My understanding is that an S corporation is the easiest for a new firm, and can always be changed to a C corporation later. What are the reasons not to do it this way?
The firm under consideration is in profesional services (primarily consulting) starting with a sole owner, eventually growing organically out of profits.
Also, are there tax reasons to pay out the income as dividends rather than salary?
There are definitely tax reasons to pay out dividends and not salary (primarily - lower tax rates on qualified dividends, which may expire at the end of the year, and the absence of the FICA and payroll taxes).
However, personal services C-corporations are taxed at higher (flat) 35% rates, which may not be the best rate with lower income corporations. Officers are required to be paid salary in corporations.
As to S-Corp, while you can avoid portion of payroll/FICA taxes, you're required to pay yourself reasonable salary, which, according to recent court decisions, should definitely be at the market level. In a recent decision, an accountant was required to pay himself salary of up to the social security maximum level, essentially rendering (almost) worthless the S-corp savings.
Having said that, unless the law prohibits, you should consider LLC/PLLC. While (taxation-wise) similar to S-Corp, it has the benefit of not requiring paying salaries to self, and less costs associated with maintaining the entity. LLC can be converted to a corporation either for tax purposes or as an entity pretty easily.
Do consult with a lawyer and a tax adviser on all issues.