The formal and informal sectors intersect when the topic concerns opportunity costs, reinforcing the cost-benefit approach. The legalistic perspective suggests that formalization is the mechanism to protect business and property rights, create capital, increase productivity, and attract investment. De Soto (2000) states that the value of real estate in third world countries is $9.3 trillion, which exceeds any form of grant and loan from the developed world. We are witnessing 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 if it is not handled properly. De Soto argues that the higher the formalization, the more potential there is 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 assets must be fixed in order to launch additional production. Assets must be integrated into a formal representation system; this is how the West succeeded in the capitalist domain. In 1849, in California, Congress gradually incorporated informal property created by immigrants and miners. Thus, the advantages, from the company's point of view, of a formal activity are: limited liability that does not endanger the entire assets of the company/owner; enforceable commercial contracts, enabling commercial entities to ensure compliance with their rights and obligations; 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 public infrastructure and services; ...... middle of paper ...... sloping country. Its costs come from sanctions after their detection by government authorities. These fines are very severe and generally covered by the modest production or physical capital stock of informal entities. On the other hand, MSMEs being informal, they are often prevented from achieving economies of scale, benefiting from legal and judicial advantages and social services, without negotiating power or ability to enforce contracts before the courts. Thus, it reduces the chances of investments in internal markets and capital markets. We have positioned the advantages and disadvantages of formal/informal to better understand the challenges in both circumstances. However, there is a need to closely analyze the precedence of successful formalization as well as successful informal institutions in order to challenge modern economic paradigms of development economics..