7 Reasons Why Contracts Are Important for Small Businesses

Ever had a business deal go south because of unclear terms? You're not alone - and there's a simple solution.

Clear and complete contracts are vital for small businesses. 

Businesses use contracts every day. 

Some do it on purpose. Others don't even know it. 

Every time you make a deal in your business, it is a type of contract. Whether in writing or just verbal.

Think about it. You order supplies. You sell your products or services. You hire contractors or freelancers. All of these are contracts. They're the backbone of business.

But not all contracts are the same. Well thought out and detailed contracts can save you from big headaches. Unclear agreements can cost you time and money.

As a small business attorney, I've seen the benefit of having the right contracts in place. They create certainty and efficiency within your business. 

But I've also seen the mess that comes from poor agreements.

In this article, we'll explore why good contracts are so important. 

What is a contract?

A contract is an agreement between parties that is legally enforceable. Essentially, a promise that is enforceable by law. 

They can be written down or verbal. That said, some types of contracts must be in writing to be enforceable. 

Good contracts describe exactly what each side will do and when they will do it. They also describe things like:

• What happens if someone doesn’t do what they said they would
• How to end the relationship 
• What happens if an unforeseen event occurs (like a hurricane)

In business it is important for contracts to always be in writing. Verbal contracts lack clarity. And they are much harder to enforce.  

Why are contracts important?

1. They are a record of the agreement

The most important reason to use a written contract is to set clear expectations. 

They are like a game plan for business relationships. 

A good contract captures all the key parts of your deal. It shows:

• What you'll do
• What the other person will do
• When things need to happen
• How much money is involved
• Where the work will be done
• How long the agreement lasts
• What happens if someone doesn't follow through
• How to end the agreement

Each side enters the relationship with a clear understanding of what they can expect from the other.

It can also be very helpful later in the relationship. It's there to look at if anyone gets confused.

If a disagreement pops up, look at the contract. It shows what everyone agreed to. 

A clear record can stop arguments before they start. And it keeps everyone on the same page.

Contracts aren't just about protecting yourself. They're about creating clear expectations for everyone involved. Clarity helps build strong, lasting business relationships.

2. They prevent conflict and reduce risk

Well-written contracts help you avoid problems before they start in two main ways:

• Clear expectations stop misunderstandings
• They allow you to identify who takes on certain risks

Contracts set clear rules from the start. Everyone knows what they are supposed to do. 

When that’s the case, there is less room for confusion. It's harder for someone to say they didn't know about an obligation when it’s in writing.  

They also help you manage risk in your business. They outline who's responsible if something goes wrong. If negotiated properly, this can limit your potential losses. 

Key parts of a contract that help reduce risk include:

• Indemnity clauses: Who pays if something goes wrong. For example, if you're a contractor this might protect you from paying for damage caused by your subcontractors.
• Limitations of liability: These put a cap on how much you might have to pay if something bad happens.
• Force majeure: This describes what happens if either side can’t perform their obligations  due to events beyond their control, like natural disasters or pandemics.

Each side has a different role and should take on the risks associated with that role. Written agreements allow the parties to negotiate those risks.

That leads to smoother, more predictable business relationships. 

Remember, preventing problems is always easier than fixing them later.

3. Contracts demonstrate trust

You value strong long term relationships in your business. Written agreements demonstrate that value. 

They show that:

• You are professional
• You care
• You are willing to stand by your promises
• You value transparency

When used correctly, contracts set a strong foundation for a long term relationship. 

It’s not all about preparing for things to go wrong. It’s actually the opposite. 

Clear expectations on the front end lead to profitable long term relationships. 

Think of a contract as a bridge of trust between you and the people you do business with. 

4. Defining boundaries

You need to define the boundaries of your work in writing. If you don’t, you might find yourself doing more than you agreed to do. 

Contracts help you prevent this from happening by clearly defining what is and is not included in the deal you make. They also outline a timeframe for performance. 

It is much easier to say no to extra work if the agreement is in writing. It’s also easier to change the price if necessary. 

Good contracts help you keep your projects on track and profitable. 

5. They encourage communication and planning

Contracts start conversations. They make you think about your business deals in detail.

The process happens in two stages. 

First, within your own business. And then with the other party. 

Internally you may consider:

• How much money you will make
• When you will get paid
• How long it will take
• Who in your business has to be involved
• What the cost will be to you

With the other party you might discuss:

• What they expect the end result to be
• What they want to be included
• How you get access to their property or IT system
• Who should take on certain risks and why

Planning ahead helps you make better decisions. 

Communication that stems from contract negotiations usually leads to better business deals.

6. They reflect your company's values

Written agreements demonstrate the way you do business. They reflect what you value. 

If you value fairness and clarity, the contract will be balanced and easy to understand. If you value a commitment to quality or quick turn around time, your contracts will reflect those values. 

Think of your contracts as an extension of your brand. They should match the image you want for your business.

Your business is rooted in honesty and integrity. Reflecting those values in writing shows that you are committed to them. 

7. Contracts make promises enforceable

Contracts make promises legally binding. They provide a level of certainty for everyone involved.

Despite what some lawyers believe, the goal isn't to end up in court. The goal is to partner with people of integrity and set clear expectations. 

However, sometimes things do go wrong. And when they do, having a written contract can be very useful. 

Putting your agreement in writing will make it easier to enforce down the road if necessary. 

If your agreement was not written down, it is a he said she said scenario. Who does the judge or jury believe?

But if you put your agreement in writing and clearly describe the details, it will be easier to predict the outcome of a lawsuit.

So why is it important to have a written contract?

We've explored seven key reasons why contracts are important for your small business. At their core, contracts serve two primary purposes:

• Setting expectations

• Mitigating risk

Setting expectations properly can prevent confusion and show that you're a trustworthy professional. 

Contracts also:

• Define the scope of work
• Encourage thoughtful planning
• Reflect your company’s values
• Provide a way to enforce promises

Remember, contracts aren't about preparing for things to go wrong. They're about setting the stage for things to go right. Contracts pave the way for smooth, profitable, and long-lasting business relationships by clearly outlining what each party expects. 

If you need help creating or reviewing contracts for your business, you should consult with a small business attorney. 

In order to properly set expectations and mitigate risk, contracts must be detailed and clear. A good business lawyer can help you accomplish those goals. 

Having good contracts in place will probably save you time, money, and headache in the future. 

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Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article  without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.