Unauthorised entrepreneurship or when does earning a living become a problem?

Quick overview

• Earning a living turns into a business mainly when you do it consistently, for profit, on your own account and offer it publicly.
• So, it’s not enough to say it’s “just a side hustle” if you regularly take orders, have a price list, promote your services on Instagram or sell goods through an e-store.
• Without the correct authorisation, you risk a fine from the trade authority, tax assessments and, on a larger scale, criminal prosecution.

Not sure if your activity already falls under business? Our online legal advice service will help you assess your specific situation and recommend how to remedy it safely.

Nowadays, business activities are no longer limited to brick-and-mortar shops and offices. People are also offering their services on social media, selling handmade products through e-shops or perhaps tutoring children in their own homes or visiting clients in their homes. However, they often do not realise that they need to be licensed to do so. This is because in some cases, sole traders may be engaging in unauthorised business activities, which may not be limited to an offence, but in some cases may also be a criminal offence. Sometimes the excuse of casual earnings is simply no longer enough.

What is a business?

A basic definition of what a business actually is would be found in Section 420 of the Civil Code. This states that “whoever independently carries out, on his own account and responsibility, a gainful activity by trade or similar means with the intention of doing so on a continuous basis for profit, shall be deemed to be an entrepreneur with respect to that activity.”

This implies several essential facts: the activity is gainful, continuous, carried on on one’s own responsibility and for profit. And it is the fulfilment of these characteristics that determines whether or not it is a business.

In practice, it is the consistency that we most often see people underestimate. A one-off order may not be a problem, but regular income, repeated orders and public advertising may be enough for the authorities to conclude that it is not a regular business but a business.

If you are not sure whether your activity already fulfils these characteristics, do not leave the decision to gut feeling. A short legal consultation can save you a fine and an unpleasant explanation to the authorities.

So when is an unauthorised business?

An unauthorised business means that a person carries out a business activity without being properly authorised to do so. Whether it is a trade licence, concession, licence or other registration required by law. Thus, it can be a situation where:

• The person has never officially started a business or established a trade, but nevertheless offers their services or products to the public.
• The entrepreneur goes beyond the scope of his or her trade, so that, for example, instead of consulting, he or she suddenly starts selling products without a permit.
• The person hides the business activity under the cover of another contract, such as ‘equipment rental’ or ‘assistance in exchange for a donation’.
• The initially innocent income suddenly turns into regular and systematic income that is not taxable and not subject to tax.

What are the penalties for unauthorised black market business?

Unauthorised business is primarily an offence under the Trade Business Act. The Act states that an individual commits an offence by carrying on a trade without the appropriate trade licence. The law imposes a fine of up to CZK 500,000 for such conduct.

However, if you carry out a craft or related trade without having a trade licence for it, you are already liable to a fine of up to CZK 750,000.

The most severe penalties are for operating a licensed trade without a licence, for which you can be fined up to CZK 1 million.

The fine in this case is imposed by the relevant trade licensing authority, which may also order you to cease your activity.

However, there is also the possibility that you will carry out the activity in question on a larger scale. Then you would not only be committing an offence, but you may also be committing the offence of unauthorised business, which is regulated by Section 251 of the Criminal Code. Under this section, anyone who unlawfully provides services or manufactures, modifies, repairs or sells products or goods on a large scale will spend up to two years in prison. The person may also be banned from working or forfeit property or other assets.

Unfortunately, the law does not define exactly what is meant by “greater extent”. However, practice and case law show that it is considered, for example:

• the repetition and systematic nature of the activity,
• the amount of profit or turnover,
• the duration of the activity,
• the extent of the services provided or the number of customers,
• the method of promotion (e.g. advertising on the internet).

This is where the assessment is most sensitive. There is no one-size-fits-all amount or number of contracts that automatically makes it clear that a crime is involved. Authorities and courts therefore assess the whole picture of the activity – how long it lasted, how much money it brought in, how it was organised and whether it appeared on the surface to be business as usual.

