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Lecture 3

LEGL 2700 Lecture 3: Legal 2700 Test 3

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Legal Studies
LEGL 2700

1 Legal Test 3 April 1, 2016 Chapter 14 Business Organizations Forms of Business Organizations • Basic o Sole proprietorship o Partnerships o Corporations • Hybrid o Limited partnerships o S corporations o Limited liability companies o Limited liability partnerships Factors to Consider When Selecting a Business’s Organizational Form • Cost of creation o Referring to the legal steps it takes to be considered an organization o Most people more concerned with how much paper work and how much time it will take rather than how much money it will cost • Continuity of the organization o Stability and durability of the organization o A death, retirement, or withdrawal of an owner creates issues of whether an organization and its business will continue ▪ A dissolution is any exchange in the ownership of an organization that changes the legal existence of the organization • Managerial control of decisions o Consideration of potential conflict and mechanisms to resolve disputes are essential to consider when selecting a form for a business venture • Owner Liability o To what degree with the owner personally liable for the debts of the business organization? o When is the owner liable under the law for harm caused by the business organization? • Taxation o How is the income of the business taxed? o How is the money distributed to the owners taxed? Corporate Form Selection Factors Sole Proprietorship 2 • Creation o Easiest and least expensive business organization to create o Legally no formal documentation o Only need business licenses o A business may shift from the proprietorship form as it becomes more successful • Continuity o So long as proprietor desires, but no transfer to others o Proprietorship’s continuity is tied directly to the will of the owner • Control o Sole proprietor is in total control of the business’s goal and operations • Liability o Personal obligation for all debts and liabilities o Owner has unlimited liability for the obligations for the business organization • Taxation o All business income subject to personal taxation whether the proprietor actually receives any of the income from the organization or not o Not taxed as an organization Partnership ❖ Agreement between two or more persons to share a common interest in commercial endeavor and to share losses and profits. o The word persons should be interpreted broadly enough to allow business organizations, as well as individuals, to form a partnership • Creation o Relatively minimal costs for creation o Automatic based on business conduct o Modified by agreement o The creation does not need to get permission from each state in which is does business o If there are two or more persons, a common interest n business, and they share profits or loses they are a partnership whether they call themselves partners or not ▪ However, partners should never rely on implied agreements and should instead explicitly state the agreement among the parties drafted into a formal document called the Articles of Partnership. ▪ A partnership also has to give notice as to their actual identity of the members under the assumed-name statue. • Continuity o Dissolved whenever one partner withdraws o If a partner dies, retires, or otherwise withdraws from the organization the partnership is dissolved. It is generally said that 3 the partnership organization is easily dissolved. Even if the partnership agreement provides that the partnership will continue for a stated number of year, any partner retains the power to dissolve the organization o Dissolution is not the same things as terminating an organization’s business activity. Termination involved the winding up or liquidating of a business; dissolution simply means the legal form of organization no longer exists. o Buy and Sell Agreement: Should be entered into when he business entity is created; provides for the amount and manner of compensation for the interest of the deceased or withdrawing owner • Control o Each partner has equal voice unless modified by an agreement • Liability o All partners in a general partnership have personal obligation for all debts and unlimited liabilities. o These partner’s personal assets, which are not associate with the partnership, may be claimed by the partnership’s creditors. o Joint and several liability • Taxation o Partnerships are not a taxable entity o A partnership files an information return that allocates to each partner his or her proportionate share of profits or losses from operations, dividend income, capital gains or loses, and other items would affect the income tax owed by a partnership. Partners then report their share of such items on their individual income tax returns, irrespective of whether they have actually received the items o All business income subject to personal taxation o Divided equally 4 April 4, 2016 Corporation ❖ A corporation is an artificial, intangible entity created under the authority of a state’s law. o Domestic corporation: in the state in which it is incorporated o Foreign corporation: in all other states o Alien corporation: corporation created under the authority of a foreign country • Creation o Incorporators apply for state charter with Articles of Incorporations ▪ Must contain the proposed name including “corporation,” “company,” “incorporated,” or “limited.” ▪ A corporate name must not be the same or similar to the name of any domestic corporation of a foreign corporation authorized to do business in the state ▪ Include corporation’s period of duration, the purpose