Corporate legal considerations in Mexico: Simplified Shares Corporations

Section VII of Article 1 of the Mexican General Law of Commercial Corporations (Ley General de Sociedades Mercantiles) (the “GLCC”) provides for the creation of the so-called “simplified shares corporations” (hereinafter “SAS”), which must be registered before the corresponding Public Registry of Property and Commerce for the purpose of becoming effective against third parties.

The SAS may be incorporated with variable capital and integrated by one or more individuals, being able to be sole owners of the corporation but without allowing any corporation to act as a shareholder.

It is important to mention that the corporate control and management of the SAS should be carried out as if it was a commercial corporation, keeping its corporate books and stock certificates in compliance with the provisions of the GLCC.

Although this type of company is an option for small and medium entrepreneurs for the creation and development of their businesses, it is necessary to consider that there are certain limitations to the development of an SAS that should be considered in the future.

The following are the advantages and disadvantages of SAS:

Advantages

• The incorporation process is simple and free of charge for the individual, it is performed in the electronic system established by the Ministry of Economy (Secretaría de Economia) and does not require formalization before a Notary Public.

• It is not necessary to create the legal reserve fund as in other types of commercial corporations.

• Individuals can opt for this option and not continue with the regime of individuals with business activity for tax purposes.

• With the creation of a SAS, individuals protect their personal assets.

• Better image to customers and suppliers.

It is important to mention that to this type of corporation the provisions applicable to the corporations provided for in the Mexican Income Tax Law (Ley del Impuesto sobre la Renta) are applicable.

Disadvantages

• As an electronic system is used for the incorporation process, there is not enough advice to determine essential matters for the proper incorporation of the SAS.

• The shareholder cannot have the control or management of any other corporations.

• Total annual revenues are limited to an amount of $7,076,469.38 (Seven million seventy six thousand four hundred and sixty nine pesos 38/100 Mx.Cy.), in which case the corporation must be transformed into another mercantile corporation regime.

• If the transformation of the company is not carried out, the shareholder(s) must respond before any third parties in a subsidiary, joint and unlimited manner, without prejudice to any other responsibility.

• Failure to approve financial statements for two consecutive fiscal years will result in the dissolution of the SAS.

As analyzed, if the intention is to generate a small company expecting to grow at a certain moment or to carry out other activities that can generate a greater cash flow, these types of companies are restrictive for their shareholders and, therefore, it would be necessary to evaluate in detail the appropriateness of its incorporation.