Beyond limited liability - the corporate veil in Mexican law and its challenges

Fernando González

Chevez, Ruiz, Zamarripa y Cía, Mexico City

fgonzalez@chevez.com.mx

María Fernanda Lores

Chevez, Ruiz, Zamarripa y Cía, Mexico City

mfloresv@chevez.com.mx

Oscar Vázquez López

Chevez, Ruiz, Zamarripa y Cía, Mexico City

ovazquez@chevez.com.mx

Introduction

Mexican corporate law acknowledges a simple but decisive idea: a company is a legal person distinct from its members. As an autonomous legal entity, the company can be the beneficiary of rights and incur obligations separate from those of its partners or shareholders. This is the keystone that allows businesses to be organised, attract investment and operate with certainty about the allocated risks.

Based on this premise, the legal system provides limited liability: those who invest in a company are only liable up to the amount of their contributions. From this principle emerges what is commonly referred to as the ‘corporate veil’: the practical consequence of recognising the company as an independent legal entity creates a barrier that prevents corporate liabilities from automatically extending to the personal estate of shareholders.

Under Mexican law, this separation has traditionally been the rule, and its disregard operates as an exceptional and extraordinary measure. The corporate veil remains a cornerstone of Mexican corporate law, but its effectiveness depends on the consistency between legal structure and operational reality.

The corporate veil as an institutional safeguard

The corporate veil is the institutional consequence of a deliberate legal design: the commercial company is a legal person distinct from its shareholders, with its own assets and independent liability.

Its legal foundation rests on two complementary layers. The Federal Civil Code (Código Civil Federal or CCF) recognises legal entities as separate subjects of law from the persons who compose them (either individuals and/or other entities). Accordingly, the General Law of Business Organisations (Ley General de Sociedades Mercantiles or LGSM) provides limited liability as a defining feature of the most commonly used corporate regimes. In both the sociedad anónima and the sociedad de responsabilidad limitada corporate structures, investors are, in essence, not personally liable for corporate obligations beyond their contributions in the relevant entity.

This separation is reinforced by formalities that make the company identifiable to third parties, including bylaws and public registry filings. These mechanisms create a framework of trust for creditors, counterparties and authorities.

Precisely because the corporate veil has such an important institutional role, its disregard cannot be routine or discretionary. While Mexican law does not contain a general statutory framework for veil-piercing, it does recognise specific exceptional scenarios in which the estate separation and liability limitation may be disregarded, and shareholders or representatives may be held liable for the company’s actions. These situations are addressed through targeted statutory responses to abusive or irregular conduct. In such cases, the law expressly allows authorities or creditors to extend liability beyond the corporate entity when defined legal conditions are met.[1] In addition, criminal law regimes allow liability to reach individuals when the corporate entity is used as an instrument for the commission of offences. In recent times, estate separation has been disregarded by courts with a logic of exception, grounded in general principles of law and civil rules on simulation and nullity, applied on a case-by-case basis.

Typical triggers for this analysis are well recognised. Simulation arises when the corporate structure exists only on paper to conceal reality. Fraud against the law occurs when the company is used to evade legal obligations. Commingling of assets appears when the company and its owners operate indistinguishably through mixed accounts, personal use of corporate assets or lack of basic controls. Underlying all of these is the instrumental use of the company to harm third parties who reasonably relied on its apparent autonomy.

The standard applied by courts is substantive rather than formal. What matters is not merely whether the company is properly incorporated or registered, but whether the entity reflects a genuine economic reality and fulfils key obligations. In recent years, authorities have incorporated materiality and substance-based reviews into the application of these exceptional liability regimes, reinforcing the idea that formal compliance alone is no longer sufficient to guarantee protection.

Mexico versus the United States

A brief comparison with US law confirms that this logic is not a Mexican particularity. In the US, the doctrine of ‘piercing the corporate veil’ varies between states, but the structural criteria are uniform: strong presumption in favour of the separation of assets, with the burden of proof always falling on the person requesting the lifting.

The classic test requires two concurrent elements: that the company is the alter ego of the person who controls it (accredited by undercapitalisation, mixing of assets, absence of formalities and instrumental use of the company) and that maintaining the separation would produce a result that sanctions fraud or promotes injustice. Neither of them, on their own, is enough.

Delaware, the dominant incorporation jurisdiction in the corporate world (at least until recent times), is particularly rigorous in requiring both elements. Mere total control, sole proprietorship or default on a debt are not enough.

The shift of focus: from form to substance

The corporate veil in Mexican legal framework is not going anywhere. What has changed is the standard used to determine whether it deserves protection. In the past, proper incorporation and formal compliance were often sufficient. Today, the central question is not merely whether the company exists as a separate legal entity, but whether its shareholders use that separation legitimately or instrumentalise it as an artificial arrangement.

