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.