It is not surprising that we have received many inquiries on how to start your own business in Mexico. In a study we did several years ago in the U.S., about one-third of aspiring expats said their primary motivation for moving to another country was to start a new business.
Mexico is fertile ground for expat entrepreneurs. We have featured many in our series, “Expat Entrepreneurs in Mexico.” Take our most recent article on Puerto Vallarta resident Rob Sharpe, who started a business teaching English online to people from all over the world. Since his business is easily transportable, it has allowed him to also live in Cancún and León. In Ajijic, Diane Pearl has owned her gallery for about 13 years. She sells a wide range of art, including jewelry, arts and crafts and sculpture. And high in the mountains of Michoacán, along the shores of Lake Pátzcuaro, Victoria Ryan opened her B&B in 1999. It is now the #1 place to stay in Pátzcuaro.
Opening your own business in Mexico is neither hard nor easy, according to The World Bank Group’s most recent ranking of 190 nations on Starting a New Business. Mexico ranked 93rd but did better in the Ease of Doing Business ranking, coming in 47th.
For this article on how to start your own business in Mexico, we asked our Expats In Mexico legal expert Spencer McMullen – who is a practicing attorney in Guadalajara and Chapala – to provide us with an overview on how to open a small business in Mexico.
Options for Opening a Small Business
“There are many options for opening a small business in Mexico,” McMullen said. “As in many countries, you can form a company or be a sole proprietor.”
McMullen said that a sole proprietorship for certain types of business activities is entitled to a special tax stimulus program called Regimen de Incorporacion Fiscal. It is for small businesses with income less than $2,000,000 pesos a year. Businesses that require a license for practice – such as doctors, attorneys, architects and engineers – and businesses related to real estate, do not qualify.
“If you want to open up a store, do consulting, rent out furnished properties or have a hair salon, then this program is the one we recommend to clients,” he said. “You can file your own taxes online every two months, avoiding the cost of accountants and monthly tax reporting, which can run around $1,500 pesos per month. The program also allows you to legally pay little to no tax the first few years.”
According to McMullen, you can issue facturas – official tax receipts – and the program benefit is phased out over a 10 year period, with a 100 percent tax reduction the first year, 90 percent the second year and so on. A chart is provided to show you what your income tax liability is before the reduction. This would be above and beyond the 16 percent IVA tax, also known as VAT or GST, or sales taxes in other countries. But this applies to all services in Mexico, not just the sale of products, so you would pay the IVA tax when buying a bicycle as well as hiring an attorney or accountant. The reduction applies both to the IVA tax and the ISR, or income tax.
The income tax rate paid on net income after expenses has tax rates from 2 percent up to 35 percent, and you would apply the program’s discount to this tax rate. For example, if you earned $61,000 pesos net in a two-month period you would be in the 18 percent bracket and have an income tax of $4,719 pesos. That means you would owe zero taxes the first year due to the special tax program. For year two, you would only owe $471 pesos.
If you want to open your small business as a sole proprietor, you will also need to determine if a municipal business license, potentially state and federal licenses – depending on business activity – and permission from immigration are required.
Because sole proprietors do not have to follow corporate formalities and reporting requirements, the savings can be substantial, even after the tax benefits end.
“Expats starting businesses in Mexico need to have temporary or permanent residence status to start a sole proprietorship,” McMullen explained. “If you do not hold one of these visas, you cannot get work permission. If you have a Mexican family or a spouse with a temporary or permanent visa, you can get work permission on a tourist visa after you change to a temporary visa within Mexico. But, it can be problematic changing from working for a company to self-employment with just a temporary visa.”
How to Form a New Business
McMullen told us that for many reasons, a sole proprietorship would not always be the best option for you when forming a new business in Mexico. Often expats look to form a Company, a Limited Liability Corporation, known as an LLC in other countries. In Mexico, if you wish to form a legal entity, there are a few options.
“Until recently there was a requirement that you had to have two people, but now Mexico has what is called Unipersonal Corporations,” McMullen said. “They can be formed without the need of a notario, but you would need to have your electronic signature from the tax authority, SAT, and have your name chosen.”
