Introduction to Corp Entities

1. Sequence of Lecture
1. Form of Business Organizations (Sole Proprietor's, Partnership,
Corporate)
2. Important Concepts for Corporate Entities (MOA, AOA,
Prospectus, IPOs)
3. Corporate Governance (Workings, Basic Principles)
4. Corporate Governance (Audit Committee, Internal
Audit, Workings of Audit Committee)

2. Learning Goals
Forms of Business Organizations
Corporate governance
Corporate accountability
Audit Committee

3. Business Organizational Forms
Business Forms
Sole
Proprietorships
Partnerships Corporations

4. A Sole Proprietorship consists of one individual doing business
• The sole proprietorship is the simplest business form under which one
can operate a business. The sole proprietorship is not a legal entity. It
simply refers to a person who owns the business and is personally
responsible for its debts. A sole proprietorship can operate under the
name of its owner or it can do business under a fictitious name, such
as ABC. The fictitious name is simply a trade name, it does not create
a legal entity separate from the sole proprietor owner.
• Definition: A business that legally has no separate existence from its
owner. Income and losses are taxed on the individual's personal income
tax return.

5. A Sole Proprietorship consists of one individual doing business
you’re the boss
Advantages
Ease of formation and dissolution.
Ownership of all profits.
Sole Proprietorships are typically
subject to fewer regulations.
No corporate income taxes
you keep all the profits
Disadvantages
Unlimited liability
Limited life
difficult for an individual to
raise capital

6. A Partnership consists of two or more individuals in business together
• A partnership is a form of business where two or more individuals
pool money, skills, and other resources , and share ownership, as well
as the responsibility for managing the company and the income or
losses the business generates. That income is paid to partners, who
then claim it on their personal tax returns - the business is not taxed
separately, as corporations are, on its profits or losses.
• Definition: A legal form of business operation between two or more
individuals who share management and profits.

7. A Partnership consists of two or more individuals in business together
Two heads (or more) are better than one
•
Advantages
Partnerships are relatively easy to
form
Partnerships may be subject to
fewer regulations than corporations
stronger potential of access to
greater amounts of capital.
No corporate income taxes
Disadvantages
Unlimited liability
Limited life
Possibility of disputes or conflicts
between partners

8. A company is a legal entity doing business
• Any three or more persons associated for lawful purpose may, by
subscribing their names to the Memorandum of Association and
complying with the requirements of the Companies Act, 2017 form
a public company and any two or more persons so associated may,
in like manner, form a private company.
• If only one member forms a private company it is called a single
member company (SMC).
• Definition: A form of business organization with the liability-shield
advantages of a corporation and the flexibility and tax pass-
through advantages of a partnership

9. A company is a legal entity doing business
•
Advantages
Unlimited commercial life
Greater flexibility in raising
capital
Ease of transferring ownership
Limited liability
Disadvantages
Regulatory restrictions
Higher organizational and
operational costs.
Double taxation

