Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 4 minutes
Running your own business may be your version of the American dream. You can set your own schedule, you can invest your time into your true passions, and better yet, you can build something of your own.
Even well-run businesses can face claims and disputes. The goal is to reduce preventable risk and make sure a single incident doesn’t create a financially devastating outcome.
With the right practices in place, however, you can protect your business from lawsuits before they happen. While you may not be able to eliminate them, you can significantly reduce the chances that your business is involved in a lawsuit or that you have to pay large out-of-pocket legal fees and settlements.
Keep It Structured
Operating as an LLC or corporation may help limit your personal liability for many business debts and claims. However, it does not eliminate personal exposure in every situation—owners could still be personally liable for their own conduct, personal guarantees, and certain legal or compliance obligations. Talk with a qualified attorney in your state to confirm how these rules apply to your business.
The structure that works best for you depends on a variety of factors. Typically, LLCs are more flexible in terms of how you can operate your business. Corporations typically require more formal governance and recordkeeping than LLCs (for example, maintaining bylaws, documenting major decisions, and keeping finances separate). These practices help preserve the legal separation between the owner and the business.
It’s important to note that there are some situations where you can still be held personally liable for your company’s conduct.
Make Sure You Are Protected
Insurance is a key part of your financial protection plan, but coverage depends on the specific policy and its terms. For many businesses, a Commercial General Liability (CGL) policy could help pay legal defense costs and cover settlements/judgments for third‑party bodily injury, property damage, and certain personal/advertising injury claims—subject to exclusions, deductibles/retentions, and policy limits.
Develop Clear Workplace Policies
This may be the most important step once your business is properly structured and insured. You don’t want to leave anything up to chance when it comes to your business’s safety and practices. Your employees should be trained on the best safety practices. This includes anti-harassment, drug use in the workplace, and non-discrimination policies.
Keeping these policies in place is the key to operating your business legally. You should shield yourself from the risks of being sued by your own employees and by third parties who may be injured as a result of your company’s work.
And when you have policies in place, that isn’t the end of the story. Make sure to conduct audits regularly. The goal is to treat misk management as a process that requires continuous work and attention. When you stay on top of compliance, you can uncover vulnerabilities in your business that might otherwise go unnoticed.
Address Issues Immediately
You should have internal procedures in place for handling complaints and safety issues. The goal is to resolve conflicts before they escalate into larger, costlier issues. Tell your staff to communicate openly about issues. Also, if you hear of an issue, don’t brush it off. Investigate everything promptly so that you can nip potential lawsuits in the bud.
Get Protected Before Disaster Strikes
Having insurance for your business really helps when lawsuits happen. Even if you follow these steps, there’s still a chance that you’ll get tangled up in a lawsuit.
If you have commercial coverage in place, you can rest assured that you’ll be protected in the event your business gets sued.
