My single owner S corporation IT client is adding a partner. The new partner is mostly contributing sweat equity in the early years. He will be buying into the business at 1% the first year, 8% the second year, but nowhere near 50/50. The current owner wants to give him distributions equal to his own. This seems to be fairly common in the IT consulting world.
The attorney doesn't want to form a new entity because it will mean having to renegotiate the current vendor contracts. The attorney wants to somehow do an automatic conversion of the S corporation to the LLC. Like a Check the Box option, which my reading, isn't an option.
We agree with the attorney that a multi-member LLC is a better entity choice. My research says the only way to accomplish this change is to liquidate the existing S corporation and have the owner reinvest this money in a new LLC.
The question is - if the S corp is liquidated and the proceeds are revinvested in the new LLC, is the liquidation a taxable transaction for the existing shareholder? He has equity of about $50K in his his business now. If it is not taxable, how is the liquidation and reinvestment reported?