Hey thanks so much for taking the time and yes, I think I'm with you. The only thing I'm not sure about is how it works when I'm continuing the business. Below is how the lawyer explained it to me. If you don't mind taking a look, does this sound correct to you? Also if you know the forms to actually implement this, I would love confirmation. My understanding is that I should file a short year 1065. I know that he gets a Final K-1. I'm not sure if mine is considered "Final" though. And then I also file a 8308 when I send in the 1065. From there I would just do a Schedule C of the business next April b/c I'm now a single member LLC. Actually I think this answers my question about my own K-1 being final. It will be the final one b/c that partnership LLC will be dead and I won't have to do K-1's anymore as a single member.
Say we have 1800 units of product. My partner just wants 144 of them. I'm going to continue the business with the rest of them. According to rule 99-6, we close out by dividing everything in half for the final tax. This is how the lawyer explained it to me:
"Because, an LLC is considered a partnership for federal tax purposes, the removal of your partner would be considered a dissolution of the partnership (because its a two person partnership) and the company would be deemed to make a liquidating distribution to both you and your partner. Accordingly, you and your partner would be taxed as if you were both distributed 50% of the assets of the company and would pay tax on those distributions to the extent they exceed your respective adjusted basis in the LLC.
After the equal distributions, You would then be considered to have "purchased" your partner's share. In the purchase agreement for partner's share, I would include some consideration, such as $100 or so and agree to indemnify him for all future LLC liabilities. This will serve as the consideration for his interest.
Effectively, your partner will be taxed on 1/2 of the partnership, even though he will only get 144 units. Given the numbers you provided, it will likely be about a wash for him as his adjusted basis will offset the gain. He will be left with a small loss ($351 or so).