"Nonprofit" can mean different things, so it is helpful to understand what that term might mean in different contexts.
- Nonprofit vs. for-profit corporation. One way to think about what a nonprofit is is to distinguish nonprofits from for-profit corporations.
- For-profit corporations can pay dividends (such as cash or stock dividends) or make other distributions of income or assets to its owners, who are usually called shareholders or stockholders.
- Nonprofits, on the other hand, cannot (by statute or governing documents) pay dividends or make other distributions of income or assets to its owners, who are usually called members.
Nonprofit corporations are a common form of entity for nonprofits, but nonprofits can also exist in other forms, such as a limited liability company or an unincorporated nonprofit association. Similarly, corporations are a common form of entity for for-profit organizations (i.e., businesses), but businesses can also exist in other forms, such as sole proprietorships and partnerships.
- Nonprofit vs. tax-exempt organization. Many people use the term, "nonprofit," to refer to tax-exempt organizations.
- Tax-exempt organizations are organizations that are exempt from paying federal income tax. Examples include charitable organizations, credit unions, educational institutions, labor organizations, and religious organizations.
- Some tax-exempt organizations are also exempt from paying state income tax (and, in some cases, other types of taxes, such as property taxes).
Like nonprofits, tax-exempt organizations can exist in a variety of forms, such as a nonprofit corporation or a trust.
Not all nonprofits are tax-exempt. For example, many homeowner associations are organized as nonprofit corporations, but are not tax-exempt.
One effect of being a nonprofit that is also a tax-exempt organization is that tax-exempt organizations are subject to additional regulation under the tax laws.
- Nonprofit vs. not-for-profit. Some, but not all, distinguish between nonprofits and not-for-profit organizations.
- For those who distinguish between nonprofits and not-for-profit organizations, the distinction is that not-for-profit organizations may pay dividends to its owners, which a nonprofit cannot do. However, not-for-profit organizations are also different from for-profit organizations because the primary purpose of a not-for-profit organization is not to generate a profit for its owners. For example, a credit union is not a nonprofit because it can pay dividends to its owners (i.e., the members of the credit union), but it is also not a for-profit corporation because its primary purpose is not to generate a profit for its owners. A credit union is a special form of entity (i.e., not a nonprofit corporation or a business corporation) that some consider a "not-for-profit" organization because its primary purpose is to operate for the mutual benefit of its owners.
- Some may also distinguish "nonprofit" from "not-from-profit" on the basis that "nonprofit" describes a type of organization whereas "not-for-profit" describes an activity (and not a type of organization) under certain tax rules.
- Some make no distinction between nonprofits and not-for-profits. For example, the Washington Nonprofit Corporation Act defines both a "not for profit corporation" and a "nonprofit corporation" as "a corporation no part of the income of which is distributable to its members, directors, or officers."