Unlike in other countries where Corporations are taxed separately from their shareholders as an independent tax payer and Limited Liability Companies are taxed are taxed as pass-through entities – this is not the case for Mexico. Both Limited Liability Companies and Corporations in Mexico are taxed in the exact same manner. There is no difference whatsoever between the two entities in terms of amounts of taxes or tax obligations. The difference arises at the moment of repatriating earnings from Mexico abroad. The LLC for purposes of the taxation in the United States and other countries will treat the Mexico LLC as if it were a pass-through entity and permit the deduction of income taxes paid in Mexico from tax obligations owed in the form of a foreign tax credit. This is the most relevant reason for why an LLC is superior in most cases instead of forming a corporation in Mexico.
In some cases, forming a corporation will be required by law or statute for a particular industry. These requirements exist most frequently in the finance industry. A SOFOM (Sociedad Financiera de Objeto Multiple) is a financial services company that engages in either regulated or unregulated financial activities, including but not limited to lending, personal loans, pay-day loans or similar are required to formed as corporations and not as Limited Liability Companies. Similarly, companies that accept deposits from the public or are otherwise engage in activities regulated by the Mexican National Banking Commission are also required to be established as Corporations.
In general, Corporations in Mexico are better suited to provide greater control over shareholders rights and classes of capital. For example, Investment Promotion Companies (Socidades Anonimas Promotora de Inversión) are a special corporate form in Mexico that provides for advanced corporate governance features for preferential voting rights, dividends, multiple shareholder classes, liquidation rights, debt repayment preferences, and minority shareholder protections. These entities cannot be established as LLCs. Furthermore, if a company is intending to go public and trade its share on the stock exchange at some point in the future, it must be established as a corporation.
For most clients, the choice to incorporate an LLC or a Corporation in Mexico will not really make much of a difference in most cases in terms of basic everyday functionality. For clients coming from Canada, the differences in terms of pass-through taxation are irrelevant, as Canada Revenue Agency does not recognize foreign LLCs as disregarded entities. Either corporate form will work in terms of owning property within the restricted zone, purchasing property, or running a business. LLCs do not require making publications upon dissolution and winding up, nor do they require a statutory auditor or shareholders’ commissioner. These aspects are fairly minor but should be taken into account. The potential tax benefits of LLCs prove significant enough to justify recommending an LLC in Mexico instead of a corporation in Mexico as the default option unless there is a specific legal or regulatory requirement by law or the company’s business activities specifically require registering as a corporation.
Corporations and LLCs are formed in the exact same way with the exact same procedures involving a notary, SAT registration, etc.