Entrepreneurs know that starting and running a successful business is hard work. They also know that growing a small business is like a marathon - long, time-consuming and grueling.

However, what many entrepreneurs don't expect is that experience can be like a hurdling event. These hurdles often appear as endless administrative forms, tax reports, and compliance with ever-changing workplace regulations. As race continues, obstacles get taller, especially in administering benefits and competing with large companies to recruit and retain talented employees. Before long, many entrepreneurs are unable to concentrate on business, and they lose speed. Consequently, a growing number of business owners are turning to Professional Employment Organizations (P.E.O.s) to remove these hurdles.

P.E.O.s were born out of frustration many small business owners experience when administrative work inhibits ability to grow an organization. To overcome that challenge, a business and a P.E.O. enter into what is called a "co-employer" relationship with existing employees, enabling P.E.O. to serve as business off-site human resources department.

According to National Association of Professional Employer Organizations (NAPEO) (www.napeo.org), there are three principal reasons why P.E.O. industry continues to grow rapidly. Chief among them is increase in number and complexity of workplace regulations (there are currently estimated to be more than 4,000 local, state and federal employment regulations).

The second underlying factor stems from need of business owners to attract and retain superior talent in a competitive labor market. For example, with a full-service P.E.O., employees at small and medium sized businesses have access to big company health plans, an employee assistance plan (EAP), a credit-union, educational assistance, a 401K plan, and other employee benefits that previously may have been unavailable.

Third, business owners seeking to control their operating costs are turning to P.E.O.s to help them better manage administrative expenses.

P.E.O.s offer a variety of services. On a basic level, most P.E.O.s assume responsibility for business payroll and related tax filings, unemployment and workers compensation claims, employer regulatory compliance, and for providing basic benefits such as a 401K plan and health insurance.

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.