Have you lately been playing with the idea of converting your business idea into a tangible reality? You must be bright-eyed and bushy-tailed, thinking of what treasure it holds for you? But you can’t solely erect a business with those bricks of pep and vigor. It takes dedication, commitment, perseverance, knowledge, and, yeah, guts to face the red tape!
Are you thinking of Mexico to locate your venture? Well, then you must know that the process of starting a business in this country is anything but straightforward. It requires one to register with different authorities such as Mexican Tax Authorities, Commercial Property registry, and the Ministry of Foreign Affairs. Every agency has different requirements and various formalities to go through. Furthermore, one needs to undertake specific legal actions like authorizing official documents, incorporating the business, formalizing wills, and so on. Despite the tough knots of administrations, the opportunities and possibilities it proposes to new businesses are enticing.
Before starting a business in Mexico, the right approach is to first acquaint oneself with the legal obligation one has to adhere to, the criteria that need to be satisfied, and the procedures one must go through. Acquainting yourself with these aspects of the process of starting a business will render the process smoother and less bothering.
Here, we have it all covered for you!
Mexico’s ever-growing and huge economy, competitive labor market, pro-investment attitude, and status of being a trade hub render the country an ideal location for starting a new business. As always, you should begin by coming up with a compelling business idea that has the potential to gain ground in the market, followed by crafting an elaborate and convincing business plan. Choose a unique business name and grant a power of attorney to your legal representative, which will enable them to sign the documents and act on your behalf.
After this comes the step of drafting the company’s bylaws which clarify the purpose of your business and how it would function and be structured. Get these bylaws legalized with a notary public, and then head to register your business with the Public Registry of Property and Commerce in Mexico. Thereafter, your business has to be registered with tax authorities, where you would be allocated a corporate tax ID number by the Tax Administration System of Mexico. Now, set up a business bank account, deposit minimum share capital, and there you go!
The whole process of launching a venture in Mexico is elaborated on in the sections that follow for more clarity. Read on!
Process of setting up a business in Mexico
Mexico is a land of opportunities for startups and new businesses, thanks to its localization, macroeconomic stability, the potential of the internal market, market size, international trade treaties, and more. The opportunities are indeed alluring. However, they do come at a cost. You may find starting a business in Mexico rather challenging considering the time and sophisticated procedures and formalities it involves. Nonetheless, with the right guidance, you can definitely streamline your journey. And here is the help!
Here is the process of starting a business in Mexico with all the requirements, criteria, formalities, red tape, etc., you need to know. Get going!
- Make a convincing business plan: A solid business plan is a must. The best part about creating a business plan is that it makes you aware of the strengths and weaknesses of your business idea, which further helps you improve it. A comprehensive business plan entails details like market size, product/ service demand, competitors, marketing strategies and budget, etc. A good business plan helps you convince potential investors, thus, cranking up the possibilities of growth in your business.
- Choose the legal structure: Before getting your business registered at different administrative offices, you will need to choose a legal business structure. Selecting the appropriate business form is a critical decision one has to make. Thus, to avoid any blunder, you may consider guidance from an expert in legal matters. Business legal structure one selects several consequences on the company such as it will determine how much tax you will pay, your liabilities, etc. In Mexico, you may choose from a branch office, a Mexican entity, or a representation office.
- Choose a company name: Before the incorporation of the company, whether it is a branch or representation office, or others, you need to decide on a suitable and unique name for your company. The Ministry of Economy in Mexico suggests start-uppers come up with at least three name ideas, all of which must be original and not taken by anyone else. Whether your name has been approved or rejected, SRE (Ministry of Foreign Affairs) will convey it to you within three days to a week.
- Prepare the Constitutive Act: As soon as you get approval from SRE and it identifies your business structure, you need to create the constitutive Act. This document entails the fundamental aspects of the business such as business name, objective, legal structure, duration, administration, etc. Once done with this step, you will have to get the Consitituive Certificate from SRE notarized before a notary public.
- Register the company with SAT: in this step, after creating and legalizing the Constitutive Act, you need to register your company with the Tax Administration Office in Mexico, which is similar to IRS authority in other countries. You would be allotted a Tac Identification Number which involves the Federal Taxpayer Identification Number (RFC).
- Register the company with RPPC: Another red tape! Here you are required to head to the Public Registry of Property and Commerce (RPPC) in the city and the state where you are planning to register your company and its commercial objectives and purposes as well. You would be asked to yield the Constitutive Act, a power of attorney, and the RFC that enables the legal stand-in to perform your company’s actions.
- Open a corporate bank account: The companies to be incorporated in Mexico must have a Mexican business bank account. That is because taxes can solely be reimbursed by Banks of Mexico here, and foreign banks do not own the platform utilized by the Tax Authority to get the tax payments. To set up a business bank account, you will be asked for the Tax ID, and the whole procedure may take about 1.5 to 3 months.
- Register the company with the IMSS: This step requires you to register your business with the Mexican Institute of Social Security (IMSS). Even if a company has an employer who exists as a worker as well in the company, he/ she will have to render personal contributions to the Social Security accounts. In case any delay occurs in doing so, the authorities may levy a fine on you.