10. Memorandum of Association
• The first step in the formation of a company is to prepare
Memorandum of Association. This is also known as constitution of
the company.
CONTENTS OF MEMORANDUM OF ASSOCIATION
Name of the Registered
Company. Objects Liability
office
Capital Subscriber
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11. Memorandum of Association
Name of the Company
• The memorandum must state the name of the company with
‘limited ‘ as the word ,in case of a public limited company and
with ‘private limited', in the case of a private limited company.
• The company is free to choose any name but it must not be
undesirable or must not resemble the name of any other
registered company.
→ Kind of the company
Private Limited Limited
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12. Memorandum of Association
REGISTERED OFFICE CLAUSE
• The Province in which the registered office of
company will be situated is mentioned in this clause.
• The registered office of the company is the official
address of the company where the statutory books
and records must normally be kept
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13. Memorandum of Association
OBJECT CLAUSE
Principle Line of Business.
This clause is quite important and must be very carefully drafted as
it determines the activities of the company. In the object clause
each and every detail of activities of the business to be carried out
must be laid down.
• Main object:- this sub-clause contains the main objects of the
company to the pursued on its incorporation
• Objects incidental or ancillary :- it covers the objects which are
incidental or ancillary to the attainment of the main object
• Other objects :- this sub-clause will cover any objects which are not
included in the main objects
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14. Memorandum of Association
LAIBILITY CLAUSE
→ Liability of Member is Limited.
• In the case of a company limited by share the fact that the liability of
its members is limited must be made absolutely clear. In case of a
company limited by shares the liability of a member is limited to the
nominal value of the share held by him
→ Liability of Member is guaranteed.
• In case of a company limited by guarantee, the liability clause must
state the amount which every member undertakes to contribute to
the assets of the company in the event of its winding up
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15. Memorandum of Association
SHARE CAPITAL CLAUSE
→ Total Paid Up Capital.
→ Number of Shares.
→ Mentioned Share Price.
• This clause states that amount of the capital with which the
company is to be registered This clause should also state the
number and face value of shares into which the capital of the
company is divided
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16. Memorandum of Association
SUBSCRIPTION CLAUSE
→ Particular of Subscriber.
Name NIC Father Name Nationality
Occupation Residential Address No of Shares
Signature.
• In this cause , the subscribes declare that they desire to be
formed into a company and agree to take the shares stated
against their names. The names, address and occupation of
the subscribers must be given each subscriber must sign.
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17. Article of Association
• A document that specifies the regulations for a company's
operations. The articles of association define the company's
purpose and lays out how tasks are to be accomplished within
the organization, including the process for appointing directors
and how financial records will be handled.
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18. Article of Association
• Items covered by the Articles of Association include :-
Adoption of preliminary contracts. Number and value of shares
Allotment of shares
Transmission of Shares
Alteration of share capital
Conversion of shares into stocks
Voting rights, proxies and polls
Appointment of Directors
Dividend and Reserves
Procedure of winding up
Transfer of shares
Forfeiture, reissue, surrender of Shares
Share certificates
Meetings and proceedings
Borrowing powers
Remuneration, etc of Directors
Accounts and audit
Seal of the company.
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19. Prospectus
• A prospectus is a formal document that is required by and
filed with the Securities and Exchange Commission (SEC)
that provides details about an investment offering for sale
to the public. A prospectus is filed for stock, bond, and
mutual fund offerings. A prospectus is used to help
investors make a more informed investment decision.
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20. Prospectus
A prospectus includes some of the following information:
• A brief summary of the company’s background and financial information
• The name of the company issuing the stock
• The number of shares
• Type of securities being offered
• Whether an offering is public or private
• Names of the company’s principals
• Names of the banks or financial companies performing the underwriting
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21. The Initial Public Offering (IPO)
• The Initial Public Offering IPO Process is where a previously unlisted
company sells new or existing securities and offers them to the public for
the first time.
• Prior to an IPO, a company is considered to be private - with a smaller
number of shareholders and company decides to go public.
• Almost all companies go public primarily because they need money to
expand the business.
• After an IPO, the issuing company becomes a publicly listed company on a
recognized stock exchange. Thus, an IPO is also commonly known as “going
public”.
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22. The Initial Public Offering (IPO)
Good time to do an IPO :
• There are clear “windows of opportunity” that open and close for
IPO issuers
• Determinants of suitability:
The general stock market condition
The industry market condition
The frequency and size of all IPO’s in the financial cycle
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23. The Initial Public Offering (IPO)
Process / Outline of the IPO :
Select an underwriter
Register IPO with the SEC
Print prospectus
Present roadshow
Price the securities
Sell the securities
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24. How companies are run: Corporate Governance
• Corporate governance is "the system by which companies are directed and
controlled"
• Corporate governance consists of two elements:
The long term relationship which has to deal with checks and balances,
incentives for manager and communications between management and
investors;
The transactional relationship which involves dealing with disclosure
and authority.

25. Let us understand the working of corporate entities
The Management (The bureaucracy)
The Board of Directors (The cabinet)
Common Shareholders (AGM-The Parliament)

26. Basic Principles of Corporate Governance
Protection of shareholders’ rights: the protection of shareholders and maintaining
investor confidence at all times in way of ensuring the continuous inflow of needed
capital.
Equitable treatment of shareholders: the equitable treatment of all equity investors,
including minority shareholders
Protection of stakeholders’ rights: the skillful consideration and balancing of the
interests of all stakeholders, including employees, customers, partners, and the local
community.
Accurate disclosure of information: the accurate and timely disclosure of clear,
consistent, and comparable information in good times and bad times
Diligent exercise of board responsibilities: Board elections should be totally free from
political interference and board members should exercise their responsibilities diligently
and independently.

27. Basic Principles of Corporate Governance
• Criteria for sound and prudent management:
• The business of the Public Sector Company is carried on with
integrity, objectivity, due care and the professional skills appropriate
to the nature and scale of its activities;
• Composition of the Board.
• The Board shall have at least one-third of its total members as
independent directors. The Public Sector Company shall disclose in
the annual report non-executive, executive and independent directors.

28. Corporate Governance
• “Executive” means an employee of a Public Sector Company, who
is entrusted with responsibilities of an administrative or managerial
nature, including the Chief Executive and Executive Director ;
• “Non-Executive Director” means a director of a Public Sector
Company who is not entrusted with responsibilities of an
administrative or managerial nature;

29. Corporate Governance
• “Independent Director” means a Non-Executive Director who is
not in the service of Pakistan or of any statutory body or any body
or institution owned or controlled by the Government and who is
not connected or does not have any other relationship, whether
pecuniary or otherwise, with the Public Sector Company, its
associated companies, subsidiaries, holding company or directors.

