TL;DR
The explosion of state privacy laws means small businesses can no longer assume that data protection is only a big‑company problem. This article explains why privacy compliance matters and offers practical steps for small businesses to protect customer data and avoid costly legal pitfalls.
Privacy Protection for Small Businesses: Legal Risks and Compliance Tips
Small businesses are collecting more personal data than ever. From customer contact details and purchase histories, to health or financial information. Yet many owners assume privacy rules don't apply to them. That assumption is dangerous because an increasing number of U.S. states are enacting comprehensive data‑privacy laws that cover companies of all sizes.
California's Consumer Privacy Act has been joined by new laws in Maryland, Kentucky, and Texas, and eight more states will roll out privacy statutes in 2025. Even when laws carve out "small business" exemptions, some provisions still apply.
In states such as Delaware, Iowa, Nebraska, New Hampshire, New Jersey, Tennessee, Minnesota, and Maryland, they require businesses to obtain explicit consent before selling sensitive information.
If your company has customers in one of these states, or processes their data, you need a privacy program.
Why Privacy Protection Matters
From a legal perspective, data privacy isn't optional. At least 30 states require businesses to secure personal information and to notify individuals if a breach occurs. The National Federation of Independent Business notes that new state laws treat companies that "control or process consumer data" as covered entities. Meaning, even firms without hundreds of employees may be subject to requirements such as notice, access requests, opt‑out mechanisms, and security controls. Failing to comply can trigger multiple consequences:
Regulatory penalties and lawsuits – State attorneys general can levy fines or bring enforcement actions if a business fails to meet privacy obligations. Many laws also permit private citizens to sue, which can result in costly class‑action litigation. The NFIB warns that legal and regulatory ramifications are among the most immediate risks when a breach occurs.
Identity theft and fraud – Lost or stolen customer data, such as Social Security numbers or credit‑card information, creates opportunities for thieves to open accounts or make fraudulent purchases in victims' names. In the wake of a breach, customers must spend time and money to repair their credit, and your company may be liable.
Financial loss and business disruption – Breaches can lead to remediation costs (i.e., forensic investigations, legal fees, notification expenses) and lost revenue. Operational disruptions (such as systems offline for investigation or reputational damage) can be particularly crippling for small firms.
Erosion of trust – Consumers and business clients are increasingly privacy‑aware. Failure to safeguard their data undermines confidence and may prompt them to take their business elsewhere.
The Evolving Legal Landscape
Nearly every state now has some form of data‑breach notification law, and many have enacted comprehensive privacy statutes inspired by the European Union's GDPR. Key trends include:
Broader definitions of covered entities
Laws are intentionally technology‑neutral. The NFIB notes that statutes apply to any business that controls or processes personal data, not just "big tech" or regulated industries. This means even a boutique coffee shop with an online ordering system may be covered.
More rights for consumers
New laws grant individuals the right to know what data a business collects, to access or delete it, and to opt out of targeted advertising or the sale of their information. Maryland's Consumer Data Privacy Act and New Jersey's statute going into effect in 2025 are examples of such legislation.
Small business exemptions with strings attached
Some laws exempt entities below a revenue or data‑volume threshold. However, Nebraska's data privacy act applies to any business that isn't a legally defined "small business" and still requires opt‑in consent before selling sensitive data. Even exempt companies must comply with data‑breach notification rules.
Sector‑specific requirements
Industries such as health care, finance and education are subject to HIPAA, Gramm‑Leach‑Bliley and FERPA, respectively. Small firms providing services in those sectors must meet both general and industry‑specific standards.
Consequences of Non‑Compliance
Ignoring privacy obligations invites significant risk. When a breach occurs, regulators investigate whether reasonable safeguards were in place. The NFIB emphasises that beyond financial loss, businesses face identity theft/fraud exposure, legal action and operational disruption. State laws often require covered entities to maintain written information‑security programs and to notify affected individuals within a specific timeframe. Failure to follow these procedures can lead to increased fines and punitive damages.
Building a Privacy Program: Core Steps
No single checklist fits every business, but the National Association of Realtors' data‑security guidance provides a helpful five‑step framework for small businesses. Adapted broadly, these steps help organizations develop a practical privacy program:
Take Stock (Inventory Your Data) – Document what personal information you collect, from whom, and where it lives. Identify vendors who handle your data and map data flows across systems. This inventory is essential for understanding your obligations and for responding to access requests.
Scale Down (Minimize Collection and Retention) – Only collect personal data necessary for your business operations and regulatory requirements. Adopt a retention schedule so you don't store information longer than needed. Reducing your "data footprint" limits liability and makes compliance easier.
Lock It (Implement Security Controls) – Protect data with physical and electronic safeguards. Encryption, firewalls, secure wireless networks, and multi‑factor authentication should be standard. Limit employee access based on job roles, and regularly update software to patch vulnerabilities.
Pitch It (Create and Follow a Retention Policy) – Establish clear policies for disposing of documents and electronic records when they are no longer needed. Retention policies should address how information is destroyed (shredding, secure deletion) and include guidance on drafting and reviewing documents before disposal.
Plan Ahead (Develop Written Procedures) – Develop a written information‑security program that outlines responsibilities, training requirements, and incident‑response protocols. Having a plan in place ensures that you respond promptly and consistently if a breach occurs.
Practical Compliance Tips for Small Businesses
Designate a data‑protection officer or team. Even small firms should assign responsibility for privacy compliance. This person should understand relevant laws, monitor vendor practices, and serve as a point of contact for customers.
Implement a Written Information‑Security Program (WISP). A WISP identifies risks, assigns responsibilities, and outlines technical and organizational controls. The IRS requires tax preparers to certify that they have a WISP when renewing their preparer tax identification number, and many state privacy laws mandate similar programs. Use a template as a starting point and update it annually or whenever you introduce new technology.
Educate employees. Human error remains a leading cause of data breaches. Train staff on recognizing phishing attempts, handling sensitive documents, and following privacy policies. Make privacy awareness part of your onboarding process.
Secure third‑party relationships. Vendors such as cloud providers, payment processors, and marketing firms may access your customers' data. Perform due diligence, require vendors to meet security standards, and include data‑protection clauses in contracts. Under many privacy laws, your business may be liable for vendors' lapses.
Prepare for breaches. Even with robust security incidents can happen. Maintain an incident‑response plan that addresses containment, investigation, communication with affected individuals, and regulatory reporting. Conduct regular tabletop exercises to test your plan.
Monitor new laws. Because privacy law is evolving quickly, stay informed about legislative developments in states where you operate or have customers. Engage legal counsel to understand how new regulations apply to you and to incorporate changes into your privacy program.
Castroland Legal - Your Trusted Data Privacy Lawyer
Data privacy is no longer a problem reserved for large corporations or technology giants. States are closing loopholes, expanding coverage to any business that controls or processes consumer data, and imposing steep penalties for non‑compliance. At the same time, customers are choosing to do business with companies they trust.
By inventorying your data, minimizing collection, implementing strong security controls, and developing a written privacy program, you can protect customers and your business.
If you're unsure where to start or how new laws apply to your company, Castroland Legal can help you design a right‑sized privacy strategy that keeps you compliant and competitive.