Seems Karla has been essentially managing the business herself. Therefore, her wages over the last couple years are a reasonable determinant of what constitutes the "fair wages" that she'd have to pay herself, before taking the rest as distributions/or whatever. You can do that math on if the anticipated profit from the business makes it worth the paperwork costs and headaches of filling as an S-Corp make it worthwhile.
Personally, I'm still just a sole proprietor. (not even an LLC) At first, it was because I didn't have any assets to protect...After looking into it further though, LLC protections don't hold up to protect personal assets in the type of protection I feel would be most likely to be beneficial to me. (if I had multiple business though...that could change)
With respect to the service providers... I would very much encourage you to err on the side of making them w2 employees. Go ahead and look up IRS rules on employees vs 1099...I think you'd agree. Forget about how Uber and Door dash can call their people "independent contractors" Compared to other situations I've seen them rule on, that's complete bullshit, they just happen to be big enough to have some influence.
It really is quite easy anyway. I use Squares Payroll app. It's like $50/month, plus $5/per employee. Super easy to use, you can usually get workers comp insurance through it (and pay weekly) it generates all the important year end reports, etc. I run payroll for my employees in less than 2 minutes. I also use it for paying the couple subs I use. (an occasional tuner, and a person or two to help when there's work 'overflow')
It's just very important that you classify people correctly...If there was ever an injury, or if a relationship ends poorly--the company can be found liable, and you may become responsible for paying for an injury out of pocket, and/or having to pay an employees back social security and Medicare witholdings. The later just happened to a friend of mine, costing them thousands.
Maybe use the occasion of new ownership as the impetus for the change.