When a two member LLC becomes a one member LLC because one of the members sells their units for less then their capital account balance, how do you account for it? Per the federal tax regulations, if they do not elect to be treated as a corporation, the partnership liquidates I believe and it becomes a sole proprietorship in the eyes of the feds. Would you account for the sale or the liquidation first? How does the selling member account for the loss if the capital contribution was for the fair market value of labor performed during the start up of the business? No salaries were paid and the selling member wants to get out but not get screwed. The LLC wants to continue under the state laws and likely this is a non-event under the states eyes.