for which it is formed, the number of authorized shares, and information about the initial corporate officials o Corporations are more costly to form because of costs of creation (fees) and also annual costs to continue operations o Artificial and intangible entity created under the authority of a state’s law o Some organizations are owned by only a few people and are known as closely held ▪ Those who own a majority of a closely held corporation can rule with near-absolute authority ▪ If the majority is acting illegally or oppresses the rights of the minority, they may file a derivative suit ▪ There is no ready market stock should the holder desire to dispose of it o Other organizations may be owned by hundreds and these are known as publicly held ▪ The reason that publically held organizations are normally corporations is so that stockholders can transfer their ownership without interfering with the organizations management • Continuity o Perpetual o So long as it can conduct business • Control o Shareholders elect the board of directors o The directors set the objectives and goals and appoint officers who are charges with managing the daily operations o Officers hire the employees • Liability o Shareholder’s have limited personal liability 5 o Absent other commitments o Someone investing in a company listed on the NY stock exchange will incur no risk greater than the investment o If the company is a small, closely held corporation with limited assets and capital, it will be difficult for it to obtain credit on the strength of its own net worth. As practical matter, shareholders will usually be required to add their own individual liability as security for borrowing. o Shareholders have limited liability for contract like obligations that are imposed as a matter of law (such as taxes). Liability also is limited when the corporate obligation results from torts committed by the company employees while doing company business. ▪ If the corporate organization has been misused, the corporate entity is disregarded and this is known as piercing the corporate veil. If it is pierced, the shareholders are treated like partners who have unlimited liability o The Alter-Ego theory, by which the corporate veil can be pierced, may also be used to impose personal liability upon corporate officers, directors, and stockholders. • Taxation o Corporate income is taxed o Corporate rates may be lower than individual rates o Shareholders taxed only on income distributed o Double taxation: corporate revenue/income is taxed when recorded and then the dividend income is taxed for the shareholders despite it already having been taxed ▪ Avoiding Double Taxation: • Reasonable salaries paid to corporate officials may be deducted in computing the taxable income of the business • Corporations provide expense accounts for many employees including shareholders. These are used to purchase travel, food, and entertainment. When so used, the employee has compensation that is not taxed. In an attempt to close this tax loophole the law limits deductions for business meals and entertainment to 50% of the costs o For a deduction, business must be discussed directly before, during, or after the meal o Meal expenses are not deductible to the extend of the meal if it is lavish or extravagant • Capital structure of the corporation may include both common stock and interest-bearing loans from shareholders • Not pay dividends and to accumulate earnings 6 • A corporation may elect to file under Subchapter S of the Internal Revenue Code which eliminated the corporate tax • Advantages of Corporation: o This form is best practical means of bringing together a large number of investors o Control may be held by those with a minority of investment o Ownership may be divided into many unequal shares o Shareholders’ liabilities are limited to their investments o The organization can have perpetual existence o In addition to being owners, shareholders may be employees entitles to benefits such as workers comp • Disadvantages of Corporations: o The cost of forming and maintaining a corporation is significant because of formal procedural requirements o License fees and franchise taxes often are assessed against corporations but not partnerships o A corporation must be qualifies in all states where it is conducting local or intrastate business o Generally, corporations are subject to more governmental regulation at all levels than are other forms of business o Corporate income may be subject to double taxation • You cannot bring your case to court if you do business in a foreign state without registering your business in their state too • 501 C 3- nonprofit organizations o Must file articles of incorporation with the state o Run by a board of directors and has limited liability o Does not return profits to its owners. Instead returns profits to the organization to be used for future operations o Can have paid employees because that is considered an expense o Tax exempt Limited Partnership • Creation o Partnership agreement and certificate filed in public office in state business is conducted. This certificate contains: ▪ The name of the partnership ▪ The character of the business ▪ Its location ▪ The name and place of residence of each member ▪ Those who are to be the general partners and those who are to be the limited partners ▪ The length of time the partnership is to exist ▪ The amount of cash or the agreed value of property to be contributed by each partner ▪ Share of profit or compensation each limited partner gets 7 o The limited partnership certificate is required to be recorded in the country where the partnership has its principal place of business. An additional