Because owls only weigh 4 pounds and can only carry an additional 1 pound.

Also, bird flight isn't just "flap wings". Birds have similar dexterity in their wings as you have in your hands. They maneuver by changing the shape of their fingers.

Is that an inherent physical limit of the design of owls, or are owls not much bigger than that because that's the size that works best in their niche in their environment?

I don't think anybody knows. We can't mechanically reproduce the motion of owl wings so there's no chance to see how far it scales.