Welfare enterprises, which are intended to create jobs for disabled people, are the core component of China's welfare system. As the economic environment and regulations change, China's welfare enterprises, which cannot take effective measures from within and emerge strong in market competition, are stuck in a bottleneck where further development is difficult. Welfare enterprises have hit the ceiling in their development for lacking sustainable sources of capital and capabilities of capital operation, inefficient management model and uncompetitive products and services. To reverse the trend of decline and grow into strong market players, the transformation from welfare enterprise to social enterprise, embracing the features of enterprise and social objectives, as an alternative is of crucial importance. As a new hybrid economic form, social enterprise combines the efficiency of businesses and the public-good nature of welfare enterprises, representing win-win cooperation among the government, society, and business sector. Such development is an institutional transformation which boosts competitiveness and tackles tough issues welfare enterprises are facing. Shifting from welfare enterprises to social enterprises means an institutional transition, during the process of which international experience in legislation shall be learned and localized. This paper analyzes the development history of welfare enterprises by taking a comprehensive look at the salient points of existing laws, policies promulgated throughout history, implementation and performance, major problems etc. so as to explore the institutional transition from welfare enterprises to social enterprises, revealing possible legal and policy problems and making suggestions.