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The HBS Blog


The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.

Protect Your Assets from Your Airplane
By Michael Bell Wednesday, May 19, 2010

Every day, thousands of people travel by airplane, but only a few of them own their own plane. Ever wonder how many airplanes U.S. Airways owns? Or Delta? Continental? American Airlines? The answer is zero. No airline owns its own planes. Airlines are structured as multiple entity operations with a central operating company that leases each airplane from its own separate entity.

Why? Although airplanes are one of the safest ways to travel, accidents do happen. If you own an airplane, you should consider using this same technique to maximize your liability protection. By owning an airplane in a Delaware LLC, you shield your personal assets from creditors in case of an accident and/or lawsuit. For the best protection, let’s take a look at how Harvard Business Services, Inc. can help.

Bill, the owner of an airplane, calls up Harvard Business Services,Inc. and asks, “How do I protect my other assets from liability that may arise from my plane? Is a Delaware LLC one of the best asset protection entities?”

Yes, it is, Bill, and here’s how we can help:

  • We can form a Delaware LLC for you, which will own the plane and provide you with asset protection.
  • We can form separate LLCs for your other major assets, to keep them out of your name alone.
  • If you are sued for an accident, we can supply you with Certificates of Good Standing proving the validity of your multi-entity structure. With the strongest asset protection by law, a Delaware LLC will help provide another layer of protection that will make lawyers reconsider suing you personally.
  • If you own a home, having a Delaware LLC could help provide protection from someone coming after your home and causing you to lose it. Also, be sure to check your state’s Homestead Laws, as these laws vary from state to state.
  • If you own any other real estate, such as a farm or beach house, be sure to put these in separate Delaware LLCs as well. This will place a metaphorical brick wall around each individual asset you own, and it will help you with your estate planning as well.
  • There may also be tax advantages to using multiple entities, depending on your individual tax bracket and situation. For tax information, you should consult with your accountant or tax professional.

Many of the major airline companies worldwide are incorporated here in Delaware to protect their assets. Why Delaware? Because Delaware’s legal infrastructure will stand behind you if you’re sued.

We offer detailed information on how Harvard Business Services, Inc. can help protect you as an aircraft owner.

We also understand the special needs of an aircraft owner, and HBS offers a unique FAA Mail Forwarding Service.

To start protecting your assets, call Harvard Business Services, Inc at 302-645-7400 to get your aircraft and other major assets into separate Delaware LLCs today. 

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An Explanation of Credit Default Swaps
By Brett Melson Monday, May 17, 2010

The financial crisis and government bailout of AIG have focused the public’s attention on credit default swaps, an extremely large but previously ignored segment of the financial market.  Despite frequently mentioning credit default swaps, politicians and pundits rarely stop to discuss what credit default swaps are, how they work and what purpose they serve.  In this post, we attempt to answer some of those questions.

A credit default swap is a privately negotiated agreement between two parties in which one party (the “protection seller”) agrees to pay the other (the “protection buyer”) a sum of money (the “notional amount”) in the event an event of default occurs with respect to an issuer of debt, such as a corporation, a pool of mortgage or other loans or a state or national government (the “issuer”).  An event of default would include the issuer’s failure to pay timely interest or repay principal on debt obligations, among other possible events that the protection seller and protection buyer agree upon.  In exchange for the protection seller’s agreement to pay the notional amount upon an event of default, the protection buyer pays the protection seller a periodic fee.  The amount of the fee reflects the risk that the protection seller feels it is taking on agreeing to pay the notional amount upon default; the fee, therefore, gives a rough measure of the protection seller’s belief regarding the likelihood of the issuer’s default.  If an event of default does not occur upon the expiration of the swap, then the notional amount is never paid and the protection seller has gained in the amount of the fee paid over the term of the swap.

Credit default swaps generally are documented using agreements published by the International Swaps and Derivatives Association, often referred to as “ISDA.”  ISDA’s agreements provide a common and consistent set of defined terms and contractual provisions which the parties can vary to suit their needs.  Starting with a common set of base agreements which each party has used before permits the parties to a credit default swap to avoid a great deal of confusion and negotiation that they would otherwise face in starting with a new form.  In addition, once a protection seller and a protection buyer have negotiated a credit default swap on ISDA’s agreements, they can quickly enter into additional swaps by simply using the same documents, modifying the terms only as needed to suit a particular transaction.

A credit default swap can be used to hedge risk or for speculation.  When used for hedging, a credit default swap is similar to an insurance contract.  A person or entity that holds the debt of an issuer may be worried that it will default and the debt will either not be repaid at all or the market value of the debt will fall precipitously.  As a result, the person or entity would become a protection buyer, paying the fee to a protection seller in order to offset (or “hedge”) the risk of the issuer’s default.  The fee paid to the protection seller will lower the debt holder’s returns if the issuer does not default, but entering into the swap will protect the holder if default occurs.  Similarly, a homeowner may pay a homeowner’s insurance plan premium for years without incident, but by paying the premium the homeowner is hedging the risk of catastrophic loss.

When used for speculation, the protection buyer does not own any debt of the issuer.  The credit default swap is a means by which the protection buyer can “bet” (for lack of a better term) that the issuer will default.

