Starting and Operating Business in Mexico

            As companies increase their exports aboard, they become concerned that the governments of their customers will apply tariffs and restrictions on imports. A direct investment aboard may protect the products’ and services’ competitive position not only in the host country but also in other countries with trade treaties with the host country.

            Risk evaluation shall include not only management problems overseas, but also political factors like the risk of some form of expropriation.

Minimizing the investment risk requires specialized consulting services with the expertise to advise in matters like handling labor relations and the difficulty to distinguish between legitimate payments and bribes, penalized not only in the host country but in the U.S. subject to be fined not more than $1,000,000, or imprisoned not more than 10 years, or both, as prescribed by The Foreign Corrupt Practice Act  (15 U.S.C. Sec 78ff(a) ).

            Mexico is a Latin American country with relatively low political and economical risk.

Except for the activities which are restricted to the Mexican government in which no private party, Mexican or foreign, can participate (Oil and gas, electricity, etc) and for the sectors that are restricted to foreign investment foreigners can own (Broadcasting, transportation etc,), the Mexican law allows foreigners to own the equity of a Mexican corporation.  In the event that foreign investment is limited, direct or indirect participation may be available through trusts, foreign financial affiliates, or other means is allowed.

            The most common method for foreign investments in Mexico is through affiliate corporation. A Mexican corporation is an artificial legal entity that exists as a separate "legal person" apart from the entity or people who owns manages, controls and operates it.  It can make contracts, it pays taxes and is liable for its debts.  Corporations exist only because federal statutory laws allow these entities to be created. The corporations are regulated by Mexico's federal law, General Law of Mercantile Organizations (Ley General de Sociedades Mercantiles [LGSM])

The most common method for domestic and foreign investors to operate in Mexico is through a corporation.  The Sociedad Anonima de Capital  Variable (S.A de .C.V.) is the most formal business organization in Mexico. A  permit for a corporate name issued  by the “ Secretaria de Relaciones Esteriores” (Foreign Ministry) is reproduced in a notarized deed, which represents the combined articles of incorporation and the bylaws.  An S.A de C.V.. must consist of at least two shareholders, with no limit on the maximum number, and a minimum capital contribution.

A foreign vendor may also penetrate the Mexican market by establishing a Partnership, S de R. L. subsidiary, forming a branch qualified to do business, or entering into a joint venture with a Mexican business entity.

A general partnership (Sociedad en Nombre Colectivo) or a limited partnership (Sociedad en Comandita).  In a general partnership, all partners are jointly liable to creditors of the company.  In the limited partnership, the "socios comanditors" have joint and unlimited liability, and are responsible for all decision making pertaining to the enterprise.  The "financiers," on the other hand, are only liable for the amount of their capital contribution and may not participate in the management of the business.  Foreign investors because of the unlimited liability rarely use the general partnership and the limited partnership.

The Sociedad de Responsabilidad Limitada (S.de R.L.) is similar to the limited liability company used in many states within the United States.  Organization of a Mexican limited liability company requires the same prior corporate name authorization and registration as the Mexican S.A. de C.V..  An S.de R.L. is limited to fifty members and is subject to a minimum capital contribution.  These contributions are manifested by "partes sociales," which are negotiable instruments subject to special provisions.  The S.de R.L. is rarely used as a vehicle for foreign investment.  The membership restrictions render the S.de R.L. unsuitable for large businesses.

The Asociacion en Participacion is another method of conducting business in Mexico.  In a joint venture contract, a person grants a working interest in his or her business to others, who provide property or services.  The joint venture contract does not create a separate legal entity like the formation of a  S.A de C.V., S de R.L. or a Mexican partnership.  The business is operated by an active managing joint venturer (associate), who is the only one with any liability to third parties.  There are no registration requirements for entering a joint venture contract and there are no requirements as to minimum capital. However, the joint venture may limit the partners' ability to modify their commitments to the venture and result in a loss of general flexibility.

If you require experienced advise  to satisfy law requirements present in the Mexican laws and minimize your investment risk allowing better access to, and interactions with, local labor unions, financial institutions, and the government, please contact us at business@itt-texas.com

 

(c)2001 International Trade & Taxation (ITT)

1300 N 10th, Suite 460, P.O. Box 3916 McAllen TX 78502-3916 Phone: (956) 994-3996 Fax: (956) 994-3989