A basic Mexico subsidiary allows firms to operate as its own branch in the country and distribute to local customers. Known as an S.A. de R.L. (similar to an LLC in the States), the arrangement acts with limited independence from its parent company. Corporations such as BestBuy and Hewlett Packard utilize this structure.
Establishing a foreign subsidiary in a new country is the standard method for firms seeking market entry, but it’s not the only way. In fact, it’s actually pretty risky if you’re new to globalization. Sure, a foreign subsidiary allows your company to operate freely in Mexico, but it’s expensive to set up and tear down and it takes a large commitment from a timing and capital standpoint.
There are alternatives to establishing a Mexico subsidiary, which we will discuss soon. First, let’s take a look at the disadvantages of direct foreign investment in the region.
Costs for Establishing a Mexico Subsidiary
Initial setup costs range from a few hundred dollars up to $5K. In addition to startup fees, which doesn’t include internal legal fees, your company is also responsible for yearly maintenance. Typically, foreign subsidiary maintenance fees cost upwards of $40K per team member.
Finally, if your strategy isn’t successful in Mexico and you want to move your company out of the country, you’ll face tear down fees. On average, if you need to leave an international market, expect to take both the start-up time and cost and multiply them by a factor of three.
When establishing a subsidiary in Mexico, your company will need to go through the following steps to maintain a legal, complaint presence in-country.
- Select a corporate name and register with SRE (Ministry of External Affairs). It will be approved once SRE confirms there are no duplicates.
- Enter a proforma agreement that bounds any non-Mexican shareholder by Mexican laws.
- Partner with a local attorney to prepare documents that spell out corporate governance, corporate purpose, duration of existence, domicile, capital stock provisions, management powers and special provisions for liquidation.
- Establish a power of attorney for the subsidiary.
- Get all documentation notarized.
- Plan for the process to take up to six months. It can be shorter, but you need to allow enough lead time to prepare documentation and wait for approval.
Outside of inconvenience, the long lead time makes it difficult to recruit and hire talent and get operations started quickly upon approval.
Once your subsidiary is formed, your company is solely responsible for adhering to all of the requirements of running an independent business in Mexico. A few of these requirements involve areas including:
- Environmental regulations
- Health & sanitary licenses
For example, foreign nationals must obtain a visa through the through the Ministry of Interior (Secretaría de Gobernación) to legally work in the country. As the employer, you’ll need to sponsor the employee. But, as subsidiary set up, lead time is long. It can take up to 40 business days for approval. A tourist visa is not acceptable for permitting business in Mexico, so this process is mandatory for all foreign nationals and expats.
Experience the Benefits of Doing Business in Mexico — Fast & Easy
Companies want to expand into Mexico because of the country’s low labor costs and access to more than 90 million consumers. There is a lot of potential for growth, which is why many US businesses, including Ford and Whirlpool, are seeking globalization to the south.
For those businesses, they need to establish a foreign subsidiary to manufacture goods. For SMEs (small to midsize enterprises), a permanent Mexico subsidiary is not a requirement.
Instead, those companies can rely on an agile global expansion approach such as Foreign Subsidiary as a Service (FSaaS). This service allows companies to obtain a legal presence in Mexico for less time, money and overhead.
FSaaS takes care of international risk mitigation, compliance, payroll, benefits, and everything else that makes global expansion difficult. Your company manages your team members. Plus, you don’t have to worry about maintaining compliance or expensive teardown costs.
To learn more about this global expansion 2.0 strategy, get in touch with our team!