In the buildup to the credit crisis that began in 2008, use of credit default swaps for speculation far outweighed their use for hedging.  This is evidenced by the fact that during that period it was common to find that the aggregate notional amounts that would be payable upon a given issuer’s default would equal many times the issuer’s total outstanding debt.  In addition, the activities of protection sellers were a key contributing factor to the failure of AIG, among other entities.  In the frantic market for credit default swaps leading up to 2008, protection sellers would often agree to pay notional amounts that far surpassed their assets.  When a default occurred, such as the default of Lehman Brothers, the protection seller could not make the promised payment, and, without government intervention, the losses could potentially have rippled out to other financial firms reliant on such protection, causing them to also fail.

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Entrepreneurs Are Unsung Heroes
By Brett Melson Friday, May 14, 2010

“What do you want to be when you grow up?” Most children deal with this question, and often answer with the profession of those we see as heroes.

Everyone is a hero in some way, but some are recognized more readily. To our credit, we recognize many of those who are in service daily to make our world better; soldiers fight, teachers educate, and police and firemen protect. Those who excel in sports, the arts, and politics gain great respect and popularity. Seldom do we think to recognize those in the world of small business, entrepreneurs who fight heroic battles to grow a company and keep the economy strong. People in business, large and small, are unsung heroes who are often ignored when hailing heroes.

Joseph Campbell, a world mythology expert, contends that the progress of the making of a hero involves three stages, and successful entrepreneurs travel through all of them:

  • departure from the known to promote a better purpose or idea
  • taking a risk and having the courage to persevere
  • coming back with a better way or product

Thinking, “I can do this, and maybe in a better way,” the risk-taker is an optimist who then sacrifices comfort and security to promote his idea, which then becomes greater than himself. At this stage great resilience is often necessary as there can be opposition to challenging the status quo, and the risk of failure is always there. Finally, the successful trail-blazer returns to make a difference and begin dealing with future challenges, often becoming the unsung hero who puts people to work, and continues to make decisions daily that affect workers and the world around them.

Not all who venture out succeed, however, and a great percent of new businesses fail. But, according to Candace Allen and Dwight Le, “over three-quarters of all new jobs each year come from firms no more than four years old. Though large, well-established corporations are more visible, one finds the most entrepreneurial action and risk-taking activity in small business ventures.”

Though it is easy to dismiss the positive role of entrepreneurs in our society, we should celebrate those who realize their potential to effect a positive change in the world!

To read more on this topic go to http://fee.org/freeman/detail/the-entrepreneur-on-the-heroic-journey

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Nonprofits Take Note! | Harvard Business Services, Inc.
By Brett Melson Thursday, May 6, 2010

As many as 400,000 nonprofit organizations are weeks away from a doomsday. At midnight, May 15, an estimated one-fifth to one quarter of some 1.6 million charities, trade associations and membership groups will lose their tax exemptions, thanks to a provision buried in a 2006 federal bill aimed at pension reform.

In 2006, the Pension Protection Act was passed, and within the Act was a provision giving the IRS the authority to revoke tax exemptions for groups that did not file for three consecutive years. (Before this law, only organizations making $25,000 or more had to file.) The three years will be up next week, and many small organizations may be surprised, even though the IRS has made a great effort to get the word out. Probably most at risk are small organizations that have been inactive for a period of time.

The IRS needs a way of tracking organizations, but “It’s going to be an unholy mess once these organizations realize what’s happened to them,” said Diana Aviv, president of the Independent Sector, a nonprofit trade group.

For detailed information on the filing of form 990 with the IRS 

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Keeping Things in Order
By Paul Sponaugle Wednesday, May 5, 2010

Though there’s no formal guide book or instruction pamphlet, for most U.S. small business owners the initial registration and licensing requirements should be considered in a certain order.   I like to think of it as a large funnel; at the mouth of the funnel is the creation of the entity and at the bottom are all the local and trade specific permits one may encounter.  Hopefully, these tips will help you pave a smooth path on your way to starting your next business.

First and foremost, form a company!  Whether it’s a corporation or an LLC, form an entity to help protect you and any partners from the debts and liabilities of the venture.  Until the legal documents to create the entity are filed you’re leaving yourself personally liable for all things related to the business.  In today’s society where lawsuits run rampant, why take the chance?  Forming an entity in Delaware provides a solid foundation for protection by giving you the most favorable legal environment in the nation, since 2001.

Now that you’ve formed the entity and have separated yourself from liabilities of the business, it’s time to do the same thing from a financial standpoint. Imagine that the company is a living being that is going to generate its own revenue.  That revenue will be taxed by the IRS.  Just like individuals, businesses can get their own tax identification numbers for claiming income and paying taxes.  The tax ID or EIN is much like a social security number and just one more step to help separate you from your business.

Next you’ll need to consider requirements where the company plans to physically operate or bank. This is where the funnel begins to taper. Each jurisdiction you encounter may have its own registration requirements.  As a rule of thumb, always start at the top and work your way down when it comes to state and local licensing requirements.  A great place to start is the Secretary of State’s office, as most states require the registration of out of state entities through a process known as foreign qualification.  This is also a good place to inquire about trade specific permits and/or licenses that may be granted by state boards.

If the entity will generate revenue in a given state, the next stop should be the Division of Revenue where the entity will typically file for a business license.  Be careful though, as some states handle business licensing at a county level.

Obtaining a business license will complete the registration “funnel” for most business owners. But for those operating within the incorporated limits of a city or a town, a visit to city hall may also be in order.

Properly registering a small business entity in the U.S. will not be the same process for everyone, as state and local compliance issues differ from state to state, county to county, and city to city.  Following this “funnel” model is a good way to keep your entity legal and valid where operating by affording you very little opportunity to miss a critical license or registration along the way.

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