Many people who have taken early retirement and moved to Mexico, and some planning for that eventuality, are interested in purchasing the stock or assets of an existing small retail or manufacturing business, or starting one from scratch. The biggest obstacles the new investor/small business owner faces are the lack of familiarity with the government regulations and, for many, the inability to communicate in Spanish. With a little time and patience, both major obstacles can be overcome.
This article is written for those who have already completed the requisite soul-searching before making the decision to move to Mexico to both live and to invest in a small retail business or manufacturing enterprise. I've also made the assumption that you recognize that in order to accomplish your goal and be successful you'll need to be conversant in Spanish. So, there's no need for me to explore the issues of business feasibility and language training at this time.
The First Step
The most valuable piece of advice I can give you is to seek out the most highly qualified professional to assist you in the town/city where you are contemplating buying/operating; its foolish to attempt to navigate the rushing river of mandatory government approvals and bureaucracy without professional advice. The assistance that you will find to be the most valuable comes from someone called a Notario Publico, an attorney specially authorized to assist in the filing of the paperwork necessary to obtain the approval of your corporate formation, including the preparation of Articles of Incorporation and corporate Bylaws.
Since passage of the North American Free Trade Agreement ("NAFTA"), many of the restrictions placed upon foreigners seeking to own or invest in businesses in Mexico prior to NAFTA have been eased. And, as time passes, the process will become even easier because Mexico recognizes the necessity for foreign investment. The Foreign Investment Law ("FIL") governs the activities of foreign investors in Mexico and the Foreign Investment Commission ("FIC") promulgates rules and regulations designed to administer and enforce the FIL. Some business activities in Mexico are restricted to government ownership, while others have requirements mandating a certain percentage of ownership be held by Mexican nationals. Yet other activities can be owned by foreigners in their entirety.
The most common corporate form utilized by the small businessperson in Mexico is the Sociedad Anónima" ("S.A.") (a fixed capital company), or the almost identical S.A. de C.V. (a Sociedad Anónima, but with variable capital). To form a S.A. or S.A. de C.V. there must be at least two shareholders and minimum start-up capital of $50,000 Pesos (+/- US$5,000), for which 20% (US$1,000) of the amount must be paid-in at the time of incorporation. The law further requires that the S.A. and S.A. de C.V. hire a disinterested third party to supervise/manage the operations of the company and represent the interests of the shareholders. The shares/capital stock of the company is freely transferable and can be traded publicly in accordance with government reporting requirements.
Both resident and non-resident foreign investors can own a Mexican business (subject to the provisions of the FIL). However, the incorporation approval process moves much more quickly, and its usually a sound business practice, if a Mexican national is part of the ownership mix (even if its only a small percentage). The holding of an ownership interest by a foreigner in a Mexican business is subject to the review and prior approval of both the Secretaría de Relaciones Exteriores (Secretary of Foreign Relations) and the FIC. The review/approval process typically takes anywhere from two to six weeks once the requisite documents have been filed.
Be certain to discuss your business plans with the Notario Publico and ask his/her advice on the proper corporate structure to fit your needs. He/she will walk you through the pros and cons of each type of corporation. There are some six or seven different possible corporate forms to choose from. The fee paid to the Notario Publico and the cost of filing the documents with the government will run about US$700 (not including the translation from Spanish to English for any documents, if desired).
If you dont yet have your FM-3 or FM-2 visa, ask the Notario Publico for advice on the timing of the filing of your immigration papers. Like any other country, Mexico has its own particular brand of bureaucracy and its not difficult to find yourself violating a rule or two. The Notario Publico will advise you as to whether or not your current status is sufficient from which to file the incorporation papers.
Working in the Business
As a general rule, the Mexican government prohibits foreigners from doing work that Mexicans are capable of and available to do. Whether or not you will be able to actively work in your business will depend upon the specific nature of the business, the part of Mexico in which you are going to locate, and if you intend to apply for a visa with permission to work specifically written onto it.
