Sam is trying to decide whether he should operate his business as a C cor- poration or as an S corporation. Due to potential environmental hazard problems, it is imperative that the business have limited liability. Sam is leaning toward the S corpora- tion form because it avoids double taxation. However, he is concerned that he may en- counter difficulty several years in the future when he may want to issue some preferred stock to his son as a way of motivating him to remain active in the business. Sue, Sam’s friend, says that he can maintain maximum flexibility by operating as a C corporation. According to her, Sam can avoid double taxation by paying himself a salary equal to the before-tax earnings. As Sam’s tax adviser, what is your advice to him?

As Sam's tax adviser, I would explain the advantages and disadvantages of both C and S corporations, and then provide a recommendation based on his specific situation.

C Corporation:
- Limited liability: A C corporation provides limited liability protection, which means the owner's personal assets are protected from business liabilities. This addresses Sam's concern about potential environmental hazards.
- Double taxation: One of the disadvantages of a C corporation is double taxation. The corporation is taxed on its profits, and then the owners are taxed again on the dividends they receive from the corporation.
- Preferred stock issuance: Operating as a C corporation provides maximum flexibility for issuing different classes of stock, such as preferred stock. This is useful if Sam wants to issue preferred stock to his son in the future.

S Corporation:
- Limited liability: Similar to a C corporation, an S corporation also provides limited liability protection.
- Avoids double taxation: Unlike a C corporation, an S corporation allows for pass-through taxation. Profits and losses are passed through to the shareholders' individual tax returns, and the corporation itself is not taxed.
- Preferred stock issuance: However, an S corporation has restrictions on the number and type of shareholders it can have. It cannot have more than 100 shareholders and cannot have non-US citizens or certain entities as shareholders. This may limit Sam's ability to issue preferred stock to his son in the future.

Considering Sam's concerns about potential double taxation and future preferred stock issuance, my advice would be to lean towards operating as an S corporation. The pass-through taxation would help him avoid double taxation and taxation at the individual level. However, Sam should carefully evaluate the number and type of shareholders he intends to have in the future to ensure that an S corporation would meet his needs. This assessment should be done in consultation with a legal and financial advisor to consider all the relevant factors specific to his business and personal goals.