But you face other consequences besides fines and prosecution. The most common ones are:

• Income tax, VAT or social security and health insurance premiums can be backdated by the tax authorities.
• Claiming compensation: if the unauthorised business has caused damage (e.g. faulty service), the victim can claim compensation, which you will have to pay.
• Prohibition: This can be imposed on you under administrative or criminal proceedings.

Have you received a notice from the trade licensing authority, the tax office or the health authority? Get in touch before you reply. We can help you prepare a response that will not unnecessarily aggravate your position.

Illegal business in practice

Practice example: a client started baking cakes for friends while on parental leave. Initially, it was a few orders a month, but later she set up a public profile, posted a price list and started taking orders from strangers. The problem wasn’t that she was making money occasionally, but the combination of regularity, promotion and profit. In a situation like this, it is advisable not to wait for an inspection, but to legalise the activity as soon as possible while sorting out tax and hygiene obligations.

Are you on maternity leave and baking cakes for your friends? That’s fine. However, the moment you set up an Instagram profile, collect orders and start selling the cakes to other people, you are already in trouble. Assuming, of course, that you don’t have a business license or a sanitation-approved kitchen. Then you can expect an inspection and a fine from the trade authority.

An even bigger nuisance was faced by a young man who set up an e-shop selling clothes online, importing goods from Chinese e-shops. He advertised his offer on social media, where he received several dozen orders a week. However, the young man did not have a business license or pay taxes. When his activities were discovered by the tax authorities, they filed a criminal complaint.

And there was also a big problem with a person who offered sports massages in a home environment without having the necessary qualifications and the corresponding trade licence. Following a tip-off from a competing masseur, the authority initiated proceedings against the person and there were also inspections from the hygiene and tax authorities.

This is not a business yet

Then there are activities which, although they may bring you some income, are still not a business in certain circumstances. Typically these things are:

• Casual income: if you sell second-hand household goods, for example, or bake something for someone on a whim without targeted advertising, then you are not in business.
• Donation: Here, however, it must be clear that it is indeed a donation with no expectation of return.
• Royalties: For example, such occasional creation of articles or photographs may be taxed as royalty income, so you are still not a business.
• Rental of property: If it is not a systematic commercial activity, then you don’t have to worry about being in business without a license.

However, each case is always assessed on a completely individual basis. The decisive factor here is mainly the long-term nature, the intention to make a profit and the public offer.

What if I find out I’m operating without a license?

If you have just discovered that you may be running an unauthorised business, then don’t panic, take action. First and foremost, stop the activity and consult a lawyer to determine whether it is a business or not. To do this, you can use our online legal advice service with a tailored solution to your legal problem. At the same time, set up a business as soon as possible, because the sooner you legalise the activity, the better. Report your income back and pay the taxes that are due. Actively communicate with the authorities and ask yourself what obligations you need to fulfil to avoid prosecution and fines.

While unauthorised business may look innocent at first glance, ignorance is no excuse. You may feel that it is just a home-based business or that you are testing an idea “out of the box”. But the reality is that the authorities and the courts are taking an increasingly stern look at such behaviour. If you’re not sure whether your activity is already covered by business, don’t be afraid to ask for expert advice. By consulting an attorney early on, you can save yourself a great deal of worry and money.

Do you have a side business that has started to grow into a regular income? Describe what you sell or offer, how often and to whom. In our online legal consultation, we will tell you whether you need a business license, what other obligations may apply to you, and how to possibly correct the past.

Summary

Anyone who carries on a gainful occupation on a continuous basis, on their own responsibility and for profit, without the necessary authorisation – typically a trade licence – is at risk of unlawful trading. Whether it’s baking cakes, selling goods online, tutoring or giving massages, if you offer your services publicly and repeatedly collect money for them, you could very easily run afoul of the law. Not only are you at risk of fines of up to CZK 1 million, but also of tax assessments, bans or, in extreme cases, even criminal prosecution. The decisive factors are consistency, profitability, promotion and scope of activity. If you are not sure whether you are no longer operating “under the table”, you should consult a specialist and, if necessary, get a trade licence as soon as possible.