Hiring Employees in Mexico
After getting your business registered and obtaining the licenses and permits to operate your company, you will ne
ed to employ people to manage various actions. To accomplish the process, you need to be aware of employment and labor regulations that are set by the administration of the country. There are rules that govern the duration of the trial period, maternity leave, employee dismissal, working hour norms, social security, pension, etc., which you must acquaint yourself with to come across as a responsible employer. Employment and labor regulations clearly state the entitlements, duties, and responsibilities of employees as well as employers. With the help of experienced HR consultants like Zimyo, all your HR requirements are addressed efficiently.
Let’s understand what these obligations are in Mexico. Read on!
- Trial Period/Probation Period: The trial period in Mexico is established in an employment contract where an employee agrees to render the services under the employer’s supervision to procure the skills and knowledge required to perform the job for which he/ she is hired. Generally, this period must be of three months, while for executive positions, it is for 6 months. Indefinite period employment contracts or contracts for a period of more than 180 days might be subject to a trial period of 30 days, during 180 days executive roles. That is to verify that the employee has the competency and skills to handle the job for which he/ she has been selected.
- Leave and Holidays: According to Article 74 of the FLL, 9 mandatory holidays have been established, which are:
- January 1st
- To commemorate February 5th, an off day is observed on the first Monday of February.
- May 1st
- To commemorate March 21st, an off day is observed on the third Monday of March.
- September 16th
- To commemorate November 20th, the 3rd Monday in November is a day off.
- December 25th
- Election day is fixed by local federal electoral laws.
Workers who need to work on these days are entitled to receive twice their regular payment in addition to regular pay. Employees in Mexico are also entitled to get 6 days of vacation annually and 2 extra days for each subsequent calendar year which may be extended up to 12 days at the most. If an employee is in his/ her fifth year of employment in the company, he/ she must get 14 days of vacation on working days.
Employers need to pay a vacation premium equivalent to a quarter percent of the employee’s salary during the vacation period. Vacations are used on the dates stated by the employer within a period of 6 months after 1 year of an employment relationship.
A person is granted 52 weeks of leave in case of temporary disability, while permanent leave is provided in the case of permanent partial or total disability. Payment in these cases is made via the IMSS as per the amount fixed in FLL. In case of illness, an employee must be granted a leave for 1 day to 52 weeks depending upon the condition.
- Maternity Leave: Female employees are entitled to get 42 days of paid maternity leave after childbirth. If the employee finds it difficult to join back and continue the work due to delivery or pregnancy, maternity leave may be extended further. During the nursing period, which is of 6 months, the female employee is entitled to two extra 30-minute breaks from work to feed the newborn in a hygienic place arranged by the employer. Maternity leave in Mexico is counted in the length of service.
- Termination of Services: An employee can be terminated by the employer only after stating the grounds of dismissal. The causes of dismissal, as mentioned in the Article 47 of the FLL, are:
- Exploiting false documents to procure the job.
- Violent or dishonest behavior against colleagues that disrupts the discipline at the workplace.
- Harassing a person in the workplace.
- Workplace sabotaging
- Being careless such that the behavior threatens everyone’s safety at the workplace.
- Disclosing trade secrets.
- Unnecessary and excessive absences from work in a 30-day period.
- Working under the influence of narcotic drugs or alcohol.
- Failing to consider and adopt safety measures.
In case an employee is terminated without any cause, he/ she is entitled to: –
- For each service year’s seniority premium of 12 days’ salary
- For each year of service, twenty days of daily aggregate salary of the employee.
- Three months of daily aggregate salary of the employee.
- Pension: The existing Mexican Pension system is a contribution system based on the following three pillars, namely:
- Voluntary savings
- Minimum guaranteed pension for employees with low income
- Compulsory individual savings accounts with competitive mutual fund regulation.
At the time of retirement, an employee has two choices:
- Get lump sum amount directly or periodic payments from the AFORE.
- Shift the account balance to an insurance firm and purchase an annuity.
- Work Hour Norms: The standard workweek in Mexico is of 48 hours which includes one full day of rest from work. Nonetheless, in certain employment relationships, like the banking sector, government offices, and the private secto
r, the workweek has been set to 40 hours. Employees are entitled to get a break for a minimum of one and half hours during a work shift.
Overtime hours per day cannot surpass the set limit of 3 hours, and it cannot be performed for three days in a row. This directly implies that overtime hours per week cannot exceed the limit of 9 hours. Moreover, employees must be paid twice the regular hourly pay rate for overtime work. In case overtime surpasses the duration of 9 hours per week, the hours beyond 9 hours must be reimbursed at thrice the regular hourly rate. Overtime is prohibited for minors (under 16) and pregnant or nursing employees to engage in overtime work.
How easy is it to conduct business in Mexico?
