BASIC PROCEDURE TO INCORPORATE IN MEXICO

The Mexican Law of Corporations (Ley General de Sociedades Mercantiles) recognizes six types of corporations, with differences ranging from the number of members allowed as members, to the way they are treated legally and for tax purposes.

 These are:

 I.- General Partnership. (Sociedad en nombre colectivo)

 II.- Limited Partnership. (Sociedad en comandita simple)

 III.- Limited Liability Company. (Sociedad de responsabilidad limitada)

 IV.- Corporation. (Sociedad anónima)

 V.- Sociedad en comandita por acciones, y

 VI.- Sociedad cooperativa.

General Partnership. Another form of business entity is the general partnership or the "Sociedad en Nombre Colectivo" (the "SNC"). A distinct disadvantage of the SNC is that all of the partners will have unlimited liability with respect to the obligations and debts. This corporate form is not frequently used in Mexico.

Limited Partnership. The limited partnership or the "Sociedad en Comandita Simple" (the "SCS") has two types of partners: the active partner(s) who have unlimited liability, and the silent partner(s) who are liable only for their capital contribution. This corporate form is also not frequently used in Mexico.

Limited Liability Company. Another form of limited liability corporation, the "Sociedad de Responsabilidad Limitada" or "S. de R.L.", has become popular among foreign companies. The key characteristics of the "S. de R.L." are as follows:

i. Like a "S.A." and "S.A. de C.V.", the partners' liability is limited to their partnership interest in the company and the directors will be fully liable for the loyal and diligent administration of the company;

ii. It must have at least 2 (two) partners to a maximum of 50 (fifty), and a minimum capital of $3,000.00 MexCy. (Three Thousand Mexican Pesos), for which 50% (fifty percent) must be paid at the time of incorporation;

iii. There is no requirement to appoint a statutory examiner;

iv. The tax rate will be the normal corporate tax rate of 35%;

Corporation. This is the “Sociedad Anónima”, it’s a form of limited liability corporation and stands as the most openly analyzed by case law, therefore becoming a vehicle for most medium and larger corporations and those with growth expectancy.

i. The shareholder's liability is limited to their stock interest in the company;

ii. The directors are fully liable for the loyal and diligent administration of the company;

iii. Must have at least 2 (two) shareholders and a minimum capital of $50,000.00 MexCy. (Fifty Thousand Mexican Pesos); 20% (twenty percent) of which must be paid at the time of incorporation; and

iv. Must appoint a statutory examiner who is a disinterested third party who supervises the operations of the company and represents the interests of the shareholders;

iv. The tax rate will be the normal corporate tax rate of 28%; and

 v. The shares which represent the capital stock of the company are freely transferable and can be traded publicly, after the corresponding filings take place.

 v. Under U.S. Federal Tax Law a Mexican organization (legal entity) may affirmatively elect corporate or partnership tax treatment (absent which election it would be treated as a partnership) if it has two or more members and if any member has unlimited (personal) liability. If none of the members has unlimited personal liability, the entity (subsidiary in Mexico) will be classified as a corporation for U.S. tax purposes; and

vi. The shares which represent the partnership interests in the company must not be freely transferable and can not be traded publicly.

Cooperative partnership. As noted above, in this type of companies foreigners may have difficulty fitting, given the limitations as to capital integration, with a maximum of 10%.

 Mexican Branch. Not listed as a form of corporation, but it is another way a foreign company may operate through branch offices in Mexico. As foreign companies are legally recognized in Mexico, they retain their liability characteristics from abroad. However, to carry out business operations, such branches must be approved by the National Commission of Foreign Investments and Ministry of Foreign Relations, and be registered at the Public Registry of Commerce.

For tax purposes, the foreign company will receive the same treatment as a permanent establishment in Mexico (see above) and will pay taxes on the income generated from such branch offices at the normal corporate tax rate of 28%. However, the foreign company should be careful to avoid the possibility of having the income generated by the foreign company outside of Mexico to become attributable to the operations in Mexico. This possibility is due to the "force of attraction" rules contained in Mexico's tax legislation, which will sometimes require a taxpayer to include in his taxable income, income generated from abroad.