If you’re starting a business in South Africa, you need to know how it will be structured, and that includes understanding which of the country’s two business sectors, formal or informal, your business actually falls into.
Every business should ideally sit in the formal sector, but a genuinely large share of South African businesses operate informally. Understanding the difference matters for knowing exactly where your own business stands.
What is a formal business?
A formal business in South Africa is any organised business offering fixed terms of employment: regular hours, regular wages, and proper tax compliance. Formal businesses are registered and legally protected.
This includes both private businesses and public corporations, any organisation that meets all relevant legal requirements and operates with a clear, regulated structure.
What is the formal and informal sector?
The formal sector covers all registered, tax-paying, regulated businesses in the economy, everything from grocery stores and restaurants to petrol stations, banks and insurance companies. As long as a business meets its legal requirements and employs people legally, it sits in the formal sector, the recognised part of the economy that contributes measurably to GDP.
The informal sector covers the part of the economy that is not taxed or monitored by government, and it makes up a genuinely substantial share of South Africa’s economy. Informal economic activity is largely excluded from official GDP figures, if a business’s activity is “off the books,” it falls under the informal economy.
Informal businesses are typically run by people not employed in the formal sector, including many township businesses and home-based small businesses. The sector also includes unregistered or unregulated ventures beyond the more common small local businesses and solo entrepreneurs.
Recent Statistics South Africa data shows informal employment has been rising, reaching 21.4% of all jobs in the fourth quarter of 2025, up from 19.5% a year earlier, representing around 5.7 million workers. Millions of South Africans depend on the informal sector both as consumers, for affordable meals, clothing, goods and services, and as a source of income where formal employment is not available.
What are three types of informal business?
Walk down any busy street in South Africa and you will encounter informal trading in some form.
Three common examples of informal business in South Africa include:
- Spaza shops
- Hawkers, pavement sellers and street vendors
- Laundromats and other small businesses run from someone’s home
Informal businesses in South Africa are typically concentrated in rural and township areas. They are generally cash-based, operate without formal employment agreements, and are not registered at national or regional level.
What are examples of formal business?
Formal business covers any trade that is regulated, registered, taxed and legally protected, making up the large majority of South Africa’s recognised economic activity.
Common examples of formal business in South Africa include:
- Retail businesses
- Bakeries, hospitality and food service businesses
- Motor trade businesses
- Financial service businesses
- Registered service providers
- Any other legally recognised business
While the majority of South Africa’s formal economic output comes from the formal sector, a significant share of the population relies on the informal economy for both goods and livelihood, particularly in rural and township areas where many businesses remain unregistered and loosely structured.
Regulating trading and economic activity matters, but shutting down informal business entirely would have a genuinely harsh effect on millions of South Africans. Formal and informal businesses continue to coexist, both playing a real role in fuelling the country’s economy.
Frequently asked questions
What is the main difference between formal and informal business in South Africa?
Formal businesses are registered, taxed and regulated with fixed employment terms. Informal businesses operate outside this system, largely untaxed, unmonitored and without formal employment agreements.
How large is South Africa’s informal sector?
Informal employment reached 21.4% of all jobs as of the fourth quarter of 2025, around 5.7 million workers, according to Statistics South Africa, and that share has been rising.
What are common examples of informal business?
Spaza shops, hawkers and street vendors, and home-based small businesses like laundromats are among the most common forms of informal trading in South Africa.
Can an informal business become formal?
Yes. Registering with the CIPC and SARS, and meeting the relevant legal and regulatory requirements for your sector, moves a business from the informal into the formal sector.
Why does South Africa’s informal sector remain so large?
It provides an accessible income source for people who cannot find formal employment, and affordable goods and services for lower-income consumers, particularly in rural and township areas where formal business infrastructure is thinner.
Knowing where your business stands
Understanding whether your business operates formally or informally, and what it would take to move from one to the other, is a foundational part of planning how your business grows and what obligations it carries as it scales.
Originally published in May 2022. Updated September 2026 to reflect current Stats SA informal sector employment figures. Figures are updated regularly by Stats SA, confirm the latest release before citing them.