The Doing Business report prepared by the World Bank positioned Mexico at the 60th position in the Ease of Doing business and assigned it a score of 72.4 out of 100. The World Bank compares 190 economies against several factors that play a key role in enabling the process of starting and implementing a business. For instance, it peruses a country’s reliability of electricity supply, ease of getting electricity connection, paying taxes, the efficiency of judicial systems and regulation in resolving insolvency, and so forth. Here, let’s walk you through the rank of Mexico on these various sub-indices created by the Doing Business report 2020. That would help you revise your decision to start a business in Mexico. Read on!
- Starting a Business: To establish a business in any nation, one is expected to run through many bureaucratic processes, qualify for certain requirements, deposit paid-in minimum share capital, and whatnot. The Doing Business estimates the formalities, cost, and time the process of instituting a venture in an economy entails. According to the Doing Business report 2020, Mexico came at 107th position among 190 countries and scored 86.1 out of 100. In 2010, the country established a digital platform to register a company, thereby rendering the process easier. Moreover, it also reduced the time involved in the registration process and eliminated the need to register with the statistical office.
- Managing Permits: For a business to operate legally, it must acquire the permits and applicable licenses. The Doing Business evaluates the cost, procedures, and time the process of building a warehouse entails. It also checks the license and permits requirements and measures the building regulations’ quality, safety, and quality control mechanisms and insurance and liability regimes involved. According to the Doing Business report 2020, Mexico got 93rd rank among 190 countries and scored 68.8 out of 100. In 2012, the process was made faster as it consolidated the internal administrative processes.
- Getting Electricity: Getting electricity is another potential indicator that the Doing Business regards when measuring the rank of a particular economy in the EODB index. It looks into the procedures, time, cost, and formalities the process of getting electricity takes. Moreover, it also estimates the reliability of the power supply and the transparency of tariffs. According to the Doing Business report 2020, Mexico came at the 106th position among 190 countries and scored 71.1 out of 100. In 2013, the country proposed training opportunities to private sector contractors, streamlined the procedures, utilized a GIS (geographic information system) for mapping the distribution of electricity, and enhanced the stock of materials.
- Getting Credit: Credit is sought by ventures to expand, meet the overheads, employ staff and workers, and for other business operations. You may procure it easily in some countries, while in others, it might get overwhelming. As this factor impacts the ease of doing business in a country, Doing business considers a potential EODB rank indicator. The Doing Business measures the time, cost, and procedures the process of getting credit comprises. It also evaluates the efficiency and power of credit reporting systems in lending capital to new businesses. In this sub-index, Mexico came at the 106th position among 190 countries and scored 71.1 out of 100. In 2012, the country implemented a centralized collateral registry with a digital database that could be accessed online to fortify the secured transaction systems of the country.
- Managing Payroll: Managing payroll is way more than reimbursing payments of the staff and employees. One has to look after the filing and payment of Value Added tax, corporate tax, and social security contributions. When accomplishing these actions, you need to abide by various obligations and rules as well. To manage the payroll and related operations efficiently, you must consider investing in installing a competent payroll management system in the company. You may choose the most reliable services offered by expert consultants at Zimyo.
- Paying Taxes: Tax filing and payment can be easier in some countries than the others. The Doing Business assigns ranks to economies on this indicator by measuring the time, formalities, procedures, and costs involved in filing and making tax payments. Furthermore, it also evaluates the ease of post-ta-filing procedures. The Doing Business report indicates the rank of Mexico at 120th position among 190 economies and a score of 65.8 out of 100. In 2008, the country lowered the rate of corporate income tax, thereby rendering the process less costly.
- Enforcing Contracts: The Doing Business measures the outcome formalities, cost, procedures, and time the Act of enforcing a contract takes. It also assesses the strength of the judiciary, efficiency of legal regulations, and courts in settling legal, commercial disputes. According to the Doing Business report 2020, Mexico came at 43rd position among 190 countries and scored 67 out of 100 in this sub-index. In 2014, the country created small claims courts with oral proceedings to handle the commercial as well as civil cases, thereby making the process of enforcing contracts easier.
- Resolving Insolvency: How efficiently a business is able to get over insolvency depends upon the regulations that oversee this domain. The Doing Business measures the formalities, time, cost, etc., involved in efficiently resolving insolvency. It also looks into the strength of judicial systems and legal frameworks for the same. According to the Doing Business report 2020, Mexico came at the 33rd position among 190 countries and scored 70.3 out of 100. In 2009, the country amended its bankruptcy law to enable creditors and debtors to reorganize the debt agreement at any phase of the insolvency procedure.
Mexico’s worthwhile and strategic location provid
es direct access to the market of the United States, which renders business operations much easier compared to other distant nations. The free trade agreements of Mexico with 46 countries offer alluring trade benefits in the country. Furthermore, Mexico is populated by young adults who promise skilled, educated, and competent labor for your company at relatively low costs. The only thing that may put you off is the amount of paperwork you need to deal with. Apart from that, the country emerges as a remarkable opportunity for new businesses.
Zimyo is a leading HR and Payroll management services provider in Mexico with multiple years of experience. The company helps businesses hire the best talent and takes care of the financial requirements of employees, such as advances or credit for a hassle-free work experience.