The formal and informal sectors intersect when the topic relates opportunity costs reinforcing the cost-benefit approach. The legalist perspective suggests that formalization is the mechanism for protecting business and property rights, creating capital, increasing productivity, and attracting investment. De Soto (2000) claims that real estate value in Third World countries amounts to $9.3 trillion, a figure that exceeds any kind of donations and loans from the developed world. We witness the unique entrepreneurial ingenuity that poor people have created in the developing world. However, it is dead capital that cannot be used for economic development unless it is treated appropriately. De Soto argues that the greater the formalization, the greater the potential to accumulate wealth and reduce the poverty rate. The concept he considers crucial for generating capital flows is the “surplus value” created by formalization and property rights. The economic potential of the assets must be fixed to initiate additional production. The resources must be integrated into a single formal representation system; this is how the West succeeded in the capitalist realm. In 1849, in California, Congress gradually integrated the informal property created by immigrants and miners. Therefore, the benefits from a business perspective of operating formally are: limited liability that does not risk the entire property of the business/owner; enforceable commercial contracts, which allow business entities to secure rights and obligations to be respected; access to financial and market information, legalized and registered entities benefit from the trust of financial institutions; access to government incentives, including tenders and export promotion policies; access to infrastructure and public services; ...... middle of paper ...... sloping countries. Its costs arise from fines after they have been detected by government authorities. These penalties are very severe and usually covered by the modest production or physical capital of informal entities. On the other hand, as MSMEs are informal, they often fail to achieve economies of scale, enjoy legal and judicial benefits and social services, lack bargaining power and the ability to enforce contracts through the courts. Therefore, it reduces the possibilities for investments from domestic and capital markets. We have identified the advantages and disadvantages of being formal/informal to better understand the challenges in both circumstances. However, it is necessary to carefully analyze the precedence of successful formalization and successful informal institutions in order to challenge modern economic paradigms in development economics..