial statements from the previous year’s end.
The Sociedad Anónima Promotora de Inversión (“S.A.P.I.”), is a variant of a stock corporation, regulated by the Mexican Securities Market Law (“Ley del Mercado de Valores”). Unlike traditional S.A. entities, S.A.P.I.s are not supervised by the National Banking and Securities Commission (“Comisión Nacional Bancaria y de Valores”, or “CNBV”). They may operate with either fixed or variable capital and were originally designed to promote investment by offering exceptions to general regulations. These exceptions include the ability to impose restrictions on share transfers, define causes for partners’ exclusion, issue shares with limited rights, and establish option and preferential rights for share acquisition or sale.
While S.A.P.I.s share many legal requirements with S.A. de C.V. entities, there are notable operational differences. For instance, S.A.P.I.s have the option to adopt the administration regime of a S.A.B. (public company) and can buy back their own shares. Additionally, a S.A.P.I. de C.V. must be governed by a board of directors; a sole administrator is not permitted.
- Sociedad Civil
A Sociedad Civil (“S.C.”) is a legal entity commonly used for non-commercial professional services or activities in Mexico, and it is governed by the Mexican Federal Civil Code. It is a form of partnership that is based on a contractual agreement among its members, who are typically professionals such as lawyers, accountants, or doctors. The partners mutually bind themselves to combine their resources or efforts for the realization of a common economic purpose, which is predominantly non-speculative and not constituting commercial speculation. Each member makes a capital contribution, such as money, property, or labor, to a common fund with the intention of dividing the profits among themselves. The Mexican S.C. has a different tax treatment compared to the other entities mentioned, which may be beneficial for individuals providing professional services.
In specific circumstances, particularly under U.S. tax regulations, the S.C. might be recognized as a pass-through entity, potentially offering tax benefits.
- Calvo Clause
When a Mexican corporation has foreign shareholders, it must include a provision called the Calvo Clause (“Cláusula Calvo”) in its by-laws. This clause dictates that foreign investors will be treated as Mexican citizens regarding their ownership in the company, preventing them from seeking intervention from their home government regarding their investment. Violating this agreement obligates them to surrender their shares to the Mexican state.
Additionally, when establishing an S.A. or S.A.P.I., the incorporators may choose to include specific clauses in the by-laws in addition to the essential formation requirements. These clauses are engineered to define and fine-tune the governance and operational landscape of the corporation, providing nuanced control over various aspects of share management and corporate decision-making:
- The by-laws may institute a sophisticated array of share transfer restrictions. These can include contractual mechanisms such as “put” options, granting shareholders the right to sell shares back to the company; “call” options, allowing the company to buy shares back from shareholders; “tag-along” rights, enabling shareholders to join in when another shareholder sells their stake; “drag-along” rights, obligating shareholders to sell their shares in the event of a majority sale; and “piggyback” rights, permitting shareholders to include their shares in a public offering.
- By-law provisions may be crafted to alter the conventional preemptive rights of shareholders, enabling the company to fine-tune or even nullify these rights to align with specific corporate strategies or investment needs.
- In cases where shareholders are deadlocked and unable to reach a consensus on critical corporate decisions, the by-laws can prescribe advanced mediation or arbitration procedures to navigate and resolve such stalemates.
- Provisions may define the extent to which directors and high-ranking executives are liable for damages resulting from their actions while fulfilling their corporate roles, potentially capping the financial repercussions they face.
- Beyond the normative grounds, additional stipulations for the forced or voluntary exit of shareholders from the company may be prescribed, like “squeeze-out” provisions, where minority shareholders can be compelled to sell their shares under certain conditions.
- The establishment of particular share types can be codified, allowing for shares that confer no voting rights, or that offer limited voting capacity. Shares might also be crafted to participate minimally in company profits or to endow certain shareholders with veto authority over specific corporate resolutions.
These clauses thus serve as vital instruments in sculpting the corporate structure and dynamics, ensuring that the entity operates with a clear, agreed-upon framework that aligns with the strategic vision of its incorporators.
The process of incorporating a corporation in Mexico typically takes two to four weeks across all corporate structures. The legal existence of the corporation begins on the date the notarial deed is formalized.
In Mexican corporate practice, it is common to hold the inaugural Shareholders’ or Partners’ meeting at the notary’s office during the incorporation stage, with the minutes included in the same legal instrument as the by-laws. As required by Mexican law, these meetings must take place within the national territory. Participants must either be physically present with appropriate immigration documentation or delegate their representation to legally authorized agents in Mexico through powers of attorney. Moreover, registration before the Mexican Tax Administrative Service (“SAT”) is required for tax purposes.
Overall, while distinctions between corporate designations like S.A. de C.V., S. de R.L. de C.V., or S.A.P.I. hold limited significance in Mexican taxation, it’s worth noting that S.C. is the only one with distinct tax treatment in Mexico.
In this regard, Mexican tax legislation does not differentiate among S.A. de C.V., S. de R.L. de C.V., or S.A.P.I. entities for tax purposes. Each of these corporate forms is subjected to the same tax obligations and does not inherently benefit from preferential tax treatment.
However, the distinction becomes materially significant when viewed through the lens of U.S. tax law. For U.S. investors, the structure of an S. de R.L. de C.V. and an S.C. can be particularly advantageous, offering potential tax efficiencies that could influence the choice of entity. These entities may be eligible for pass-through taxation under certain conditions, which can mitigate the tax burden by preventing double taxation — once at the corporate level and again at the individual level.
It is imperative for U.S. citizens considering the establishment of a business entity in Mexico to conduct a comprehensive U.S. tax analysis prior to incorporation of these entities in Mexico. This is because certain U.S. tax provisions, such as the Controlled Foreign Corporation (CFC) rules, Subpart F income, and the Global Intangible Low-Taxed Income (GILTI) regulations, may apply. These rules could result in significant tax liabilities, effectively influencing the overall fiscal impact of their Mexican investments.
Freeman Law offers value-driven services and provides practical solutions to complex tax issues such as these and many others. To schedule a consultation please call (214) 984-3000.
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