It’s no secret that small businesses are targets for lawsuits. Even though small businesses generate only about 20% of business revenue in the U.S., they experience about 48% of total commercial tort liability costs. According to one source (e.g., vehicle accidents, malpractice, slip-and-falls), about 12 million cases are filed against small businesses each year, costing on average $54,000 in liability. What’s more, the cost of legal representation for discovery, court proceedings, settlement talks, and more can be staggering. And these statistics don’t take into account the personal cost—time, stress—to small business owners.
Liability lawsuits aren’t the only thing that threaten the assets of a small business owner; creditors’ claims and bankruptcy can also get to assets. So, risk management should a vital part of running your business and your personal financial affairs in order to protect what’s yours.
5 strategies you can easily use:
1. Incorporate or form an LLC
If you are a sole proprietor, independent contractor, or general partner, your personal assets are at risk. Creditors of the business can seek recovery through your personal assets—your house, your personal bank account, your savings. If you are a partner, you are jointly and severally liable for the debts of the partnership. This means a creditor can seek full restitution from any single partner. That partner can then try to recoup part of the payment from other partners, but there’s no guarantee the partner will recovery anything.
Strategy:
Incorporate your business or set up a limited liability company (LLC). In this way, creditors of the business can seek recovery for debts and other legal claims only from the business. You can do this even if you are the only owner. There is a state fee involved for this action, and there may be annual state filings and other required actions that entail yearly costs. Learn more about incorporating or using an LLC from CFI .
2. Insure everything
One of Chubb’s taglines is “peace of mind.” That’s what you get when you carry the right type of insurance, and enough of it. It also gives you asset protection to the limit of your policy.
Strategy:
As a minimum, be sure to carry sufficient liability coverage, which is typically part of your business owner’s policy (BOP). Professionals should carry errors and omissions (malpractice) coverage. Consider an umbrella policy to add protection on top of existing coverage at a modest cost. Learn more about insurance for small business from The Hartford. Work with a knowledgeable insurance agent or broker who can review your needs and help you find affordable coverage.
3. Get professional legal advice
Small businesses may go it alone because they don’t think they can afford legal fees. They may turn to YouTube, Instagram, or ChatGPT for advice rather than getting information and guidance from a professional. The cost of mistakes by foregoing professional advice can be much greater than legal fees.
Strategy:
Have an attorney review all legal touchpoints: contracts, regulatory compliance, etc. Get prompts for new legal rules and regulations requiring actions on your part. If you want to minimize costs by doing legwork (e.g., using a readily available template for a contract or a nondisclosure agreement), be sure to have a lawyer review it before you use it. And don’t rely on ChatGPT (I’ve seen too much incorrect information here).
4. Set up a qualified retirement plan
A federal law—ERISA—gives unlimited asset protection to funds in a qualified retirement plan, such as a 401(k) plan. There may be other protections for non-ERISA plans, such as IRAs and IRA-based plans (e.g., SEPs and SIMPLE-IRAs) on the state level.
Strategy:
When choosing a plan, opt for one protected through ERISA, such as a 401(k) plan. These plans generally entail annual filings with the Department of Labor and reporting to plan participants. Learn more about asset protection through retirement plans.
5. Spread the wealth
If you’re willing to give up control over some of your assets, you can protect them by transferring property or interests in them to a spouse or family member. As long as transfers are made before you become subject to any creditor claims, nothing stops you from being as generous as you want. With the high federal exemption for estate and gift tax transfers ($15 million in 2026), you likely won’t incur any tax. Note: Gifts of present interests in property in 2026 that are valued over $19,000 require the filing of a gift tax return even though no tax may be due, and you may need to pay an appraiser if you’re transferring shares in your business, land, or certain other property.
Strategy:
You can give property to family members, such as a spouse or children. Property jointly owned with a spouse using “tenancy by the entirety” has strong asset protection. You can also use trusts to add a layer of asset protection.
Bottom line
In the old days, some business owners sought to protect assets by moving them offshore. Now, however, there is strict reporting of foreign assets, making it easier for creditors to find them. Best strategy of all: think about your exposure to creditors’ claims and then work with professionals—attorneys, insurance agents—to decide on the best actions to take for your situation.
