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An LLC with several members is generally considered as a partnership.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business.
Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.
Some additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html
All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf
Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
While the LLC with several members is treated as a partnership and it is not disregarded entity - it is not a taxable entity for income tax purposes. When passing income to members - the type of the income is not changes.
So far you established that ownership is divided in proportion 95-5 between partners. As long as the partnership exists - your partner will not be liable to pay taxes on 5% of the 200K.- however if the partnership interest is sold - your partner's basis will be zero (because no contribution is made) - and he/she will be taxed on the full amount.
Your basis is $200k - so your gain in case the interest in sold will be (selling price - $200k (basis).
If you are a partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct any personal withdrawals made from the business.
Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income.It is very common when some partners receive guaranteed payments and others do not. That is based on agreement between partners.
Thus based on your information - 140K/yr annual compensation for services paid to your partner should be treated as guaranteed payments.
Section 83(a) provides generally that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse) as of the first time that the transferee's rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the
amount (if any) paid for the property is included in the service provider's gross income for the taxable year which includes such time.
Correspondingly - section 83(b) if elected allows to postpone recognition of the gain.
Generally - such election is made when employees are given corporate stocks in exchange for their services. I do not see such election would apply to your situation unless you choose to treat your LLC as a corporation and issue shares to your partner.
Let me know if you need any help.
Please be sure to ask for clarification if needed.