Foreigners intending to live most/all of the year in Mexico generally apply for the form of visa referred to as the "FM-3", while many other short-term annual visitors simply move around on their tourist card, the "FM-T". However, many, if not most, foreigners who own businesses in Mexico are living in Mexico on a FM-3 visa. An "FM-2" visa is issued to foreigners who have demonstrated a desire to remain in Mexico as an immigrant, and some foreigners who own businesses are holders of this type of visa. If youre planning on moving to Mexico and to participate in the ownership of a business, then you ought to seek out an attorney experienced in immigration matters and file for the visa that properly reflects your intended status. If this is not a service that your Notario Publico performs he/she will most likely be able to refer you to someone qualified to help you with this.
The fact that you own a business in Mexico doesnt guarantee you the right to actively work in that business. Most foreign business owners stick to the back of the house bookkeeping, the ordering, and the general administrative work; youll see few foreigners working out front with the customers. Yes, you can greet people, talk to people, and hang around, but in almost all cases you cant do the work. As a foreign business owner in Mexico, youll draw the attention of your competition who will be watching carefully to make certain that you dont use your foreigner status as a business advantage (particularly true in areas that see many foreign tourists or have many foreigners living nearby).
Mexico is still the land of La Mordida (the bite, or the bribe), and some government employees may be watching you closely
hoping to catch you in violation of one rule or another so that they can put the bite on you for a cash payment to them for their silence about any real, or concocted, violations. If you end up living in Mexico for a number of years, and have upgraded your visa classification as you go along, there will be a time when you will have the right do any of the work involved in your business; your immigration attorney can explain the regulations and time frame to you.
Some of the realities youll face as a new business owner in Mexico are: If you own a restaurant/bar, you will not be permitted to wait on customers, cook in the kitchen, pour drinks, mop the floor, etc. If you own an ice cream shop, you will not be able to scoop the ice cream into the cones, make milk shakes, ring up the sale, wipe the tables clean, etc. If you own a small manufacturing plant, you cant operate machinery, assemble a product, package a shipment for delivery, make sales calls, etc. For the preceding: you can (not always legally, but realistically) mingle with the customers and wander through your community, thus marketing the business; count the receipts at the end of the day and prepare bank deposits; handle the inventory and order additional supplies; visit the local markets and purchase supplies; and keep the books and records of the business (although youll also need to engage the services of a bookkeeper in order to properly comply with the myriad of financial reports/human resource requirements).
There are foreigners who have opened language institutes, and other private schools, who have received government approval to actively work in their businesses. Providers of certain professional services have received similar approval, and function more on a basis of a sole practitioner. As I said earlier, much is going to depend upon the drafting of your incorporation documents and your discussions with immigration officials when you apply for and/or receive your visa.
Youll quickly learn that one of the most frustrating things about doing business in Mexico is the inconsistency in policy between government offices and by geographical area, of the rules, regulations and procedures. One official will tell you one thing, and another official will contradict what youve previously been told. An office in Guanajuato may instruct you to do something differently than what the central office in the Federal District instructs you to do. Each violation of the rules costs you money, sometimes a lot of money. Thats why its so important to a professional advisor in whom you have confidence. The adviser will keep records of what youve been told to do, and what youve done. And, should you run afoul of the regulations or the law, the adviser represents you before the agency in question; this way itll not be a foreigner dealing with a Mexican, itll be a Mexican dealing with a Mexican
..the best scenario for you to operate in. Some foreigners try to economize by eliminating the adviser, and almost always end up wishing that they hadnt.
Yes, some foreigners do skirt/violate the regulations without getting caught. Your permission to enter Mexico to live or move about as a tourist, or on an FM-2 or 3, is granted with the understanding that you will obey the laws of the country. If you are thinking about not complying with the law then you will need to determine the level of risk that you are willing to accept. Penalties for violating the laws may include jail time, a civil penalty, expulsion from Mexico and the potential loss of your business and investment.