copy has to be filed in every community where the partnership conducts business or has an office • Continuity o Dissolved when general partner withdraws unless they have assigned their interest to another person • Control o Limited partners have no right to participate in management • Liability o Limited partners are not personally liable for the partnership’s debts o A limited partner’s surname may not be used in the partnership’s name unless there is a general partner with the same last name. If a partner’s name is used in the firm’s name, that partner will become personally liable to unsuspecting creditors. • Taxation o All business income subject to personal taxation S Corporation • Creation o Organizers apply for state charter with articles of incorporations o Shareholders of certain corporations unanimously elect to have the organization treated like a partnership for income tax purposes o Has all legal features of a corporation o Cannot have more than 100 shareholders ▪ Shareholders must be individuals. They cannot be other corporations or partnerships, etc. • Continuity o Perpetual- so long as number of shareholder limited • Control o Managed by officers o Appointed by directors who are elected by shareholders • Liability o Shareholder obligations limited to investment o Absent other commitments • Taxation o All business income subject to personal taxation o Shareholders have to account on their individual income tax returns for shares of profits or losses o Shareholders avoid having a tax assessed on the corporate income Limited Liability Company or Partnership • Creation o Organizers file articles of organization with state official o File Articles of Organization with the secretary of state o Call the creator organizers 8 o Have to include LLC in your name with filing with the state. You cannot try to mislead people by omitting it o Shareholders are called members • Continuity o The owners of an LLC are called members o Membership of an LLC is not limited to individuals o Dissolved when member withdraws or dies, but may be continued by those remaining if either provided in the articles of organization or if remaining members decide to continue within 90 days • Control o The managerial control of an LLC is vested in its members, unless the articles of organization provide for one of more managers o Equal management by members unless manager designed • Liability o Members are agents, but not liable to third parties • Taxation o State laws and IRS recognize LLCs as nontaxable entities o All business income subject to personal taxation • Limited liability company (LLC) o Treated as nontaxable entities o Owners have more flexibility compared to S corporations o Would be treated as non-taxable partnerships o Very popular • Limited Liability Partnership (LLP) o Variation of the LLC o Have characteristics of both a partnership and a corporation o Primarily used by doctors, lawyers, accountants, CPAs o No general partners o All limited personal liability ▪ If you are in practice with someone else and your partner makes a mistake it keeps people from coming after you because you are technically separate Deciding on Organizational Form • Making the decision on the form o Seek legal counsel o It is not unusual for the growth in a business to be reflected in changes in organizational forms as a part of a life cycle • Trends in management of the organization o Benefit organization ▪ Combines aspects of non-profit and profit organization in a way intended to permit the business to make a profitable while pursuing explicit, socially oriented goals ▪ “B-corp” and a benefit corporation are not the same things ▪ Make money for their shareholders 9 ▪ In most states with the benefit corporation structure, firms identify the targeted public benefit in the articles of incorporation and subsequently provide reports to shareholders on progress in achieving the benefit ▪ 501 c 3s aren’t supposed to be making money necessarily because they’re nonprofit o Treating businesses as persons under the law ▪ US code states that interpreting the law includes businesses when saying persons ▪ Closely-held corporations are found to be persons that have the right to the free exercise of religion o Criminal prosecutions for corporate wrongdoings may be declining due to the increased use of “deferred prosecution agreements” by the federal government. A DPA is used to encourage self-reporting and remediation of illegal acts before a criminal case is commenced 10 April 8, 2016 Chapter 15 The Regulatory Process Administrative Agencies • Boards, bureaus, commissions, and organizations that make up the governmental bureaucracy • Types of regulatory authority o Quasi-legislative: an agency can issue rules (regulations) that have the impact of laws o Quasi-judicial: agencies can make decision like a court • Creative and enforce laws constituting the legal environment of business Reasons for Agencies • Almost every governmental agency exists because of a recognized problem in society and the expectation that the agency may be able to help solve the problem • Provide Specificity o The legislative branch often cannot legislate in sufficient detail to cover all aspects of many problems o Legislative branch can only do so much and then they toss it to an agencies and say tighten all the loose ends • Provide expertise o A reason many agencies are created is to refer a problem or area to experts for solution and management o Administrative agencies often provide needed continuity and consistency in the formulation, application, and enforcement of rules and regulations governing business • Provide protection o Business often fails to regulate itself, and