Small business owners may shy away from formal contracts of any kind, preferring the informality of verbal or electronic (e.g. e-mail) agreements.
The advantages of this are less bureaucracy and paperwork; lack of legal expenses associated with drafting and reviewing contracts; and potentially stronger trust-based relationships with customers, employees, suppliers, and other stakeholders.
The major downside of not having formal contracts in place is that there can be miscommunication and confusion about who is supposed to do what and when, as the parties involved may have different interpretations of what is expected. Another disadvantage is that even when there is consensus initially, one of the parties may later renege on an agreement.
Either of these situations can degenerate into a complete breakdown of relations or even disputes that can only be resolved in a court of law.
Business contracts can be as simple or complex as circumstances require, and small business owners should not assume that by definition all contracts are difficult to understand or involve some trickery and loopholes.
For instance, quotations sent to potential customers (and received from suppliers) can be viewed as contracts as they specify what products and services will provide, when, how and what cost. Payment is an indication that the quotation has been accepted, and there is an expectation that the business will do what is specified in the quotation.
Another example is that of employment contracts, which can consist of a short customized document (indicating the job title, the hours of work, remuneration, and the start and end dates of employment), accompanied by standardized policies regarding leave days, performance reviews and other aspects of the employment relationship.
Small business owners may choose to distinguish between permanent and temporary employees and have written agreements with the former. It may be worthwhile for small business owners to engage a legal expert on a once-off basis to develop standardized templates for contracts typically entered into by the business on a day-to-day basis. These can then be tweaked where necessary.
Alternatively, small business owners can conduct secondary research (e.g. local and international websites targeted at small businesses) and develop their own contracts or purchase ready-made versions from stationery shops.