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.

We shall proceed step-by-step.

1. Monthly unique users: Analyze your server log files using a good server log analysis software package that can tell you how many unique users come to your web site every month. Some web hosting service providers already give you log file analysis. Ask your web hosting provider whether they do. If your provider does not, download one from Download.com. For our example here, let us assume that you get 1,000 unique users a month.

2. Number of sales per month: Next, you need to find out how many sales you make per month on average. This is number of units that you sell, not sales value in dollar terms. For our example here, let us assume that you sell 50 units per month of whatever product or service it is that you sell.

3. Conversion ratio: Calculate your conversion ratio by dividing your monthly unique users by your monthly sales units and converting that into a percentage. In our example, that is 50 divide by 1000 multiplied by 100 which is equal to 5%.

4. Next, write down your gross profit on sales units. For example, if you sell downloadable software for $80 per unit, and your per unit costs are $15, then your gross profit per unit of sales is $65.

5. Now you know that for every 100 people that visit your web site, five percent of them by something on your web site that has an average value of $65 and that brings you a gross profit of $65 x 5 = $325. This means that you can afford to spend a maximum of $3.25 per visitor if you were to pay someone to bring you visitors to your web site ($325 divided by 100).

6. Find out what keywords people used to search for your web site. Again, analyze your server log files to find out what keywords were used to find you. That kind of information is there. Also, go to http://inventory.overture.com and see what keywords related to your web site are popular.