Equity consolidation when going from an SCorp to a CCorp

[Mars]

I am working with a client that was an LLC in 2020 and elected to file as an SCorp for 2020. At the end of 2020 Decmeber they received an investment from a VC and were  required to switch to a CCorp. They are incorporated in Delaware now and will be filing as a CCorp in 2021. We did file a revocation with the IRS. At the end of 2020 they had net equity of -$1k. Which comprised of 4k owner investment and $4.3k of owner distributions and a net loss.

Should the opening balance sheet for 2021 just be consolidated into retained earnings? Consolidating the investment and distributions into retained earnings or is there some other transaction required? My instinct says to consolidate them but I am not very familiar with switching an entity from an S to C Corp.

 

Thanks for your response in advance.

[Lee B]

Unless your outside stock basis is different from the inside basis, you may have a a small taxable event at the end of 2020,

Also becoming a C Corp with negative equity in essence constitutes the assumption of debt.

On way or the other, in this scenario, you may have taxable transaction.