Liability
Non-compete rules
Comment
One of the choices that an investor must make is the form of company through which it will do business in Mexico. There are several forms of commercial company in Mexico, including:
- the general partnership;
- the limited partnership;
- the limited liability company;
- the stock corporation; and
- the stock limited partnership.
The decisive factor in choosing a particular corporate structure is often the liability that its members may incur. The most frequently used corporate vehicles are the stock corporation and the limited liability company, because the liability of their shareholders or members is limited to their contributions. In contrast, all partners in a general partnership - and the general partners in limited partnerships and stock limited partnerships - have subsidiary, joint, several and unlimited liability for the partnership's obligations.
The partners' liability is subsidiary because the partnership's creditors can claim against the partners only if the company's assets are insufficient to cover the claim.
Joint and several liability means that if the company has insufficient assets, its creditors can claim against any of the partners in respect of the company's obligations, regardless of the partner's individual share in the company or in its liability. In addition, if creditors claim against a partner and the latter proves to be insolvent, they may claim against any of the other partners.
Unlimited liability means that the partners are liable for all of the company's obligations to their entire net worth.
A company's partners may agree to limit the liability of one or more partners to a certain portion or quota. However, such an agreement will be effective only among the partners and will have no effect on third parties.
Non-compete rules
Another factor to consider is whether members can compete with the company's business. The shareholders of a stock corporation and the members of a limited liability company can freely engage in business in competition with the activities of their respective companies; they can also form part of other companies that engage in competing business.
The law prohibits partners of general and limited partnerships, as well as general partners of stock limited partnerships, from engaging directly or indirectly in business in competition with the company and from forming part of another company that engages in such business. However, limited partners of stock limited partnerships are free to engage in any type of business. The limitation on all partners of general and limited partnerships and general partners of stock limited partnerships may be waived with the consent of the other partners.
In the event that a partner breaches a non-compete obligation, the partnership may exclude the partner, withhold benefits(eg, dividends) and claim damages. However, the company has a relatively short period in which to act: three months from the date on which the company becomes aware of the violation.
Partnerships are increasingly regarded as commercially obsolete as a result of the personal liability that they impose on their partners. However, the rules of such corporate vehicles ensure that their partners cannot compete with the company without consent. This may prove advantageous when dealing with antitrust issues.
An investor must weigh the benefit of such a competition limitation against the liability which it may incur though a general or limited partnership. In the case of a limited partner in a stock limited partnership, only the general partner is liable for the company's obligations and is bound by the non-compete requirement.
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 ([email protected]).