Thinking about expanding your business to Mexico? You’re not alone. International investment in Mexico is increasing every year. And it’s not surprising. For many companies in the Americas, the country provides an opportunity to tap into a deep pool of talent in a region with similar time zones.
It might seem simple at first. Start hiring employees in Mexico, and all that’s left to do is watch your business grow, right?
Not exactly. First, you need to become a legal employer in the country, a process that takes time, money, and patience.
Key takeaways:
- Setting up legal entities in Mexico creates a complex process for international employers.
- Delays can increase expenses for even the most well-planned expansions.
- Once an entity is established, the costs of managing employment and compliance can significantly increase overhead.
Understand Mexico’s Legal Entity Types
There are two primary options for international companies setting up a Mexican subsidiary.
The S.A. de C.V. (Sociedad Anónima de Capital Variable) operates much like a corporation. It's popular among local and international businesses that prioritize scalability and growth.
The S.A. de C.V. is also often the preferred choice for companies anticipating external equity investment or eventual public offerings. This flexibility, however, comes with a trade-off: the S.A. de C.V. can require a more formalized governance structure than other entities.
Another entity type is the S. de R.L. de C.V. (Sociedad de Responsabilidad Limitada de Capital Variable), which operates similarly to a limited liability company. It’s a common choice for closely held entities because it limits the number of partners to 50.
Beyond the two main entity options, international companies can also opt to establish a branch office in Mexico. This route is less common because it merely creates an extension of the parent company, rather than a separate legal entity.
Opening a branch office also carries significant risk, as the parent company is subject to greater direct liability for the branch’s actions in Mexico. It also exposes the company to greater regulatory and legal scrutiny.
Required Documentation to Establish an Entity
Once you’ve decided on the best option for your company, it’s time to prepare for paperwork. A LOT of paperwork.
The process of formally registering your entity in Mexico begins with compiling and validating documents from the country where your company is based. Word to the wise — errors in this phase are the primary cause of delays for new operations.
Typically, your company will need to provide:
- Parent company incorporation documents: The Articles of Association or Incorporation for your company, along with the corporate bylaws.
- Articles of association: A certificate of good standing proving connection to the parent company in their local jurisdiction.
- Appointment documents: This includes a Power of Attorney that appoints a representative to sign documents on your company’s behalf in Mexico.
- Shareholder/director identification: Valid IDs, passports, and proof of address for the principal shareholders and directors of the new Mexican entity.
- Mexican domicile: Proof of the registered Mexican address (known as the domicilio fiscal)
- Apostille certificate: This verifies the official who signed the document in the country of issuance.
All documents, including the Apostille, must be translated into Spanish by a certified translator (perito traductor).
To complete many of the steps, you must appoint at least one Apoderado Legal (legal representative) who can sign contracts and represent the company before the SAT, IMSS, banks, and other government bodies.
If this representative is not a Mexican citizen, they must possess a valid visa that explicitly permits business activities in the country (e.g., a visitor visa for business or a specific work/residency visa).
Ensuring your representative is on solid legal footing is just the first of many steps in establishing an entity in Mexico.
Step-by-Step Process for Setting Up a Legal Entity in Mexico
The exact order of actions necessary to incorporate a business in Mexico may vary based on your location and specific corporate circumstances. However, the list below highlights the significant milestones you must reach to complete the process.
Step 1: Reserve and Register the Company Name
The first step in establishing a legal entity is to choose the name your company will use in Mexico.
Mexican law requires that all company names be distinct and not conflict with any existing registered entities. Therefore, companies must submit between three and five options to the Ministry of Economy (Secretaría de Economía) to obtain the denominación o razón social (corporate name).
While this step is technically intended to take only a few days, regulatory backlogs and the risk of rejection often result in early delays.
Step 2: Draft the Company’s Bylaws and Incorporation Documents
With your company name secured, the next step is to prepare the necessary documentation to support your business. This means creating bylaws that will define your entity’s governance structure, capital structure, and ownership stakes.
It also requires detailing the rules governing shareholder and director decision-making and establishing your company’s articles of incorporation deed (Acta Constitutiva).
Step 3: Formalize the Entity Before a Notary (Constitutive Act)
Once your bylaws and incorporation documents are approved, a notary public (notario público) must officially certify the entire setup, including your Acta Constitutiva.
All shareholders who do not reside in Mexico must have an official representative present at the signing.
Step 4: Obtain the Tax Identification Number
After your company is formally incorporated, you must register it with Mexico’s Tax Administration Service (Servicio de Administración Tributaria or SAT). This registration will assign your Federal Taxpayer Registry (RFC) number.
An RFC is your company’s unique tax ID. Without it, you cannot legally hire employees, issue or receive official electronic invoices, open corporate bank accounts, or conduct the vast majority of official transactions.
You can begin the registration process for your SAT and RFC online. However, verification typically requires an in-person visit to a local SAT office.
Unfortunately, securing appointments at the SAT office can be challenging. Plan on allocating sufficient time and administrative resources to obtain your RFC and ensure it’s officially signed and registered.
Step 5: Register the Business Address
Once you have obtained your RFC, your company's legal and fiscal business address (domicilio fiscal) you must register with the Mexican authorities (e.g., the SAT).
To complete this step, you must provide proof of a physical address in Mexico. While some companies may consider establishing virtual offices, the SAT does not always accept them for initial registration or ongoing compliance.
Step 6: Open a Corporate Bank Account
While opening a bank account may seem routine, setting up a corporate account in Mexico can create a significant bottleneck.