30. Basic Principles of Corporate Governance
Term of office and removal of directors.:
• A director, once appointed or elected under section 180 or section 178 of the
Ordinance, shall hold office for a period of three years, unless he resigns or is
removed in accordance with the provisions of the Ordinance. ;
Role of the chairman and chief executive and separation of the two positions
• The office of the chairman shall be separate, and his responsibilities distinct,
from those of the chief executive.
• The chairman ensure that the Board is properly working
• The chief executive is responsible for the management of the Public Sector
Company and for its procedures in financial and other matters , subject to the
oversight and directions of the Board,

31. Basic Principles of Corporate Governance
Meetings of the Board :
• The Board shall meet at least once, each quarter of a year, to ensure that it
discharges its duties and obligations to shareholders and other stakeholders
efficiently and effectively. In case of non-compliance, the same shall be
reported to the Commission with reasons of non-compliance, within fourteen
days of the end of the quarter in which the meeting should have been held. ;

32. Audits Committee
• Internal Audit- for the Board of Directors
• External Audit- for the shareholders
• Government audit- for PAC
• - Audit Committee
• - Human Resources & Remuneration committee
• -Procurement committee

33. Internal Audit
• There shall be an internal audit function in every listed company. The
Head of internal Audit shall functionally report to the Audit Committee
and administratively to the CEO
• A director cannot be appointed, in any capacity, in the internal audit
function, to ensure independence of the internal audit function.

34. Audits Committee
• Audit Committee
The audit committee functions to enhance confidence in the integrity of an
entity’s processes and procedures relating to internal control and corporate
reporting. Boards of Directors rely on audit committees
Frequency of meeting
Attendance at meeting
Term of Reference
Reporting Procedure

35. Audit Committee Composition
• The audit committee is a committee of Board of Directors
consisting at least3members comprising of non executive
directors and al least one independent Director. The chairman of
the committee shall preferable be an independent director, who
shall not be the chairman of the board. The board shall satisficed
itself such that at least one member of the audit has relevant
financial skills/ expertise and experience

36. Frequency of meeting
The Audit Committee of a listed company shall meet at least
once every quarter of the financial year. These meetings shall
be held prior to the approval of interim results of the listed
company by its Board of Directors and before and after
completion of external audit. A meeting of the Audit
Committee shall also be held, if requested by the external
auditors or the head of internal audit

37. Attendance at meeting
The CFO, the head of internal audit and a representative of
the external auditors shall attend meetings of the Audit
Committee at which issues relating to accounts and audit are
discussed.
Provided that at least once a year, the Audit Committee shall
meet the external auditors without the CFO and the head of
internal audit being present. Provided further that at least once
a year, the Audit Committee shall meet the head of internal
audit and other members of the internal audit function without
the CFO and the external auditors being present.

38. TERMS OF REFERENCE
• The Board of Directors of every listed company shall determine the terms of
reference of the Audit Committee. The Audit Committee shall, among other
things, be responsible for recommending to the Board of Directors the
appointment of external auditors by the listed company’s shareholders and
shall consider any questions of resignation or removal of external auditors,
audit fees and provision by external auditors of any service to the listed
company in addition to audit of its financial statements. In the absence of
strong grounds to proceed otherwise, the Board of Directors shall act in
accordance with the recommendations of the Audit Committee in all these
matters.
• The terms of reference of the Audit Committee shall also include the
following:

39. TERMS OF REFERENCE
determination of appropriate measures to safeguard the listed company’s
assets
review of quarterly, half yearly and annual financial statements of the
listed company, prior to their approval by the Board of Directors:
major judgmental areas;
significant adjustments resulting from the audit;
the going concern assumption;
any changes in accounting policies and practices;
compliance with applicable accounting standards;
compliance with listing regulations and other statutory and regulatory
requirements; and significant related party transactions

40. TERMS OF REFERENCE
review of preliminary announcements of results prior to publication;
facilitating the external audit and discussion with external auditors of major
observations arising from interim and final audits and any matter that the
auditors may wish to highlight (in the absence of management, where
necessary);
review of management letter issued by external auditors and management’s
response thereto;
ensuring coordination between the internal and external auditors of the
listed company;
review of the scope and extent of internal audit and ensuring that the
internal audit function has adequate resources and is appropriately placed
within the listed company;

41. TERMS OF REFERENCE
consideration of major findings of internal investigations of activities
characterized by fraud, corruption and abuse of power and management's
response hereto;
ascertaining that the internal control systems including financial and operational
controls, accounting systems for timely and appropriate recording of purchases
and sales, receipts and payments, assets and liabilities and the reporting structure
are adequate and effective;
review of the listed company’s statement on internal control systems prior to
endorsement by the Board of Directors and internal audit reports;

42. TERMS OF REFERENCE
instituting special projects, value for money studies or other investigations on any
matter specified by the Board of Directors, in consultation with the CEO and to
consider remittance of any matter to the external auditors or to any other external
body;
determination of compliance with relevant statutory requirements;
monitoring compliance with the best practices of corporate governance and
identification of significant violations thereof; and
consideration of any other issue or matter as may be assigned by the Board of
Directors

43. Reporting Procedure
• The Audit Committee of a listed company shall appoint a secretary of
the committee who shall either be the Company Secretary or Head of
Internal Audit. However, CFO shall not be appointed as the secretary
to the Audit Committee. The secretary shall circulate minutes of
meetings of the Audit Committee to all members, directors, Head of
internal Audit and the CFO prior to the next meeting of the board and
where this is not practicable, the Chairman of the Audit Committee
shall communicate a synopsis of the proceedings to the board and the
minutes shall be circulated immediately after the meeting of the board.