LO.3, 4, 7 Sam is trying to decide whether he should operate his business as a C corporation 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 corporation form because it avoids double taxation. However, he is concerned that he may encounter 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?