Mexican banks are subject to extremely strict Know Your Customer (KYC) regulations and often require the company’s legal representatives to appear in person to finalize the application. The whole process can take weeks, so plan accordingly.
Step 7: Register With Social Security (IMSS)
Before extending any job offer, you must formally register your new entity as an employer with the Mexican Social Security Institute (Instituto Mexicano del Seguro Social or IMSS).
Registration immediately triggers a host of statutory obligations. These include mandatory contributions for employee health insurance and retirement pensions (SAR), as well as the calculation and payment of occupational risk premiums.
Ensure your company is on top of all required contributions to avoid any compliance pitfalls and prevent legal and financial penalties.
Step 8: Register With Local Payroll and Labor Agencies
Mexico's decentralized system requires registration and compliance with requirements at both the state and local levels, in addition to federal registration.
The most significant state-level obligation is the State Payroll Tax (Impuesto Sobre Nómina, or ISN), which is determined by the state where your employees are based.
The rate is paid entirely by the employer (it’s not deducted from employee salaries), and is generally 2% to 3% of the total gross payroll, depending on the region. For example, Mexico City and Nuevo León have distinct rates.
Depending on your industry and local municipality, you may need to obtain additional registrations, such as operating licenses and industry-specific permits.
What’s a Realistic Timeline to Open a Mexican Entity?
While a handful of companies may be able to power through the process in as little as 90 days, plan for it to take about three to six months.
The primary reason for this extended time range is Mexico’s somewhat unpredictable bureaucratic process. Notaries might have a backlog. Scheduling SAT appointments can be challenging. The KYC process can easily extend beyond your initial expectations.
Ultimately, budgeting the full six months is the most realistic way to manage the process and ensure a smooth launch.
Costs to Expect When Setting Up an Entity
The cost to incorporate an S.A. de C.V. or S. de R.L. de C.V. can vary significantly. Key cost drivers include:
- Notario público fees: This is one of the single largest expenses. Fees vary significantly by state, may be percentage-based, and can cover the formal execution of the Constitutive Act and verification of international documents.
- Office address costs: You must have a verified domicilio fiscal (physical address). This can take the form of a lease deposit or the initial cost of using a professional office service.
- Monthly accounting and tax filings: Companies must submit detailed provisional tax statements and financial reports to the SAT each month, which are percentage-based assessments of payroll.
Failing to account for variable costs, such as these, along with ongoing monthly compliance requirements, is the fastest way to exceed budget and potentially incur significant fines and administrative penalties from Mexican authorities.
Common Legal and Compliance Pitfalls
Despite their best efforts, many companies fall victim to somewhat predictable obstacles, often by underestimating bureaucratic processes and/or misunderstanding Mexico's employee-friendly labor laws.
International businesses often fail to plan accurately for the time required for formal government sign-offs. Securing your RFC from the SAT and completing KYC requirements can result in unpredictable wait times that may stall your business for weeks.
And then there’s the risk of non-compliance. Missteps here can lead to significant fines, labor disputes, and retroactive payments.
Some common components that can trip up a business new to Mexican labor laws include:
- Mandatory benefits: Failing to provide essential statutory benefits can lead to significant liabilities. These include an annual Christmas Bonus (Aguinaldo) of at least 15 days’ salary, a minimum number of vacation days (which increase with seniority), and a mandatory Vacation Premium.
- Profit sharing: Under Mexican law, all companies that generate taxable profits are required to distribute 10% of those annual profits among eligible employees.
- Termination costs:
- Mexican law doesn’t allow for “at-will” employment. Termination without just cause requires the employer to pay a statutory severance package that typically includes three months’ salary plus 20 days’ pay for every year of service.
- Employees terminated for cause receive 12 days’ salary for each year of service at the company.
- Mexican law doesn’t allow for “at-will” employment. Termination without just cause requires the employer to pay a statutory severance package that typically includes three months’ salary plus 20 days’ pay for every year of service.
- Tax errors: Incorrect or late tax filings with the SAT can trigger audits and penalties.
If you're establishing an entity, consider seeking local tax and legal advice to oversee a compliance-savvy office from the start.
Hiring Employees Via the Entity
Mexico’s labor environment is highly regulated, and hiring entails numerous administrative tasks. Once you establish an entity in Mexico, you’ll have to manage:
- Employment contracts
- Mexican Social Security Institute (IMSS) enrollment
- Payroll withholdings, including INFONAVIT (Housing Fund), and the state-level payroll tax (ISN)
- Mandatory leave and bonuses
- Profit-sharing obligations
Ultimately, maintaining this level of compliance requires employing qualified local accounting, HR, and legal talent, especially if your current HR team is lean (and/or not experts in Mexican tax and employment law).
Skip the Entity Headaches, Hire in Mexico With an EOR
If thinking about the process of opening an entity feels overwhelming, know that it IS possible. It just requires a lot of time, effort, planning, and money.
However, there’s another option that is a lot faster and more affordable — partnering with an Employer of Record (EOR) like RemoFirst.
An EOR acts as the legal employer of any of your international employees, eliminating the need to open an entity in Mexico.
Instead, the EOR takes on the management of:
- Local payroll
- Taxes and social security
- Benefits administration
- Employment contracts
- Compliance with Mexico’s labor laws
RemoFirst can also increase your efficiency, enabling you to hire and onboard employees in days instead of months, all without incurring incorporation fees, hourly legal counsel bills, or the headache of handling monthly filings on your own.
Sound good? Schedule a demo today to learn how we can help you grow your business in Mexico, as well as in 185+ other countries.
