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18 July 2011
Following a common international trend, the Senate has approved a bill that authorises the formation of stock corporations and limited liability companies with a single shareholder or member.
The bill was sent to the Chamber of Representatives for debate on February 8 2011. The president had previously vetoed a bill on the same subject in November 2010 - he agreed that single-member companies were necessary, but considered that the previous bill created excessive formalities while providing inadequate procedures for company formation. Many jurisdictions allow for single-member companies, including a number of EU countries, the United States and Colombia.
The new bill indicates some of the advantages of single-member companies, including allowing small businesses to be incorporated, limiting the liability of their members and enabling them to deal with public entities that are required to contract with companies rather than individuals. Single-member companies should eliminate the use of 'straw men' while enhancing possibilities for business continuation. Such companies also offer an advantage from a tax perspective, as they do not have to pay a fixed amount of income tax in addition to 28% of their taxable income, as an individual would be required to do.
In Mexico, the most frequently used corporate structures are the stock corporation and the limited liability company, which limit the liability of their members. Previously, limited liability companies were not widely used; but since the United States decided to recognise them as pass-through entities for tax purposes, they have become common in Mexico. Other forms of company (ie, general partnerships, limited partnerships, limited stock partnerships and cooperative companies) cannot be established as one-member companies and may not reduce their membership to a single member.
The bill originally proposed to allow general partnerships to be formed by a single member; however, when reviewing and discussing the bill, the Senate indicated that general partnerships are outdated and are rarely used (mainly for the practical reason that their members are jointly and severally liable for the company's obligations).
Limited partnerships and limited stock partnerships were not included in the bill because they have two categories of member, with different forms of liability for each: general partners are jointly and severally liable for the partnership's obligations, whereas limited partners are liable only for payment of their contributions. Thus, such companies require at least two members.
Cooperative companies were also excluded, as they are formed though the association of individuals to achieve a common interest. Such companies can be formed as cooperatives of consumers or producers or as savings and loan companies.
Therefore, a general partnership, limited partnership or limited stock partnership must be converted into a stock corporation or limited liability company in order to have a single member.
Single-member companies are not considered a form of stock corporation or limited liability company; rather, the law simply allows a stock corporation or limited liability company to have a single member. The rationale is mainly to avoid formalities, such as the publication of notices and registration with the Commercial Registry. For example, if single-member companies were considered a form of stock corporation, it would be necessary to convert the company into a single-member company through resolutions of the extraordinary shareholders' meeting, which would have to be formalised before a public broker or notary and recorded with the registry. By allowing stock corporations and limited liability companies to have a single member, existing companies can simply reduce or amortise the participation of members that are no longer required or arrange for the members to sell their interests.
The amendments proposed in the bill are straightforward. A paragraph has been added to the provision of the General Law of Commercial Companies that establishes the forms of commercial company, indicating that a single-member company is a limited liability company or stock corporation with only one member.
The sections defining the terms 'limited liability company' and 'stock corporation' have been amended to establish that:
The rationale behind the requirement to minute the member's decisions is that such a company should not be its member's alter ego. Single members should ensure that they comply with these formalities, as the Mexican courts may well decide to follow a worldwide trend and pierce the corporate veil if they suspect that a company is a mere alter ego of its sole member.
The section that establishes the requirements for forming stock corporations has been amended to establish that one such requirement is to have one or more shareholders. Moreover, the section that establishes reasons for dissolution of a company has been clarified, so that having only one member cannot be interpreted as grounds for dissolving a limited liability company or a stock corporation.
For further information on this topic please contact Graciela M Diedrich at Béndiksen, Diedrich, Enríquez, Salazar, Santoyo & Yanar by telephone (+52 55 3687 7285) or email (firstname.lastname@example.org).
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