A Mexican Sociedad Anonima (S.A.) is a type of legal entity with two or more shareholders (owners). The owners have their liability limited to the amount of capital they invested in the company. It is a stock corporation. Therefore it issues stock of shares to the owners. Also, these shares are negotiable. This means owners can sell and buy them freely. Another key point is that the S.A. is the Mexican equivalent of the American Corporation. Certainly, it is by far the most widely used type of company in Mexico.
In addition, you may find that the words de Capital Variable or de C.V. follow the Sociedad Anonima or S.A. But this only means that the company can increase and reduce its capital stock. Basically, it does this by either admitting new shareholders or asking current owners for more money.
At Start-Ops Mexico, we help foreign companies get established in Mexico hassle-free. Accordingly, one of the most recurring questions our clients ask us is, what is the type of legal entity I should incorporate in? The answer in 98% of the cases is either a Sociedad de Responsabilidad Limitada (S. de R.L.), the Mexican LLC, or a Sociedad Anonima (S.A.). In sum, this article will give you all the information you need to understand if an S.A. is the right structure for your business.
Be it as it may, please feel free to contact us if you still have questions. Even more, you can check our Ultimate Guide to Start a Business in Mexico for more information on relocating your business to Mexico.
Sociedad Anonima General Information
First of all, federal law regulates all types of companies in Mexico. In specific, General Mercantile Corporations Law or Ley General de Sociedades Mercantiles in Spanish regulates them. Specifically, the fifth chapter, On Sociedad Anonima, specifies all of the regulations this type of corporation must comply with. Hence, all of the information in this article has its legal basis on that law.
Sociedad Anonima Key Facts
- Owners are referred to as shareholders.
- There has to be a minimum of two shareholders.
- It can have an unlimited amount of shareholders.
- Shareholders’ have their liability limited to their stock investment.
- Since 2011 there is no mandatory minimum capital requirement. However, it’s always a good idea to keep it within business standards.
- Capital and ownership are represented in share certificates e.g. 1,000 shares.
- Each share has equal value and equal rights.
- Shares are traded freely.
- A Sole Administrator or a Board of Directors manages the company.
- All S.A. corporations must have at least one Statutory Auditor appointed by the shareholders.
- Ordinary General Shareholders’ Meetings are mandatory once a year.
- Extraordinary General Shareholders’ Meetings vote to decide on special matters.
Corporate Management in a Sociedad Anonima
Undoubtedly, Shareholders are the supreme authority that governs an S.A. In general, they exercise this authority by taking decisions at Shareholders’ Meetings. These meetings can be either Ordinary, for regular business decisions, or Extraordinary, for special decisions.
Secondly, the Sole Administrator or Board of Directors gives direction to the company. As a result, they implement the decisions taken by the Shareholders’ Meeting. Certainly, they have the day-to-day responsibility of the company’s management and administration.
Meanwhile, a third party, the Statutory Auditor, oversees the activities of the Sole Administrator or Board of Directors. The Shareholders appoint him specifically to protect their interests. Indeed, one of his functions is to make sure that the Directors are doing their work properly.
The corporate hierarchy in an S.A. looks like this.
The Shareholders exercise their authority by taking decisions at Shareholders’ Meetings. There are two different types of meetings:
- Ordinary Shareholders’ Meetings
- Extraordinary Shareholders’ Meetings
Ordinary Meetings are for regular business decisions and Extraordinary Meetings are for special decisions.
Ordinary Meetings Matters
- Approve the Sole Administrator’s annual report. They take the auditor’s report into account to do it.
- Appoint the Sole Administrator or Board of Directors and Statutory Auditors (if needed).
- Set the pay of the Sole Administrator or Board of Directors and the Statutory Auditor (if not specified in the by-laws).
Some Extraordinary Meetings Matters
- Dissolve the company.
- Increase or reduce the capital. If you wish to ask current shareholders for more money, an extraordinary meeting needs to take place.
- Change the purpose of the company (what the business does).
- Transform the company into a different legal entity.
- Merge the company with another company.
- Issue shares.
- Issue bonds (debt).
- Modify the deed of incorporation.
