Corporate legal considerations: Corporate Structures in Mexico & U.S.A. for Cross Border Transactions – Part I

The business relationship between Mexico and the United States of America keeps growing with the nearshoring era and therefore it is important to understand the type of corporations existing in both countries in order to determine the best strategy for doing business.

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Below is a brief description of the most relevant type of corporations in both countries, starting with the United States of America in order to determine which would be the best strategy depending on the nature of each corporation and their tax benefits.

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United States of America

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Corporations are incorporated in each state and therefore subject to local and federal laws, as applicable. Shareholders or partners, as the case may be, must agree on the by-laws and articles of incorporation for the corporation, which may be notarized before a notary public.

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Type of Corporations

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LLC stands for a limited liability corporation which main characteristics are credibility and limited liability, while in an LLP, which stands for a limited liability partnership, the main characteristics are being a flexible corporation and being a pass-through entity for tax purposes.

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Inc may be applied to companies that have incorporated their business (i.e., registered with a state to become a corporation). A corporation can either be an S corporation or a C corporation.

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An S corporation is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code, making it a “pass-through” entity for tax purposes. A C corporation is a legal entity that protects the owners’ personal assets from creditors and may have an unlimited number of owners and multiple classes of stock. Unlike an S Corporation or an LLC, it pays taxes at the corporate level.

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Both LLCs and corporations involve properly completing and filing your documents with the corresponding local authorities, appointing a registered agent, and fulfilling ongoing requirements from local authorities.

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The shareholders or the members of an LLC are not liable for the business's debts; thus, their liability is limited to their investment. While incorporating may protect a shareholder's assets from the corporations’ creditors, the corporation itself may be at risk from the shareholder’s creditors.

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Business growth objectives should also be taken into consideration since the choice of business structure can affect the corporations’ ability to receive financing and for such a reason corporations have a much easier time attracting passive investors. In fact, many venture capitalists prefer investing in corporations since investments in LLC’s are limited.

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Tax Considerations

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A C corporation is a separate tax-paying entity since it pays corporate income tax on its income, after offsetting income with losses, deductions, and credits, and pays its shareholders dividends from its after-tax income.

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S corporations are corporations that have made an election with the IRS to be taxed as a pass-through entity. All the corporations’ income, deductions, and losses are passed through to the owners who report these items on their individual income tax form.

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In an LLC the members can decide whether they want to be a pass-through entity or be taxed as a C corporation. By default, an LLC with one member is disregarded (like a sole ownership) while an LLC with more than one member is taxed under the pass-through rules applicable to partnerships.