I have a CA LLC (taxed as a partnership) that wants to convert to an S-Corp for both tax & legal purposes. I am wondering if it makes a difference if we either:
1. Convert LLC to Corporation and immediately elect S-Status.
2. Elect S treatment for the LLC then convert to corporation.
The potential problem with #1 is that for, tax purposes, this is treated as a liquidation of the partnership followed by a capitalization of a corporation. While, I don't anticipate any hidden tax traps on these two transactions, I would like to avoid it.
Would #2 avoid this?