- Anything else that requires a special quorum.
As you can see Extraordinary Meetings are indeed for extraordinary decisions. The key difference is the quorum (the minimum number of shareholders that need to be present). Ordinary meetings require a quorum of 50% and this cannot be modified. Extraordinary meetings require a quorum of 75%, given the importance of the decisions voted. With these meetings, the quorum can be modified up to 100% if shareholders wish. This is done in the articles of incorporation. In both cases, resolutions are passed by a majority vote.
The number of shares each individual represents determines the quorum and votes. Remember, each share has one vote. If one shareholder has 50% of the shares, he automatically represents this proportion in quorum and votes.
Shareholders may have someone represent them in the meetings, with the exception of Directors (or Sole Administrator). A proxy letter grants representation to other individuals. We can help draft and formalize it.
Board of Directors
The second tier in a Sociedad Anonima corporate management is the Sole Administrator or Board of Directors. From now on we will refer to them as just the Board of Directors for simplicity.
The Board of Directors acts as the company’s legal representative. They are in charge of managing its day-to-day operation. Directors (or the Sole Administrator) can be shareholders at the same time. Or they can be outsiders to the company. Foreigners can perfectly function as Directors as long as they have a visa. They don’t need a work permit. The articles of incorporation establish their responsibilities and power. This may be changed if needed.
The Board of Directors is responsible for delivering an annual report to the shareholders’ meeting that includes:
- Company’s annual performance, current projects, and current policies.
- The main accounting policies and criteria used.
- Financial statements showing the situation of the company with explanatory notes.
All S.A. companies need to have, by law, at least one Statutory Auditor. Shareholders designate this person to oversee the Board of Directors. Their task is to make sure they comply with their best interests. Think of it as internal police. The Statutory Auditor reports to the Shareholders the activities that the Board of Directors performs. This is a big responsibility.
The main difference between a Sociedad Anonima and a Sociedad de Responsabilidad Limitada is the mandatory figure of a Statutory Auditor. An S.A. is meant to be a corporation with many members. So it enforces a Statutory Auditor to protect the Shareholders’ interests. The S. de R.L., on the other hand, is meant to be for smaller groups of members so it does not enforce it.
Some of the responsibilities of the Statutory Auditor are:
- They make sure monthly financial corporate reports are delivered.
- Oversee the corporation’s activities.
- Issue an annual report. This includes his opinion on accounting practices.
- Call ordinary or extraordinary shareholders’ meetings when required.
- To attend these meetings.
There are certain limitations to being a Statutory Auditor. Since the position oversees a group of individuals, there shouldn’t be conflicts of interest. Usually, the position is held by an independent auditing firm or the accountant of the company. If needed, Start-Ops can function as your Statutory Auditor.
None of the following can act as a Statutory Auditor.
- Employees of the company
- Direct blood relatives of Directors
The Board of Directors acts in a more strategic way. So, in order to run the day-to-day operations, they usually hire a manager (or more). Managers are employees of the company. So, in order for a foreigner to be a manager, he would need to obtain a work permit. Ideally, the articles of incorporation define the powers granted to the said manager, but it is also possible to grant a new manager power to act on behalf of the company through a Power of Attorney.
When to Incorporate in a Sociedad Anonima
The Sociedad Anonima is similar to the American Corporation. The legal structure of an S.A., as you can probably see, is aimed toward having many owners. This may include minorities, which are protected by the law to an extent. The whole structure has mechanisms to settle disputes between its parties. Understandably this is made to coordinate larger groups of people.
Your decision depends on the type of operation you will have in Mexico. The Statutory Auditor, for example, represents an extra cost. If there will be only two shareholders that trust each other and both will be appointed Directors, this figure doesn’t really make sense.
The S.A. is great for cases in which the owners of the company will be many and the Directors will be outsiders to the organization. Then, overseeing their performance and activities truly makes sense. If you are planning for example to raise equity from investors, it may be a good idea to incorporate in a Sociedad Anonima.
I really hope this article helped. If you have any questions please leave them in the comment section below. And remember to share the article if you know someone that may find it useful. Sharing is caring!