Types and formation of partnerships
Sources of partnership lawWhat is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?
Partnerships, partnership-like structures and companies are mostly regulated by the General Law of Commercial Companies. Partnerships are also regulated by the General Law of Cooperative Partnerships, and commercial companies are regulated under the Securities and Exchange Law. All laws are at the federal level.
Partnerships and companies require a name, and are considered to be constituted as legal entities with their own legal personality. The law establishes provisions that are applicable specifically to limited liability stock companies. The provisions are applicable mutatis mutandis to other types of partnerships, partnership-like structures and companies.
Types of partnershipsIdentify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?
The different types of partnerships in Mexico, which are regulated by the General Law for Commercial Companies, are general partnerships, limited partnerships and limited partnerships by shares; however, general partnerships are no longer used, and there are increasingly fewer instances of the other two types of partnership. This is owing to the fact that, under most partnership structures, all partners have unlimited and joint liability for all obligations to which the partnership may be responsible.
Partnerships are typically used for savings and loan cooperatives or for recreation centres.
Differences between types of partnershipWhat are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?
A partnership has its own legal personality and therefore functions as a single entity, since it may acquire obligations under its own name. However, while a corporation’s shareholders have limited liability exclusively for their contributions to the corporation’s capital, partners have unlimited liability, unless the opposite is stated in the by-laws.
Reasons for choosing a partnership structureWhat are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?
While small businesses usually adopt a form of partnership to represent their common interests, the most common types of business in Mexico are corporations and limited liability companies. The limited liability stock company is the most common corporate structure for operating a business, being as easy to constitute and operate as a limited liability partnership would be in other countries. However, most international companies constituting subsidiaries in Mexico opt for limited liability companies.
Formation (formalities and bars to formation)How are partnerships and the similar structures available in your jurisdiction formed?
Partnerships require a formation document containing by-laws, where partners state their intent to form a partnership. In these by-laws, partners specify the name, nationality and address of the individuals or entities that constitute the partnership, and their corporate purpose, to determine the partnership’s activities. These by-laws must also include the duration of the partnership (which can be indefinite, but this must be stated). Similarly, the by-laws must detail corporate capital and how much each partner will initially contribute. In limited partnerships, the by-laws may also include the responsibility of each partner, and detail who has unlimited and limited responsibility. The by-laws must also include the partnership’s address; this will set the jurisdiction in case of controversy for the partnership, and the administration of the partnership if it will not be managed by all partners. Finally, the by-laws may also include causes for dissolution and liquidation processes to terminate the partnership, as well as causes other than those provided that can allow a partner to withdraw from the partnership.
The formation document must then be ratified before a notary, who will issue a public deed that will determine the constitution of the partnership. With this document, the partnership will then be registered with the tax authorities to obtain an identity document or taxpayer contribution identification, and then with the Public Registry of Property and Commerce. Once all of these formalities are completed, the partnership will become its own legal entity.
Regulation
TaxationHow are partnerships taxed?
Partnerships are taxed the same as corporations. Federal law imposes that all entities legally considered to be ‘moral persons’ are taxed based on Income Tax Law and Value Added Tax Law. These taxes are paid annually, at the end of the fiscal year. State and local governments generally impose taxes on real property and some states levy taxes on salaries and wages, generally paid by the employer. Partners pay income tax based on the dividends they receive. The Value Added Tax Law generally benefits the partnership, since these taxes are often returned, as the partnership is not usually the last consumer and it is the last consumer who pays value added tax.
Mexico has adhered to approximately 60 double taxation treaties on income. A partnership is subject to tax when the main management of the business is based in Mexican territory.
Reporting and transparency requirementsTo what extent must partnerships, LLPs and similar structures file accounts and other documents and information with a government agency?
All types of entities, whether corporations or partnerships, must comply with accounting norms and regulations. However, some are more strictly regulated than others. For instance, public corporations must file reports quarterly that must be transparent and audited. On the other hand, partnerships, if unlimited, are not subject to audited accounts.
One can review the public registry for documents regarding general partners’ meetings (if published) and a partnership’s formation. However, the information regarding financial or accounting conditions generally remain private, unless a specific topic has been discussed in a meeting made public.
Ownership and membershipCan anyone be a partner, and, if not, who can and cannot? Can bodies corporate or other partnerships own a partnership?
Partners must be individuals or entities who have the legal ability to trade, and must have the capacity to exercise their rights. Although it is not legally prohibited for other partnerships or corporations to be involved in a partnership, it is very rare, owing to the complication of unlimited responsibility of the partners in a partnership.
In general partnerships, all partners must respond in such a way, unlimitedly and jointly; in limited partnerships, certain partners can have unlimited responsibility, while others have limited responsibility according to the applicable law. If a person’s name appears in the partnership’s name, then he or she must respond unlimitedly and jointly, and cannot agree to a limited liability.
Execution of documentsHow do partnerships and LLPs execute documents? Must all partners sign? Can the partnership or LLP sign in its own name?
