Taking a livelihood perspective to study tourism has become popular in recent years, but as an essential part of livelihood analysis, institutional processes have not yet received enough attention. This study focuses on the influences of formal and informal institutions on small tourism businesses in rural areas. A case study was conducted in Hong Kong, and the entitlements framework was adopted as an analytical tool. Based on qualitative data generated from field study, this paper describes how different groups of residents rely on institutions at multiple levels to gain assets and make legitimate effective use of them through operating small tourism businesses. Results indicate that the interaction between formal and informal institutions is mediated by a variety of organisations, particularly implementation authorities at the frontline, and determines residents’ access to assets and the tourism market and subsequently, affects their start-up and operation of small tourism businesses. Informal institutions play a vital role in creating a favourable situation for local residents. However, this role may not satisfy small business owners who are non-local residents.