the lack of self-regulation is contrary to the public interest o A prevailing attitude exists that the government’s duty is to protect the public from harm • Provide regulation o Agencies often replace competition with regulation • Provide services o Many agencies arise simply out of necessity. o Since we need mail, a post office is necessary Functions of Agencies • Rule making o By allowing time periods for public comments on proposed regulations, interested parties have an opportunity to be heard on the desirability and legality of the proposals o Rules and regulations may apply to a business practice irrespective of the industry involved, or they may apply only to an industry 11 o Guidelines are also issued by agencies to supplement rules o Guidelines are administrative interpretations of the statues that an agency is responsible for enforcing. o Guidelines help businesses determine whether certain practices may or may not be viewed as legal o Guidelines do not have the same force of law as rules and regulations do • Adjudication o The quasi-judicial function involved both fact-finding and applying law to the facts o A cease and desist order can be mandated which would require the violator to stop the activity in question o Consent order: requires that the organization or individual accused admit to the jurisdiction for the agency and waive all rights to seek a judicial review. There is no admission that the business has been guilty of a violation of law, but there is an agreement not to engage in the business activities that were the subject of the complaint. A consent order saves considerable expense and has the same legal force and effect as a final cease and desist order issued after a full hearing • Advising o The advisory function of an administrative agency may be accomplished by making reports to the president or to congress o An agency may propose new legislation to congress, or it may inform the attorney general of the need for judicial action due to violations of the law. o Agencies also report information to the general public that should e known in the public interest, and they publish advisory opinions • Investigating o Agencies can gather and compile information concerning the organization and business practices of any corporation or industry engaged in commerce to determine whether there ahs been a violation of the law. o Agencies may use the subpoena power and require reports, examine witnesses under oath, and examine copy documents, or they may obtain information from other government offices Power of agencies Organization of Agencies • Consist of 5-7 members o One member is appointed as chairperson • No more than a simple majority of the members may belong to the same political party • Appointments require Senate confirmation 12 • Appointees are not permitted to engage in other employment during the terms • Agencies have distinctive organizational structure to meet its responsibilities • They may be removed from office by the president only for inefficiency, neglect of duty, or malfeasance in office • In general: o The chairperson is designed as such at the time of nomination by the president o The chairperson is equal in voting, but is somewhat more important that the other agency members because of visibility and the power to appoint staff o The secretary is responsible for the minutes of agency meetings and is legal custodian of its records. The secretary usually signs order and official correspondence and it responsible for publication of all actions in the Federal Register o The office of General Counsel is so important in many agencies that the appointment usually requires Senate approval. The general counsel is the chief law officer and legal advisor. They are often as powerful as a commissioner or board member o Advisory councils are person not employed by the agency but interested in its mission. These councils provide for interaction between regulators and those being regulated o The executive director for administration is the chief operating official of an agency and supervises usual administrative functions such as accounting, budgeting, and personnel. Since agencies spend a great deal of time lobbying with congress, most of them have legislative liaison, reporting to the executive director for administration o Regional offices investigate alleged violations of the law. In addition they usually have an educational function • Quasi-Judicial Staff o Administrative law judges: perform the adjudicative fact-finding functions. Like other types of judges, administrative law judges are protected from liability for damages based on their decisions. This protection is called immunity o These administrative law judges hear cases of alleged law violations and apply the law to the facts o Administrative law judges use prior decisions or precedents o Since even administrative law judges work for the appointed agency, leaders who hear appeal of the decision made, there is a clear appearance of bias that must be overcome to maintain the confidence of the parties regulated. To reduce the likelihood of being biased towards the agency, several states have created an Office of Administrative Hearings 13 o Quasi-judicial proceeding usually begin with a complaint filed by the agency o The business or individual accused of some illegality is called the respondent 14 April 11, 2016 Influencing Agencies • Agencies give public notice of proposed rules and hold public hearings • Interested parties present evidence in support or opposition to the regulation • Agencies react to the force of public opinion • Each branch of government has control over the administrative process Judicial Review of Agency