Maintaining Control of Your Business/Investment
Most people start/buy a business because they want to be in control. However, few foreigners are well prepared to own/operate a business in Mexico as a sole proprietor. Most have found that it makes common sense to share the business risks with others, and to have a Mexican national as a business partner, if for no other reason than to help explain the cultural differences between doing business in their home countries and doing business in Mexico. And, no matter how well you think that you communicate in Spanish, youll never communicate with a Mexican as effectively as a native Spanish-speaking Mexican does. Then how does one retain control if others are brought into the ownership/management group?
Here is one example of an area where a good Notario Publico will earn his/her fee. Make certain that the Articles of Incorporation and Bylaws are prepared to clearly state that he/she who controls a majority of the shares of stock controls the corporation. Its irrelevant that you are a foreigner. Then, find another investor, or investors, with whom you are very familiar and in whom you have the utmost confidence. Be certain that your fellow investor(s) shares your vision of the business and is in accord with what you want to do, and the role that he/she/they will play in the business (workers/silent partners?). If your documents are properly prepared, and youve chosen a compatible partner(s), control should not be a concern.
By holding a controlling interest in the stock of the business, you have the ability to hire/fire the person you select to be your manager, or disinterested third-party. Depending upon the size of the business, you will probably find that the person best suited for this manager position is a bookkeeper/accountant. Technically, the manager, in this scenario, will actually be the accountant who maintains the financial records of the business and prepares the payroll and ensures that the proper filings are made with Mexican government agencies. These office/reporting tasks are important and you will not be able to do them yourself, anyway. The terms of employment of the manager are negotiable, and you can choose to employ the individual on a part-time basis, if you wish (again, depending upon the size of the enterprise and the scope of the business activity). Your attorney and outside accountant in Mexico will provide you with various structural options from which to choose. The disinterested third-party requirement must be met by Mexicans forming an S.A. or S.A. de C.V. also, so the attorneys are aware of ways to get around this requirement and permit the controlling shareholder to control the business.
Its very important that you fully understand all of the transactional documents prior to executing them. Sign nothing until you understand what you can and cant do once the company is formed. I always recommend that people pay the extra cost required to translate all corporate formation documents and contracts from Spanish into English. The translations are performed by a government-certified translator who will affix an official seal to the translated documents. By not completely understanding what you are signing you risk losing your entire investment, the business, and run the risk of substantial civil penalty and potentially imprisonment if a business dispute arises in the future.
Its wise to pencil-in your business plan some time lost to unexpected delays. Youll be functioning in an environment that is foreign to you, with substantial business/government cultural differences, and this usually adds up to unforeseen delays. Youll also learn that the concept of time is viewed differently by many in Mexico than by other North Americans. Its not that people are lazy, or disinterested in your wanting to lease space, place orders, etc., its just that whats important to you in the timeframe youve established may not be viewed the same by those you deal with.
A book that all who are interested in owning a business in Mexico should read is, "Management in Two Cultures - Bridging the gap between US and Mexican Managers", written by Eva S. Kras (Intercultural Press, Inc. - ISBN: 1-877864-32-3). This book compares the major cultural differences in the lives, and business operations, of the United States and Mexico and will help prepare you for both doing business and living in Mexico.
Dr. Marc Ehrlich, a Mexico City psychological consultant and psychotherapist, has written extensively on the issue of the challenges facing foreigners transitioning into Mexico. Take the time to read these two articles that are available free-of-charge on the w.w.w.: "Mexico Points of Comparisons: The Social Perspective" (http://www.mexconnect.com/mex_/erlich1.html); and "Transitional Anxiety The Series, the Inter and Intrapersonal Effects of Moving to a Foreign Culture" (http://www.mexconnect.com/mex_/ehrlanxietyindex.html).
Owning and operating a business in Mexico is difficult, even for the most seasoned businessperson. For those who have gone before you, patience has indeed been a virtue. Good luck!