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

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 via e-shops or perhaps tutoring children in their homes or visiting clients in their homes. However, they often do not realise that they need a licence to do this. This is because in some cases, sole traders may be engaging in unauthorised business activities, which may not be limited to transgression, but in some cases may also be a criminal offence. Sometimes the excuse of casual earnings is simply not 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.

So when is it an unauthorised business?

Unauthorised business means that a person carries out a business activity without having the proper authorisation to do so. Whether it is a business license, license or registration. This can include situations where:

• The person has never officially started a business, or has not set up a business, 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 licence.
• 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 a regular and systematic income that is not taxable and not subject to tax.

What are the penalties for unauthorised black-marketing?

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 penalties for operating a licensed trade without a licence are even more severe, 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).

But there are other consequences besides fines and prosecution. The most common 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.

Illegal business in practice

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’ve got a problem. 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 a trade licence. Following a tip-off from a rival 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 as to whether or not it is a business. 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.

Summary

Anyone who carries on a gainful activity on a continuous basis, on his or her own responsibility and for profit, without having the necessary authorisation – typically a trade licence – is at risk of being an unauthorised entrepreneur. 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.