Decisions • Standing to Sue o A party seeking the judicial review of any administrative agency’s decisions must be able to prove standing to sue o Reviewability ▪ Is the action or decision of the agency subject to judicial review? The Federal Administrative Procedure Act provides for judicial review except where: • Statues preclude judicial review • Agency action is committed to agency discretion by law o Aggrieved party ▪ Is the plaintiff an aggrieved party? Generally the plaintiff must have been harmed by an administrative action of decision to have standing • Review of rule making o Must not propose rules and regulations within the confines of its grant of power from the legislature, or a court will find the proposal void. o An unwise or ineffectual law may be corrected by political action at the polls; an unwise rule or regulation adopted by an agency may be corrected by the legislature that gave the agency power to make the rule in the first place. o Two basic issues: ▪ Is the delegation valid? • It must be definite and it must be limited • Definiteness means that the delegation must be set forth with sufficient clarity so that all concerned, and especially reviewing courts, will be able to determine the extend of the agency’s authority • This delegation of authority must provide that the agency’s power to act is limited to areas that are certain, even if these areas are not specifically defined • The general language used in delegating quasi- legislative authority usually involved grants of substantial discretion to an agency 15 • This delegation of discretion is to the agency and not to the judiciary ▪ Has the agency exceeded its authority? • Courts will hold that an agency exceeds its authority if an analysis of legislative intent confirms the view that the agency has gone beyond that intent, however noble its purpose may be • Procedural Aspects o Exhaustion of remedies ▪ The doctrine of exhaustion of remedies is a court-created rule that limits when courts can review administrative decisions. Courts refuse to review administrative actions until a complaining party has exhausted all of the administrative remedies and procedures available to him or her for redress. ▪ The doctrine of exhaustion of remedies avoids the premature interruption of the administrative process. ▪ Exceptions: • When very fundamental constitutional guarantees such as freedom of speech or press are involved or when the administrative remedy is likely to be inadequate. • Probably no court would insist upon exhaustion when the agency is clearly acting beyond its jurisdiction or where is would result in irreparable injury to the petitioner • Fraud o Primary jurisdiction ▪ Exhaustion applied when a claim must go in the first instance to an administrative agency alone. ▪ Primary jurisdiction applies when a claim is originally filed is the courts. It comes into play whenever enforcement of the claim requires the resolution of issues that, under a regulatory scheme, have been place within the special competence of an administrative body. ▪ The doctrine is invoked when referral to the agency is preferable because of its specialized knowledge or expertise in dealing with the matter in controversy. • Review of factual determinations o It upholds the agency’s finding and conclusions on questions of fact if they are supported by substantial evidence in the record. o Courts do not (1) reweigh the evidence, (2) make independent determinations of fact, or (3) substitute their view of the evidence for that of the agency. However, courts do determine if there is substantial evidence to support the action taken. 16 o For the courts to exercise their function of limited review, an agency must provide a record that sets for the reasons and basis for its decision (Judicial Review of Agency Decisions in review) • Regardless of whether a party is challenging an agency’s rule making or adjudication, that party must have standing to sue • The establish standing to sue, the challenger must show the reviewing court that the agency’s decision is subject to review and that the challenger is personally affected by the agency’s decisions • When the decision challenged involves the agency’s rule-making function, the court must determine if the agency’s authority was validity delegated • If the delegation of authority is definite and limited, the court will decide if the agency has exceeded its authority. If the answer is no, the agency’s rule will be upheld • When the decision challenged involved the agency’s adjudicatory function, the law requires the challenger to exhaust the available administrative remedies and the court to determine whether an agency should have primary jurisdiction • The factual findings of an agency are presumed to be correct • Courts are not permitted to substitute their personal views for the agency’s findings and conclusions if a reasonable person could reach the same result as the agency. • An agency’s expertise is entitles to great defense and will not be reversed unless it is clearly erroneous Criticisms of administrative agencies • Relating to personnel o Difficulty in hiring and retaining the best-qualified people o Difficult to discharge unsatisfactory employees o Personnel in top positions are selected for political reasons and lack sufficient experience to effectively run organization • Relating to procedures o Delay in the decisions-making process o Administrative process is overwhelmed with paperwork and meetings o Rules and regulations are written in complex legal language o Often a lack of enforcement procedures to follow up on actions taken to ensure compliance o Dictatorial in nature • Relating to substance o Rules and regulations