The Distinction Between For-Profit and Non-Profit Corporations

My area of study specializes in corporate law and non-profit corporation law.

What is the difference between a for-profit stock company and a non-profit corporation? A stock company conducts business activities to generate profits and distributes those profits to its shareholders as dividends. In contrast, while a non-profit corporation may also conduct business activities and generate profits, it is prohibited from distributing those profits to its stakeholders. This is known as the "non-distribution constraint."

Stock companies can conduct large-scale business activities by raising funds from investors known as shareholders. The purpose for which shareholders invest is to receive financial benefits through dividends, increases in stock prices, and other means. In other words, the ability to distribute profits to shareholders is essential to the structure of a stock company. And for a stock company to attract a large amount of investment, it is crucial to generate substantial profits and return them to its shareholders.

So, why is distribution prohibited in non-profit corporations? Suppose a children's cafeteria that provides free, nutritious meals to children adopts the structure of a non-profit corporation. Due to the non-distribution constraint, this corporation cannot distribute money to its stakeholders, even if it has funds on hand (though this does not prevent it from paying appropriate salaries to its employees). Therefore, if someone is considering making a donation to support the operation of this children's cafeteria, they can donate with peace of mind, as the system prohibits the funds from being distributed to stakeholders, increasing the likelihood that their donation will be used for the cafeteria's operations. As a result, it may be able to attract more donations. In this respect, there is an advantage to using the non-profit corporation structure when accepting donations and operating for public interest purposes (for details, see my book, "Fiduciary Duties of Officers of Non-Profit Corporations" (Shoji Homu, 2014)).

Thus, the distinction between for-profit stock companies and non-profit corporations appears clear at first glance. However, in recent years, as reflected in terms like corporate social responsibility and SDGs, the idea that stock companies should act not only for the benefit of their shareholders but also for the public good, such as for society and the environment, has been gaining strength. This raises a difficult question. Is it desirable for a stock company to spend funds that could be distributed to shareholders on public interest purposes, such as for society and the environment, instead of distributing them to shareholders?

This is a considerable challenge, and I myself have not yet reached a final answer, but let me introduce a few perspectives. First is the perspective of whether a stock company should be the one to decide whether to make expenditures for social and environmental causes. In other words, the issue is whether the decision to donate—and if so, to whom specifically—should be made not by the stock company, but by the shareholders who have received dividends from it. On this point, one might argue that because stock companies are in a position to learn which areas of society are in particular need of support through the course of their business, allowing them to make expenditure decisions could lead to more effective and efficient funding.

Second is the perspective that if funds that could be paid to shareholders as dividends are spent on public interest purposes, the dividends to shareholders will decrease accordingly, which could dampen people's motivation to invest in stock companies. On the other hand, there may be shareholders who wish to buy shares in companies that make expenditures for the good of society, even if the dividends are lower. If so, would it be beneficial to have a system that can distinguish between companies that plan to contribute funds for public interest purposes and those that do not?

In relation to the issues introduced here, various discussions, institutional designs, and innovations are currently underway. The statement published in 2019 by the Business Roundtable, an association of CEOs in the United States, attracted significant attention because it did not include the traditional view that a corporation exists primarily to serve its shareholders, but rather referred to a "commitment to all of our stakeholders" [note: this broadly includes company-related parties such as the environment, society, employees, and business partners]. In the field of investment, "ESG (Environment, Social, Governance) investing," which involves selecting and purchasing shares of companies that are mindful of the environment and society, is also expanding. In other countries, systems and examples of "social enterprises"—which are stock companies but also explicitly state the pursuit of public interest purposes as a corporate objective—have emerged (for a compilation of legal systems concerning social enterprises in various countries, see The International Handbook of Social Enterprise Law (Springer, 2023) ; the author also contributed the chapter on Japan).

Considering what kind of systems and rules should (or should not) be developed for these issues is also one of the important roles of legal studies. Would you like to study together?