Usually, partnerships will appoint a legal representative to execute documents; however, if there is no legal representative and all partners are also administrators, an administrators’ meeting will be held. In an administrators’ meeting, a decision will be made by unanimous consent or majority vote, and a delegate will then be appointed to execute the resolution in the partnership’s name. Through either of the aforementioned methods to execute documents, the partnership, and thus the partners, are legally bound to the obligations acquired.
Benefits, employment rights and partners’ duties
Remuneration and benefitsTo what extent are partners free to agree how to share profits and what are the most common types of profit-sharing arrangements?
Essentially, partners are free to agree how profits are shared. The only legal exceptions to this are that the partnership must comply with a legally instituted monetary reserve; the partnership must have generated a profit, not losses, for the period of time; and no partner can be individually excluded from receiving profits. Other than the previously stated exemptions, partners are free to agree how profits will be distributed, generally through dividends, or reinvested within the partnership.
Employment rightsTo what extent are partners considered employees? Do they benefit from statutory employment rights?
Partners are not considered employees. They benefit exclusively from rights related to corporate law and what is stated in the by-laws. However, it is not forbidden for a partner to also be hired as an employee of the partnership, in which case the partner becomes entitled to the statutory employment rights applicable to any other employee. An exception to this rule may be if the partner represents the majority of the stake, as he or she could not be subordinated to him or herself.
Partners’ dutiesIs there a statutory or common law concept of good faith among partners, and what are its implications? What are typical contractual duties between partners or owed by partners to their firms?
Mexican law states that all legal acts must be based on good faith. The constitution of a partnership, being a legal act, must be subject to this. The implications of good faith are intertwined with the general legal principle ‘No one can benefit from one’s own ill intent’. Therefore, a lack of good faith in a partnership or in the constitution of a partnership can lead to the nullification of the partnership. A partnership could be declared nonexistent, piercing the corporate veil in the worst-case scenario, or the acts executed by the partnership with third parties could be declared null, with repercussions against the partnership.
Entering and leaving the partnership
Joining the partnershipHow do prospective partners typically enter the partnership? Are there any formalities?
The partnership can decide in its own by-laws the requirements needed to consider the incorporation of a new partner and the rights that other partners have once a new partner has entered the partnership. Typically, because of their unlimited and joint nature, partnerships require the unanimous consent of all partners for a new partner to enter the agreement. Another typical process is one without unanimous consent, but where those who disagree have the right to leave the partnership. Since partners respond together and for each other, there should be a material element of trust; therefore, the choice of who belongs, who is admitted and who decides to leave the partnership are essential negotiations partners must conduct.
The legal formalities for new partners to join the partnership are essentially the same formalities required for shareholders in corporations. In essence, there must be an agreement between the partners set on a written partners’ general meeting, in which the new partner is admitted. Such participation must then be registered in the legally stated partners’ registry book for it to have legal effect among partners and before third parties.
Leaving the partnershipCan partners leave a firm without the agreement of the other partners, and must they serve a notice period? Will a partner receive back any capital invested, a share of the value of the partnership or any other payments on leaving? In what circumstances can a partner be required to leave a firm?
Given the partnership’s nature, partners are usually more free to leave than corporate shareholders. Usually, if there is a disagreement about whether to subject the partnership to a certain obligation, a change in its organic structure, substantial amendments of its by-laws, the admission of new partners or other similar situations, partners are free to retire from the partnership.
If a partner wishes to leave the partnership and has yet to fulfil a certain obligation, his or her contributions to the partnership may be withheld by the remaining partners until the obligation is fulfilled, even after leaving the partnership. Meanwhile, it is often the case in the partnership’s by-laws that, if a partner is to retire, he or she must notify the other partners with the assistance of a notary public and it will not have legal effect until the end of the annual accounting period on 31 December.
Disputes and redress
Recovering losses caused by partnersMay partners sue for loss caused by another partner?
According to the general principle of law, and pursuant to the subsidiary nature of civil law to company law, civil liability is an obligation to compensate damage caused by a breach of a contract or to repair damage caused to a third party, usually through the payment of compensation for damage.
Therefore, a partner may sue another partner through standard means. A right of action may accrue to the partnership itself as well as the partners.
DisputesHow are disputes among partners and between individual partners and the partnership itself typically handled?
Partners may introduce in the company’s by-laws or partners’ agreement an alternative dispute resolution, which can include negotiation, mediation and arbitration, instead of state courts. If these alternatives are not included in the by-laws, disputes will be resolved before state courts, specifically of the address stated in the partnership’s constitution. The most common type of dispute resolution is before the state courts. Since partnerships are infrequent in Mexico, data regarding the most common types of partnership disputes is not available.
Dissolving the partnership
DissolutionHow are partnerships voluntarily dissolved?
According to the General Law of Commercial Companies, the dissolution process is the same process for partnerships and corporations. There can be an established process in the company’s by-laws for a dissolution process as well as causes that may trigger a dissolution; however, the process always falls under the framework of the applicable law. The partnership must file for dissolution before the Public Registry of Commerce for the process to be executed, and appoint a liquidator who will be the legal representative and in charge of liquidating all assets or debts of the partnership. In the case of general partnerships, these can be dissolved by the separation, retirement or death of the partners.
Update and trends
Emerging trendsAre there any emerging trends or hot topics in your jurisdiction?
No updates at this time.