Nonprofit organization: Definition & meaning

The term ‘non-profit organization’ refers to an organization that:

  • Operates for the common good and not for generating individual wealth.
  • Does not distribute its profits to individuals who control the organization such as its members, officers, directors, or trustees.

While a non-profit organization can make a profit, the profit it earns must be used toward the core missions of the organization and not towards any personal benefits.

Other differences between a ‘for-profit’ and a ‘non-profit’ organization

  • Typically a non profit organization cannot issue stocks to its constituent members while a ‘for-profit’ organization can issue stocks/equity shares amongst its members. Quasi non-profit organizations like cooperatives can issue stocks to its members.

  • If a non-profit is dissolved or liquidated, it can transfer its assets only to another non-profit organization. It cannot distribute the assets amongst its members. If a ‘for-profit’ organization is liquidated, the assets can be apportioned and distributed amongst its constituent members.

  • A non-profit organization can seek tax exemption while a ‘for-profit’ organization is generally not exempted from paying taxes.

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