Double taxation
A C corp pays tax on its profit, then shareholders pay again when that profit reaches them as dividends.
Double taxation describes how C corp profit is taxed twice. The corporation pays 21% federal income tax on its profit under Section 11. When it pays what's left out as a dividend, the shareholder pays tax on it again. Qualified dividends get the lower capital gain rates of 0%, 15% or 20% per Topic 404, and higher earners can add the 3.8% net investment income tax.
On $200,000 of profit fully paid out to a single owner in the 15% band, the company pays $42,000 and the owner pays $23,700 on the $158,000 dividend, plus $1,444 of NIIT if their income is above $200,000. That is 33.6% in total.
Pass-through structures avoid this. Sole proprietorships, LLCs and S corps pay one layer of tax, on the owner's return.
Owners of small C corps reduce it by paying themselves a salary, which the company deducts, or by keeping profit in the company to grow. Kept profit is taxed only once, until it comes out.