If you have both, you can do the company formation on the website of the Secretariat of Economy (Secretaria de Economía) for free and then choose who will do follow up items. If you need to form a regular entity the traditional way due to specific needs or you do not have the electronic signature from SAT, then you need to follow these nine steps:
Step One: Choose a Company Name
Obtain authorization from the Department for Trade (located within the Secretaria de Economía) for the company name to be used. This can either be done online or via a notary public (notario público) who can fill out the forms and get the company name. Normally, five names are submitted in the order of preference you want.
Step Two: Draw up the Deed of Incorporation
Choose a notary public to draw up the deed for the business entity. For certain business entities, a Corredor Público – a class of attorney between regular attorneys and notaries – can do the formation of certain business entities. You can have a regular corporation – a Sociedad Anónima de Capital Variable – or an S.A. de C.V., a regular general corporation or company. A Sociedad de Responsabilidad Limitada, S. de R.L. is like an LLC, a Sociedad Civil, S.C. is like an LLP or PC for professionals and an Asociación Civil, A.C. is like a Nonprofit. There also are some more sophisticated entity forms for investments and investors, such as Sociedad Anónimas Promotoras de Inversión, SAPI.
You should be aware that the notary also could be chosen at the beginning of the start-up process to obtain authorization for the company name.
Step Three: Sign the Deed of Incorporation
The Deed of Incorporation must be signed in the presence of the notary. For this the following are required:
- The presence of all owners (socios) of the entity mentioned in the Deed (the Deed will also specify the shareholdings of each owner).
- Identification documents of each owner. For Mexican citizens, any form of official ID is sufficient (for example passport, Elector’s Card (IFE) or Cédula Profesional). For foreigners, passports and proof of legal presence in the country. For example, a temporary or permanent residence permit or a tourist visa is required.
- CURP (like a social security number) number and RFC number (tax ID) for those that have them.
- Proof of address (Comprobante de Domicilio) of each of the owners, usually a utility bill not more than three months old.
Besides figuring out how many shares each partner will have, you will also need to know the names of whomever you will give power of attorney to, such as attorneys and accountants who will represent you in day-to-day operations with the tax or other authorities, or for later representation in litigation. This is done to avoid the need to personally appear at various government offices.
Step Four: Register the Business Address
Obtain a registered address (Domicilio Fiscal) for the company where you can receive notifications in the event a government agency needs something from you.
Step Five: Registration for Tax Purposes
Register the business for tax purposes with the Mexican Tax Authorities (SAT). This can be done at any local office of SAT after preregistration is done online. You can make an appointment for the final visit or get in line early in the morning. SAT will want you to bring many of the same original documents you gave to your notary as well as a notary certified copy of the deed pending registration and a letter from the notary stating the deed registration is in process.
Step Six: Businesses Open to the Public
If your business is open to the public – such as a retail store – you will need to notify your local government (Municipio) of the opening of the business and obtain a municipal business license, and any state or federal licenses that may apply due to the specific types of business activities.
Step Seven: Registering Employees
If your business is planning to hire employees, register the business with the Mexican Social Security Institute (IMSS) and the National Worker´s Housing Fund (INFONAVIT), as well as with your local state tax office. Many states tax certain types of business activities and others have a small state payroll tax.
Step Eight: Register with the SIEM
Register your business with the National Business Information Registry (SIEM). This registry is run by the Department of Trade, which is located within the Secretaría de Economía.
Step Nine: Foreign Investment Registry
If one or more of the owners is a foreign national without permanent residence status, it is also necessary to register the business with the Foreign Investment Registry (Registro Nacional de Inversión Extranjera).
This must be done in person within 40 working days of incorporation of the business by someone designated in the Deed as having power of attorney (poder).
A form must be filled in and submitted along with a copy of the Deed and the identification documents of the person doing the registration.
You will also have to do quarterly filings as long as you have foreigners who are not permanent residents but own part of the company.
In addition to these nine steps provided by McMullen, the World Bank Group also provides an excellent and detailed step-by-step guide to starting a business in Mexico and additional useful information for entrepreneurs on how to start your own business in Mexico.
You should also know that the Mexican government operates the National Institute of Entrepreneurship to promote new business activity in the country. Another valuable resource is ProMéxico, a trust fund of the Mexican government that promotes international trade and investment. Its website also provides excellent information on how to start a business in Mexico or make an investment.