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Legal Considerations for Small to Mid-Size Businesses Using Generative AI

Generative AI is a transformative technology with vast potential for small to mid-size businesses (SMBs). However, as with any new technology, it is crucial for SMB owners to understand the legal risks and implications associated with the use of generative AI in their businesses.

Benefits and Productivity Gains

Before diving into the legal considerations, it’s important to recognize the significant benefits that generative AI can bring to SMBs. AI-powered tools can automate repetitive tasks, such as data entry or aspects of marketing, allowing employees to focus on higher-value activities. For example, a retail business can use AI to generate social media posts or email campaigns, saving time and resources while continuing to stay top of mind with customers. Additionally, generative AI can assist with problem-solving and decision-making by analyzing data and providing insights that might otherwise be overlooked. By harnessing the power of generative AI, SMBs can gain a competitive edge, improve efficiency, and drive growth. However, as we’ll now address, the use of AI is not without its risks, and SMB owners should beware of the potential downsides from this powerful technology.

Intellectual Property Concerns

One of the primary legal considerations for SMBs using generative AI revolves around intellectual property (IP) issues. When AI systems generate content, such as text, images, or designs, questions often arise regarding the ownership of that content. For example, if a marketing agency uses AI to generate ad copy for a client, the agency must navigate copyright laws to determine whether they can claim ownership of the AI-generated content or if it falls under fair use provisions. Similarly, using AI to generate logos or branding elements poses potential trademark infringement risks. An AI-powered logo generator might inadvertently create a design that closely resembles an existing trademarked logo, exposing the business to legal challenges.

Employment and HR Issues

The adoption of generative AI in the workplace raises various employment and human resources concerns. AI-assisted hiring processes must be carefully designed and monitored to prevent bias and ensure fairness. If a business uses AI to screen job applicants, the AI algorithm might inadvertently perpetuate historical biases present in the training data, leading to discriminatory hiring practices. Amazon famously had to scrap its use of AI in reviewing job applicants’ resumes when it found that its system was biased against women. SMBs should also be aware of the security risks that AI can pose. Many AI tools use any data that’s entered into a system for system training. If someone’s personal data is entered—such as employee or job candidate data—this can increase the risk of a data privacy breach, as well potentially trigger liability under a data privacy law. 

Fact-Checking Information 

We’ve all heard that AI can and does “hallucinate”—that is, produce inaccurate information. Even lawyers, who should know better, have found themselves in hot water by filing legal pleadings with courts which include non-existent cases in support of their arguments. Accordingly, SMBs must prioritize fact-checking and verifying the accuracy of AI-generated content before using it for business purposes. Relying on inaccurate or misleading information can lead to legal risks, such as false advertising claims or other forms of liability. Imagine a financial advisory firm using AI to generate investment reports for clients. If the AI system produces inaccurate financial projections or misleading statements, the firm could face legal consequences. 

Protecting Sensitive Business Information

As discussed above, many AI systems use information that’s entered into the system as training data. Accordingly, when integrating generative AI into business operations, SMBs must take precautions to safeguard sensitive information, such as trade secrets and proprietary data. Implementing internal systems and employee training on data handling practices can help mitigate the risk of data breaches and protect valuable business assets.

Risks of AI-Generated Legal Documents

While generative AI can streamline various business processes, SMBs should exercise caution when using AI to generate legal documents, such as contracts or other do-it-yourself legal forms. AI-generated legal documents may not adequately address the unique needs and circumstances of a particular business, as legal documents should be tailored to the specific context, industry, and jurisdiction in which the business operates. Relying solely on AI-generated documents without proper legal review can lead to unintended consequences, such as unenforceable provisions or exposure to legal liabilities.

Moreover, AI systems are only as good as the data they are trained on. If the training data is outdated, biased, or incomplete, the resulting documents may contain errors, omissions, or inconsistencies. SMBs must be aware that AI-generated legal documents may not always align with the latest legal developments, industry standards, or best practices. Additionally, AI-generated language may be ambiguous or open to misinterpretation, leading to potential disputes. To mitigate these risks, SMBs should generally steer clear of do-it-yourself “solutions” like this. Should an SMB choose to produce an AI-generated legal document, it should be seen as a starting point, and the SMB should seek professional legal review to ensure accuracy, compliance, and protection of their legal interests.


Generative AI presents both opportunities and legal challenges for SMBs. By understanding and addressing key legal considerations, SMBs can harness the power of generative AI while minimizing legal risks.

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