Social Enterprises in China: Legal Forms, Government Supervision and Entrepreneurial Choice

Social enterprises come into being usually due to failure of the government to provide public goods. However, the rapid development of Chinese social enterprises has been motivated by both governmental initiatives and grass-roots practices. China has enacted legislation governing the organizational registration and government supervision of social enterprises. When social entrepreneurs choose suitable legal forms for their social enterprises, they make pragmatic decisions based on actual needs and cost-benefit analyses. The most popular legal form in China has been the “Private Non-enterprise Unit” (PNU), a Chinese-style not-for-profit firm, due to friendly tax treatment, and flexibility in the not-for-profit nature. In addition to exemption from enterprise income tax, some PNUs allow investors to receive reasonable returns (e.g. private medical institutions and private schools), which gives PNUs a great advantage over companies. Other social enterprises have been registered as for-profit companies due to external financing needs, legislative efforts promoting corporate social responsibility, and extra regulatory burdens associated with PNUs. This shows that legal forms of social enterprises in China can be quite diverse. The government’s supervision of social enterprises includes three aspects: not-for-profit purpose, assets, and conduct. This article conducts an empirical study on administrative enforcement actions against PNUs. It shows that, as of May 1, 2024, a total of 12,504 administrative penalties have been imposed by the Ministry of Civil Affairs (MCA) and other governmental agencies. Since 2017, the number of PNU cases has increased rapidly due to more social conflicts caused by China’s economic slowdown. The main grounds for sanctions on PNUs have been failing to submit work reports or undergo annual inspections, as well as illegally setting up branches. The trends show that China has adopted a policy of strict control over the activities and quantity of social enterprises, especially during the COVID-19 pandemic lockdowns.