<p>How do informal sector entrepreneurs strategically interact with the institutional arrangements determining their degree of inclusion in society? Drawing on a framework that defines informal sector business activities as illegal but perceived as legitimate by important stakeholders, we develop a theory of how entrepreneurs interact with institutional arrangements in the informal sector. We argue that the tension between illegality and legitimacy gives rise to arrangements that allow entrepreneurs to operate&#xa0;informal businesses while excluding them&#xa0;from the mainstream of society. We employ a grounded theory approach to analyze the history of networks of illegal rural migrants who created used cooking oil (UCO) collection businesses in Beijing during the economic boom of late 20th-century China. Our case study is informed by scholarship of Chinese administrative history that identifies a characteristically Chinese institutional arrangement, the Third Realm. By drawing from interviews with actors in Beijing from the 1980s through the first two decades of the twenty-first century, we explain how the arrangements that govern informal sector activities can become dynamic and transitional between negative and positive states. In this context, informal sector entrepreneurs engage in activities that resist hostile control and achieve an outcome we call legitimation without full inclusion.</p>