Your Guide to Starting a Business in Mexico
Mexico is a great place to do business, and more and more US businesses realize this every day. If you’re thinking of expanding your business into Mexico or you’re just starting to explore the idea, this guide is for you. In it, we’ll discuss the basics of doing business in Mexico, from setting up a legal entity to hiring employees and paying taxes. We’ll also give you some tips on how to make the process smoother and less stressful.
Starting or Expanding a Business in Mexico
Opening or expanding a business in Mexico can be a great way for US business owners to improve both growth and profitability. However, doing business in Mexico requires a knowledge of not only the process, the laws, and the labor market but also the costs and legal basics as well.
All business owners must begin by registering their business in Mexico. On average, this process can be completed in just a few weeks.
How to Register a Business in Mexico
The first step in setting up a business in Mexico is to have your legal representative sign a Power of Attorney (POA), which will allow them to assist you in starting your business in Mexico.
Next, you’ll want to choose the legal structure for your business that best suits your needs. The most common structures for foreign-owned businesses are the maquiladora, the limited liability company (LLC), and the branch office.
After you have chosen your business structure, you will need to register it with the Mexican government. To begin, you should contact the Ministry of Economy and establish your business name as a trademark in Mexico. You will then need to register your business with the Public Registry of Property and Commerce by submitting a number of documents, including the following:
- A notarized copy of the articles of incorporation or partnership
- A notarized copy of the bylaws
- A notarized copy of the registration form
- A bank letter of good standing, showing that you have a business bank account in Mexico
- Proof of address
The registration fee is 16.3% of the estimated income of the business during its first year of operation. This is a separate, one-time fee, and it is not paid in subsequent years.
After your business has been registered, you will need to obtain both a business license and a Mexican tax identification number (NIF). You can submit an application for a business license to the local city or state government and an application for an NIF to the local Sistema de Administración Tributaria (SAT) office.
Hiring in Mexico
If you plan to hire a workforce in Mexico, as part of the registration process, you will need to register with the local tax administration to enroll employees in both income tax (handled by the Secretary of Financial Administration) and Social Security tax (overseen by the Mexican Social Security Institute).
Employment agreements are mandatory in Mexico, which means that you will need to have a signed contract with each employee. In general, an employment contract must not only contain the employee’s personal information but also clearly define the services to be provided; the work location and schedule; the form, amount, and payment date of wages; and other employment conditions, such as leave or vacation days.
In Mexico, the standard full-time work schedule is 8 hours a day, 6 days a week. Overtime is paid out at an additional 50% of hourly pay, and vacation days are typically awarded each year after the first full year of employment. The minimum wage is currently $140 US per month.
Mexican law allows either the employer or the employee to terminate an employment contract with cause. If an employee is fired, the company must provide a notice of the unsatisfactory conduct and the dates on which it occurred. Failing to give cause when terminating an employment contract may allow the employee to claim their dismissal was unjustified and sue for an additional 3 months’ salary, as well as any bonuses and accrued vacation or holiday pay.
Building Commercial Property in Mexico
Along with hiring employees, most businesses starting in or expanding into Mexico will need a physical facility in which to conduct operations. In most cases, you should plan to invest at least 10% of the commercial real estate value upfront. While the process of buying and building a warehouse, office, or factory in Mexico is similar to that in the US, there are also some differences you should be aware of.
For example, all new builds must be registered with the Mexican authorities. While the process is relatively simple, it can take several months to complete. The registration fee is 6.2% of the property’s value and does not include capital gains or other taxes. You will also need to connect your new building to the electrical grid, which can be another expensive and time-consuming process. Along with the required connection fees, you can also expect to pay a tariff on monthly electricity use of $0.793 MXN pesos per kilowatt hour.
It’s also important to note that the quality of land administration in Mexico can be unreliable and you may run into issues with property rights, infrastructure, and the transparency of information unless you have experienced legal counsel on hand to guide you through the process.
Taxes and Foreign Investor Protections
Most businesses in Mexico make as many as nine tax payments each year. These taxes are levied by various government offices and include everything from property to employment taxes. All businesses operating in Mexico must keep separate tax accounting books, complete and file tax returns with all appropriate agencies, and make arrangements to pay or have taxes withheld with each. The time investment in these activities is comparatively high, as is the tax rate. Altogether, tax contributions for most companies in Mexico equal about 55% of profits.
As a rule, foreign investors in Mexico have a number of protections under the United States-Mexico-Canada Agreement (USMCA), which replaced the North America Free Trade Agreement (NAFTA) in July 2020. It is also possible to enforce contracts and resolve disputes through the Mexican legal system. However, there are court costs and legal fees required, and the system can move slowly at times. Most lawsuits take about a year to obtain a judgment, and the reliability of the legal process can vary widely from place to place.
Grow Your Business in Mexico
As you can see, there are a number of hoops to jump through to start or expand a business in Mexico. However, as long as you understand the process and follow the regulations – and consult an experienced legal professional before you begin – starting a business in Mexico can be a rewarding option filled with possibilities.