Starting a Business: Risk of Penalties

Abstract

The risks of penalties for doing business without registration and for unauthorized business activities are different in the legal systems of different countries. Russia establishes criminal or administrative liability for illegal business activities as a crime in itself. In the United States, the United Kingdom, France and Germany criminal or civil penalties generally apply for tax evasion or failure to pay for social insurance. The peculiarity of French law is the use of astreinte to force business registration. This approach seems to be more effective in the context of business withdrawal from the shadows, but it raises apprehension in the context of the entropy of the legal system. Carrying out unauthorized activities in Western legal systems entails criminal or civil penalties regardless of the size of the income. The type of activity and other circumstances are taken into account. Over the past decade, registration systems for the final beneficiaries of legal entities are being introduced everywhere. The comparative study leads to the conclusion that punishment (both criminal and administrative) for engaging in commercial activities without registration is not an effective tool for getting business out of the shadows. British rules seem more successful. In England and Wales the obligation to notify tax authorities of the facts arises as the business succeeds, reaches a certain level of income or profit. Responsibility is provided for tax evasion, and failure to act does not entail a criminal charge. Russian legislation on licensing activities loses consistency and becomes difficult to foreseeable, its revision is necessary. The question of sanctions (criminal or otherwise) for unauthorized activities should be decided not on the base of the amount of income, but on the base of the danger that the activity poses to others. Registration systems for beneficial owners entail dubious benefits and are fraught with additional problems.