The evolution of this criterion is explained through different aspects. One is the growing emphasis on identifying beneficial ownership, which reduces the ability to conceal control and decision-making behind complex structures. Another is the modern tax approach, which prioritises economic substance and business purpose over formal documentation. Anti-money laundering (AML) and know-your-customer (KYC) requirements have also strengthened expectations of transparency, traceability and internal controls.

At the same time, corporate disputes are increasingly resolved through detailed examination of operational conduct rather than formal documentation alone. Courts focus on how decisions were made, how transactions were executed and whether corporate autonomy existed in practice.

For business actors, the implication is clear: preserving the benefits of corporate separateness requires demonstrating it in practice, not merely asserting it.

Congressional bill with founding principles to pierce the corporate veil

On 28 July 2025, a bill was submitted to the Mexican Congress proposing a Federal Law on Liability for Abuse of Legal Personality and Piercing of the Corporate Veil. Currently under legislative analysis, this initiative represents an innovative attempt in Mexico to regulate, within a single statute, the grounds, standards and procedures governing disregard of legal personality.

The bill reaffirms investors’ limited liability as a pillar of modern commercial law while seeking to organise a practice previously developed in fragmented form by courts. The bill characterises veil-piercing as an exceptional and subsidiary remedy, subject to due process and applicable only when abuse, simulation or harm to third parties is proven.

The message should not generate alarm. Structures that operate with transparency, real asset separation and legitimate purpose have nothing to fear. The bill is directed at those who use the corporate form as a mechanism of concealment or abuse. However, for those who rely on the corporate formalities without any underlying reality to support it, the legal exposure is real, growing and no longer theoretical.

From veil to armour: the operational dimension

With this new perception, the corporate veil derives its strength from the way a company operates on a day-to-day basis. Its effectiveness does not rest solely on statutory recognition or judicial standards, but on consistent organisational discipline. Corporate shielding is sustained over time through verifiable practices that demonstrate that the legal entity operates as a genuinely autonomous subject. For the business owner, this translates into three structural imperatives:

• substance. Corporate structures must reflect a coherent business purpose, adequate capitalisation and effective asset separation in every transaction. The company must operate as a genuine economic unit, not merely as a formal shell;
• coherence. Legal form and actual operations must remain aligned on an ongoing basis, not only when a dispute is foreseeable. Governance, accounting, contracting and decision-making processes must consistently reflect the institutional reality of the entity; and
• anticipation and prevention. Corporate protection is not activated at the moment of crisis. It is constructed day by day, and its true value becomes evident in the moments of scrutiny that inevitably follow the decisions that determine its strength.

These imperatives materialise through concrete institutional practices. Essential concepts for implementing this new approach are the following:

• functional corporate governance: boards that actually deliberate, decisions that are properly documented, conflicts of interest managed through clear rules and traceability between what is approved and what is executed. When a company operates with discipline, its autonomy becomes credible;
• asset separation in daily operations: standalone accounting records for each entity, treasury controls and properly allocated assets;
• contractual substance, particularly within corporate groups: intercompany agreements (for services, licences, financing or trademark use) must have real content, be performed as agreed, include defensible terms and be supported by evidence of actual performance. When these conditions are met, the company demonstrates that its operations are authentic rather than merely instrumental; and
• adequate capitalisation and operational compliance: current beneficial ownership records, effective AML and KYC practices, basic internal policies and a culture that documents what matters.

These four pillars must be considered as minimum conditions for asset segregation to constitute an economic reality rather than a paper declaration.

Corporate protection does not materialise at the moment it is needed; it is the result of decisions made long before any dispute, audit or transaction arises. The practical conclusion is clear: what was not institutionally built should not be improvised during due diligence. Corporate shielding is an economic asset – one that is cultivated through sustained alignment between legal form and operational substance.

Conclusion

There is no question that limited liability in commercial companies (ie, the corporate veil), is a fundamental pillar of corporate organisation for business in Mexico. While the concept is evolving, its essential substance and relevance remain untouched. But it must be taken care of.

The principle of asset and liabilities separation enshrined in the LGSM and the CCF has not been repealed or supplanted by an expansive liability regime. Limited liability remains the rule: piercing the veil remains the exception. However, to suggest that nothing has changed would be equally mistaken. What has changed is the context within which the corporate veil operates.

The contemporary Mexican framework no longer affords automatic protection to the corporate veil in all cases. The beneficial ownership regime, the rules governing fiscal substance, AML obligations and the Supreme Court jurisprudence, converge on the same principle: corporate autonomy is protected when exercised with genuine coherence and it is challenged when it becomes an instrument of opacity or fraud.

The protection of limited liability rests on demonstration rather than invocation. It depends on sustained alignment between legal form and operational substance, built over time through institutional discipline. In this context, compliance and preventive measures are not ancillary obligations but structural safeguards. Real corporate governance practices, transparent information and internal controls are essential to preserve the credibility of asset separation. Substance, coherence and anticipation are the preventive foundations that justify estate separation in practice.