[CO] What do I need to know about setting up an S-corp?

Lexi, Chatbot

I understand starting a data scraping company can be complex. What specific concerns do you have regarding the formation of your LLC or S-Corp?

Lexi, Chatbot

Have you already taken any steps, like registering your company or consulting any professionals?

Lexi, Chatbot

Is there anything else the corporate lawyer should know?

Queeneth E. Esq

Hello. My name is Queeneth, an attorney with 8+ years of experience. Which state does your question pertain to?

Queeneth E. Esq

Thank you. Here’s an overview:

• LLC (single-member, default tax): Easy setup/maintenance. Taxed on Schedule C. All net profit subject to self-employment tax (15.3%).
• LLC taxed as S-Corp (via IRS election): Still an LLC legally, just taxed differently. You pay yourself a reasonable W-2 salary (payroll taxes apply). Profits above that are distributions not subject to SE tax. More admin: payroll setup, quarterly filings (e.g., Form 941), year-end W-2; usually use a payroll service.
• When S-Corp makes sense: Often once net profit ≥ ~$60k. Below that, admin costs can outweigh tax savings.
• One LLC vs. two: You can run multiple lines under one LLC (use DBAs and clean books).
• Consider a separate LLC if: different liability profile (scraping: contracts/IP/compliance), separate brand, or you want clean financial separation. Each additional LLC adds cost/filings/bookkeeping.
• Selling online nationwide: Usually no foreign registration unless you have physical presence (employees/office/warehouse) in other states.
• Taxes (high-level): Many states don’t tax pure digital services, but rules vary; Colorado generally doesn’t tax most digital services. Income tax is generally where you’re domiciled (Colorado).
• Rule of thumb: Under ~$60k net: stay default LLC for simplicity. Expecting ~$100k+ net: consider LLC + S-Corp election.
• Scraping carries legal risks (CFAA/ToS/IP/privacy), so a separate LLC for the scraping brand can be prudent.

Queeneth E. Esq

The IRS doesn’t give a single number; “reasonable salary” = what someone in your role would be paid:

• Consider industry pay (e.g., data engineer/scraping contractor in your market), your duties (hands-on vs. managerial), and company profits.
• Common benchmark: 40–60% of net profit as W-2 salary, remainder as S-Corp distributions.
• Red flags for audits: salaries that are too low (e.g., $10k on $200k profit) or no salary.

S-Corp admin to expect:

• Run payroll with withholdings; quarterly payroll filings (Form 941); year-end W-2; unemployment insurance.
• Many use Gusto/ADP/QuickBooks Payroll (~$40–$100/month).
• File 1120-S annually; issue yourself a K-1.
• Budget for a CPA ($1k–$2k/yr), typically offset by tax savings at higher profits.
• Potential benefits: solo 401(k), certain health reimbursements (special rules for >2% shareholders).

Formation steps for the new entity:

1. File Articles of Organization in Colorado.
2. Get a new EIN.
3. Make S-Corp election (Form 2553) within 75 days of formation (or by next year’s deadline).
4. Keep your existing freelance LLC as a disregarded entity if you like, and run the new one as the S-Corp.

Legal risk notes for scraping (high level):

• CFAA (18 U.S.C. § 1030): Risk if access is “without authorization”—e.g., behind logins/paywalls or bypassing technical blocks.
• Terms of Service (ToS): Violations can lead to breach-of-contract/unfair competition claims, even if not criminal.
• Copyright/Database rights: Avoid reproducing proprietary or creative content at scale.
• Privacy laws (GDPR/CCPA, etc.): Be careful collecting or selling personal data (emails/phones/locations).

Lower-risk practices:

• Stick to public web pages (no login walls/paid content).
• Respect robots.txt (not binding, but shows good faith).
• Throttle requests to avoid service disruption claims.
• Aim for transformative use (analytics/insights, not republishing raw data).
• Avoid sensitive personal info unless you have clear legal grounds/consent.