Double taxation

I will give you an example of how small business owners sometimes get in trouble with dividends.
You own a business and you earn a salary of a million dollars per year. You pay ordinary income tax on this and at the top rate of 35% and your company retains profits of a $100,000. The government does not like retained earnings so they place a limit of $250,000 on the amount the company can retain. If you go over that amount there is a 15% surcharge penalty. The company does not want to pay this out as dividends to the owner since he will pay 15% tax so they look for ways to get it to him without using dividends. One way is to increase his salary but what happens when he is near retirement and no longer working full time. The government steps in and says your salary must be reasonable and in the law it is called reasonable compensation. Let’s say you are retired and living in Florida but you come up once a month to check on the company and you are still paying yourself your full salary. The government will step in and force you to pay dividends under the theory that you are just trying to avoid paying a dividend which in fact is what you are doing. When this happens the owner paid 35% on the earnings and now he will pay 15% on those same earnings when if he takes a dividend.
You might say that it is not the governments business to determine what is reasonable compensation but according to the IRS rules you would be wrong.
One thing to understand about retained earnings is if you can show evidence that you are saving the money to re-invest in some large project they will give you some leeway but you better not try to use this as an excuse to avoid dividends.
The more you understand about the IRS the more you will see why business people do not like it.