overlap and conflict o “Sweet heart regulations” or favoring the industry or industries they regulate over the public interest o Actions for illegal conduct end only with consent orders 17 o Volume of rules adopted by agencies is beyond the ability of the business community to keep up with an comply with o Enforcement of laws varies over time Costs to Business • Regulation is a form of taxation. It directly increases the cost of government • The existence of a governmental agency usually forces a business subject to the agency’s jurisdiction to create a similar bureaucracy within its own organization to deal with the agency • Other costs the public must absorb result from agency regulations that inhibit competition and innovation • Perhaps the most disturbing additional cost to the business community is the cost of paperwork. • Small businesses can be force out of business by the regulatory process Costs to Society • How do you apply cost-benefit analysis to a rule dealing with human life? • The regulatory process can be so cumbersome that even the administrative agency involved becomes less effective • At the federal level, all agencies are required to publish guidelines and rules in their proposed and final versions. The place for such publications is the Federal Register, which appears daily o There is nothing like a state or local version of the Federal Register • The cost of “keeping up” is balances against the cost of being out of compliance Trends in Regulation: • Although it was not the first federal administrative agency, the Federal Trade Commission (FTC), created in 1914 to prevent unfair methods of competition, started the growth of the administrative agencies in the twentieth century • Throughout the first half of the 20 century Congress attempted to balance the bargaining power of business management and organized labor • The secondary half of the 20 century saw a focus on discriminatory practices and their negative impact on society and business • The latter portion of the last century saw a growing concern for protecting the environment April 15, 2016 - movie April 18, 2016 Chapter 17 Financial & Securities Regulations What is a security? 18 • An interest or instrument that offers the right to subscribe to or purchase stock, bond, or any certificate of interest • The Supreme Court has held that a security exists when one person invests money and looking to others to manage the money for profit • Security includes more than corporate stock • Not to keep people from making a stupid investment but rather have a way to allow people to make an informed decision making process • Questions to determine whether a person has purchased a security: o Is the investment in a common business activity? o Is the investment based on a reasonable expectation of profits? o Will these profits be earned through the efforts of someone other than the investor Securities and Exchange Commission (SEC) • Created in 1934 and is responsible for administering the federal securities laws • Consists of five commissioners appointed by the president for five-year terms • Possess quasi-legislative and quasi-judicial powers o Under its quasi-legislative power, it has adopted rules and regulations relating to financial and other information that must be furnished to the Commission. Other rules prescribe information that must be given to potential investors. The SEC also regulated the various stock exchanges, utility holding companies, investment trusts, and investment advisers. o Under its quasi-judicial powers, the SEC also is involved in a variety of investigations Securities Act of 1933 • Requires the disclosure of information to the potential investors and that it be registered prior to any sale and that a prospectus be furnished to any potential investor prior to any sale being consummated. • Applies to the initial sale of the security • Information must not be untrue or misleading • Sanctions for violations o Criminal punishment o Civil liability o Equitable remedy of an injection • Regulated parties: o Issuer is the individual or business organizations offering a security for sale to the public o An underwriter is anyone who participates in the original distribution of securities by selling such securities for the issuer of by guaranteeing their sale o A controlling person is one who controls or is controlled by the issuer, such as a major stockholder of a corporation. 19 o A Seller is anyone who contracts with a purchaser or who is motivating influence that causes the purchase transaction to occur • The issuer of securities must prepare: o A registration statement ▪ The statement includes a details disclosure of financial information about the issuer and the controlling individuals involved in the offering of securities for sale to the public ▪ During the prefilling period, it is legal for the issuer of a security to engage in preliminary negotiations and agreements with underwriters. It is illegal to sell a covered security during this period. Offers to sell and offers to buy securities are also prohibited during the prefilling period ▪ The waiting period is next and lasts about 20 days. During this time, the SEC staff investigates the accuracy of the registration statement to determine whether the sale of the securities should be permitted. During the waiting period, it is still illegal to sell a security subject to the act. However, it is not illegal to solicit a buyer or receive offers to buy. Offers cannot be accepted during the waiting period. But during it the sellers may solicit offers for later acceptance • The solicitations during the waiting period are called
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