Because credit unions are not-for-profit cooperatives, they continue to merit their income tax exemption.

How can it be that credit unions are not-for-profit? Don’t they charge their members interest on loans, and some fees? Don’t they make a profit?

Yes! Of course they make income. That’s what all that loan interest is. Income. But income is different than profit. Profit is generally viewed as the income left over after the expenses are paid. In that regard, credit unions do make a profit.

Then how can they be considered not-for-profit if they make a profit?

For several reasons.

First, the credit union’s purpose is not to make a profit. For many companies, the purpose is to make a profit—to transfer ownership of money from costumers to business owners. That is why they exist. However, credit unions exist to provide their members with financial services.

This is most evident in the fact that credit unions issue no stock. Stock is a primary method of investing in a business for the purpose of making money, either in dividends or capital gains, when the stock is sold. If the stock price starts to go down, or the dividends stop being paid, you can bet that the stockholders (owners) would be upset. However, you cannot buy stock in a credit union. It simply does not exist. Profit is not the point of the credit union.

Second, the “profit” kept by credit unions benefits all the members as a whole because it allows the credit union to operate in a safe and sound manner. In fact, credit unions generally return profits to members throughout the year by offering lower rates on loans, higher rates on savings, and lower fees than for-profit institutions. So, while credit unions retain some profit, they retain less profit because they return profit to members through the cost structure of the credit union.

In fact, safety and soundness is really the only reason credit unions keep any profit. These retained earnings do not inure to the benefit of executives, employees, or volunteers—only the entire membership is benefitted by the pool of reserves, which protects deposits. Without the need for retained earnings for safety and soundness, credit unions would likely return even more to their membership.

For these reasons, while credit unions earn a profit, they are not-for-profit.