The Small Business Guide to AI Regulations (Under 50 Employees)

The rapid expansion of AI regulation raises an immediate practical question for small businesses: do these laws actually apply to us? The honest answer is: sometimes yes, sometimes no, and the analysis depends entirely on the specific law, what your AI tools do, and where your customers and employees are located.

This guide cuts through the ambiguity for businesses with fewer than 50 employees, explaining which laws have explicit small-business exemptions, which do not, and what practical steps you should take regardless of your formal compliance posture.

The Colorado Small Employer Exemption

Colorado's AI Act (SB 24-205), effective June 30, 2026, contains an exemption for organizations with fewer than 50 full-time equivalent (FTE) employees, but with critical conditions: the exemption applies only if the business does not train or fine-tune the high-risk AI system using its own proprietary data, uses the system only for the developer's intended purposes, and makes the developer's impact assessment available to consumers.

What This Means in Practice

• Exempt (likely): A 30-person accounting firm that uses a third-party AI tool for client intake screening, without modification or custom training on firm data.
• Not exempt: A 20-person lender that has fine-tuned an AI credit scoring model using its own loan portfolio data to improve predictions for its specific borrower base.
• Borderline: A 45-person HR firm that has provided its vendor with proprietary job description data and historical hiring data to customize the model. This likely eliminates the exemption.

If you are shaping how the model behaves with your own data, you bear accountability for the outputs—and the exemption does not apply. See the full exemption analysis on our Colorado AI law page.

New York City Local Law 144: No Size Exemption

NYC Local Law 144 has no small employer exemption. If your company uses an AEDT to screen or evaluate candidates for jobs performed in New York City, you must comply with annual bias audit and public disclosure requirements regardless of your company size. A 15-person startup with one NYC-based employee that uses an AI-powered applicant tracking system to screen resumes is subject to LL 144 for that NYC role.

Cost Considerations for Small Employers

Illinois AIVIA: Applies to All Employers, No Size Threshold

The Illinois Artificial Intelligence Video Interview Act (AIVIA) applies to any employer that uses AI to analyze video interviews of candidates for Illinois positions, regardless of company size. The requirements—notice, explanation, consent, and a 30-day video deletion right—are procedural and relatively low-cost to implement. The annual demographic reporting obligation only triggers when AI replaces, rather than assists, human judgment entirely.

Laws That Likely Do Not Apply to Most Small Businesses

• California AB 2013 (GenAI training data disclosure): Applies to developers of generative AI systems. A small business using ChatGPT or similar tools as a user is not directly covered.
• California SB 1120 (healthcare AI): Applies to licensed health care service plans and disability insurers regulated under California law. Most small businesses in other industries are not covered.
• Colorado SB 205 (with exemption): The small employer exemption is designed precisely to keep the law manageable for small businesses using off-the-shelf AI tools.

What Small Businesses Should Do Now

Step 1: Inventory Your AI Tools

List every AI or automated tool that touches employee or customer decisions: hiring tools, credit or risk scoring, customer pricing, loan underwriting, insurance quoting, healthcare decisions. Note whether any are used in Colorado, New York City, or Illinois—the three most active enforcement jurisdictions.

Step 2: Classify Your Role

For each tool, determine: are you a developer (you built or substantially modified it) or a deployer (you use a third party's tool)? Have you provided your own data to customize the model? This analysis determines your Colorado SB 205 exemption eligibility.

Step 3: Read Your Vendor Contracts

AI tool vendors increasingly offer compliance assistance, bias audit facilitation, and documentation packages. Understand what your vendor provides and what you remain responsible for. Confirm who bears the cost and responsibility for LL 144 bias audits if you hire for NYC roles.

Step 4: Implement Basic Disclosure Practices

Even where not legally required, disclosing to job applicants and customers when AI is used in significant decisions is good practice. It reduces litigation risk under existing anti-discrimination law, builds trust, and positions you for compliance with laws that may apply in the future.

Step 5: Check for Industry-Specific Laws

If you are in healthcare, insurance, financial services, or housing, industry-specific AI rules may apply regardless of your company size. Check our healthcare, insurance, and hiring topic pages for relevant laws.

Cost Estimates for Common Compliance Activities

For a full breakdown of which laws apply by state, visit our small business AI compliance page and the Colorado, California, and New York state pages.

This article is for informational purposes only and does not constitute legal advice. Consult a qualified attorney for guidance specific to your situation.