So you’ve decided to make a go of it and follow your dream of operating your own small business. Congratulations! You’ve got quite an adventure ahead of you — one filled with long days, frustrating lows, lots of paperwork, exhilarating highs and quite a few evenings when you can sit back and say “Yes — this is what life is all about.” Owning your own business is not for the faint of heart, but nearly every entrepreneur that I know will tell you that it is absolutely worth it.

However, many people who are starting their own business, and even those who are veterans at the game make a very simple, but very costly mistake. They make the mistake of doing work without a contract. There are quite a few reasons for this occurring, of course. You want to trust people. There is so much legalese in those things — they can sound pretty complicated and scary! Some people even believe that they can scare away potential customers.

man-875702_1280The truth is, though, that working under contract — whether you’re selling homemade stuffed animals or creating web content for a website — is essential to running a successful business. Here are a few of the reasons why using contracts in your smart business is a smart decision.

Reason #1: Protection

One of the essential reasons to work with a contract is for protection. Legally speaking, a contract is nothing more than a detailed agreement between two independent parties that is legally enforceable, where one party receives compensation in some fashion for either a service or product that is provided to the other party. That’s it. As a business owner, working under a contract provides you with a way to make sure that you are compensated and treated fairly. On the flip side, it also offers protection to your client, providing a way for them to have their grievances addressed.

Working without a contract means that you and your client have very few legal or in some cases no legal recourse when something goes wrong. Is that a chance you want to take?

Reason #2: Clarification

Let’s face it; people make mistakes and misunderstandings can happen every day. A contract, which details what services or products are being offered, as well as the compensation that is expected, lessens the chance of those misunderstandings and mistakes ruining an otherwise potentially good business relationship.

Reason #3: Professionalism

Getting into the habit of working with a contract also indicates to your potential and current clients that you take your business, and them, seriously. It indicates that you not only want to be in the game for the long haul, but that you also value them as customers and wish to look out for their best interests if you can. That kind of dedication to the business and your customers also provides another reason why working with a contract is a good idea.

Reason #4: Referral Marketing

Believe it or not, working under a contract is not only the professional thing to do, but it is also a great way to increase your business through personal referrals.

Let’s say for the sake of argument that you wanted to get your roof fixed. You ask your friends or co-workers for recommendations. One friend tells you that they know someone who in turn knows someone who can do the job at an astronomically low price, provided that you pay in cash and don’t ask too many questions. Another friend gives you the name and number of another company and lets you take a look at the contract they signed with the roofer. Everything looks very professional and aboveboard, and the prices seem pretty reasonable as well. Provided that you could afford the cost in both cases, wouldn’t you want to go with the second choice? Why? Well, one of the reasons is because of the professional attitude of the roofer, and the other would be the satisfaction of your friend. Without that contract, chances are that this level of satisfaction may not have been reached. Without that satisfaction, your friend may not have suggested that roofing company.

The same thing — getting a satisfied customer to make a recommendation to a friend — can happen for you and your business. And just like that roofer, you’re more likely to have a satisfied customer if you provide your client with exactly what they need, which was spelled out in a contract.

What other reasons do you have for using a contract in your business dealings?