Forming an S corporation eliminates this double taxation. Small C corporations avoid this problem by paying salaries to shareholder employees rather than dividends. Nonemployee shareholders get short shrift because of this. S corporations don't have this problem because salaries are not tax-favored over dividends as they are in a C corporation. Depending on income levels, tax rates at the shareholder level could be lower than tax rates at the corporate level.
S corporations shift taxation to the shareholder level.
C corporations that experience tax losses may be in a worse position than an S corporation. A C corporation can carry tax losses to different years to get a refund, but if the corporation is just starting out, it doesn't have any other years to work into the equation. This gives the shareholder a deduction that can reduce his or her tax on other income. The first step is to become a qualifying corporation. Large corporations may not become S corporations.