The answer is that from a tax point of view, it is advantageous to trade through a limited company as long as income is drawn from company by owners as dividends from their shares and amount of dividends drawn is restricted below 40% band rate (i.e. œ31,063 for tax year 2002/03). That way, owners have no further personal tax ("income tax") to pay. Moreover, dividends are not subject to national insurance contributions. This is excellent news of course. But, if dividend income falls within higher rate bracket of income tax (i.e. above œ34,515), they will be taxed at 22.5% on excess, which of course will increase tax burden. The company profits are subject to corporation tax rates. Those are lower than income tax rates.

The most catastrophic scenario is when director takes his reward from company as salary. Then his/her salary is taxed at income tax rates (like a sole trader's income). That is because, unlike sole traders, tax system treats companies as separate from their owners because a company is a separate legal entity. The problem is that income taxes are higher than corporation tax rates. On top of that, they will be subject to employee and employer national insurance contributions, which of course increase tax burden and render his position worse than even an unincorporated business ("sole trader"), because NIC Class 1 on payroll are higher than NIC Class 2 paid by self employed.

In contrast, a self employed person ("sole trader") is taxed at income tax rates on profits from his business, which are added to his other sources of income. As it has already been mentioned, income tax rates are overall higher than corporation tax rates. On top of income tax, national insurance contributions class 4 are payable on business profits within a specified band (7% on profits between œ4,615and œ30,420). National insurance contributions Class 2 are also paid by self-employed people, although those are lower than those payable by company directors on their salaries.

To illustrate above, let's take a simple example. We have a limited company and a sole trader. They both make œ60,000 profits each in tax year 2002/03. We assume that company director takes a salary equal to amount of his personal allowances (untaxed income) of œ4,615 and balance as dividends. The company will pay corporation tax at 19% equal to œ10,523 and nothing else. The sole trader will pay income tax œ16,542, National insurance Class 2 œ104 and National insurance Class 4 œ1,806. Total œ18,452. The bottom line is that person that has incorporated his business into a limited company will make a tax saving of œ7,929 compared to a sole trader! Isn't that fantastic?

Somebody might be wondering: why is this entire happening? The official explanation is that, this government, to help economy grow, encourages people to leave as much profits within their businesses to be reinvested, instead of being taken out and spent.

#1 People who are looking for a sure-fire "get rich quick" scheme

I don't know about you, but well-off people I know worked their behinds off for their money (unless they were lucky enough to have a rich old aunt kick bucket in their favor.) Personally I've never yet met a person who has actually gotten rich from a "get rich quick" scheme, but I've encountered THOUSANDS who tanked trying to get rich without work. P.T. Barnum was right about a sucker being born every minute. The Internet has empowered these people. They literally can't wait to get online to get taken advantage of. It's sickening. You want to get rich? Work!

#2 Expecting to create a profitable online business without making any investment

These people often overlap with group above. They're really gullible ones. Despite massive evidence to contrary, they expect to go online, invest NOTHING, and make their fortune lickety- split. It NEVER happens. Having encountered a ton of these people, however, I've become a critic of educational system which produced them. What are we teaching people in schools that leads them to think that merely showing up is going to make them rich?

#3 Expecting to create a business without knowing products

How many times have you asked someone for information about products sold by their company and gotten a bumbling, non-sensical response? The sad truth is that first thing people ought to know about their businesses -- namely what they're selling and what's so good about it -- is actually last thing you can get an intelligent response about. How can people expect to prosper selling things they cannot explain and know so little about? Yet that's precisely what far too many people online are doing!

#4 Changing your online business over and over again

I know a woman who's into a new online "business" every few DAYS. One day she's selling herbal products... next day it's online services... then it's fake noble titles. She cannot decide what business she's in and because she's afraid she's missing out on a couple of nickles somewhere, she jumps from "business" to "business" faster than a flea jumping onto a new dog. Her sales are pathetic, of course, her credibility non-existent, but her unshakable optimism just cannot be dented, despite mountains of evidence that she's a fool. Lord, spare me from those with ability for unlimited self-deception, especially when they keep emailing me with their latest and greatest "sure-thing" discovery.

#5 The Non-Readers