Formal Businesses
- Formal businesses generally have the following features that set them apart from informal businesses
- They are legally recognised and registered with the government or a competent authority
- A competent authority is someone who is authorised by the government to legally register businesses
- Examples of competent authority include rural or urban councils or the registrar of companies
- Formal businesses are required to adhere to certain laws and regulations
- Some formal businesses often have limited liability, meaning owners are only liable for the amount of money invested in the business
- Formal businesses often have access to more resources and opportunities, such as loans and investments
- Formal businesses often have more credibility and are perceived as more trustworthy by customers and partners
- This is because most formal businesses often have a registered office or site from which they operate
Advantages of formal businesses
- Advantages are closely related to the features of formal businesses. These include:
- The fact that the business is legally recognised the government and its authorities
- They have access to more resources including loans
- They can process VAT properly and do not have to treat it as a cost
- Some of them have limited liability
- Have credibility and are perceived as more trustworthy by customers
Disadvantages of Formal Businesses:
- Higher start-up costs and ongoing expenses, such as legal fees and compliance costs
- More bureaucracy and paperwork
- Potential for higher taxes
- Greater risk of government intervention and legal action
Informal Businesses:
- Not legally recognized or registered with the government
- Not required to adhere to certain laws and regulations
- Often operated on a small scale and informally
- Low start-up costs
- Greater flexibility in terms of operations and decision-making
Advantages of Informal Businesses:
- Lower start-up costs and ongoing expenses
- Greater flexibility in terms of operations and decision-making
- More autonomy
- Potential for higher profits
Disadvantages of Informal Businesses:
- No legal recognition or protection
- Limited access to resources and opportunities, such as loans and investments
- No legal recourse if disputes arise
- Limited credibility and perceived as less trustworthy by customers and partners
- Potential for operating in illegal activities
Differences between Informal and Formal Businesses:
- Formal businesses are legally recognized and registered with the government, while informal businesses are not.
- Formal businesses are required to adhere to certain laws and regulations, while informal businesses are not.
- Formal businesses often have limited liability, while informal businesses do not.
- Formal businesses have access to more resources and opportunities, while informal businesses have limited access.
- Formal businesses have more credibility and are perceived as more trustworthy, while informal businesses have limited credibility and are perceived as less trustworthy.
