A nonprofit business is a business whose owners do not receive distributions of profits—and any money remaining after payment of the business’s expenses must be retained and used for its own expenses and for charitable purposes. Nonprofit businesses are often charitable foundations and exempt from federal income tax under Internal Revenue Code section 501(c)(3). A tax-exempt 501(c)(3) is a charitable organization that is formed for religious, charitable, educational, literary, artistic, or scientific purposes, or for preventing cruelty to animals and children, fostering amateur sports competition (locally and internationally), or testing for public safety. These charitable organizations are distinct from not-for-profit social or recreational clubs that may be exempt from federal income taxation if they meet the requirements of Internal Revenue Code section 501(c)(7).

In Pennsylvania (PA), a nonprofit business is typically structured as a nonprofit corporation, which is governed by the Pennsylvania Nonprofit Corporation Law of 1988. These entities are designed to operate without the primary goal of making profits for owners or shareholders. Instead, any surplus revenues are reinvested into the organization to further its mission, which must be for religious, charitable, educational, scientific, or other purposes that qualify under Section 501(c)(3) of the Internal Revenue Code. To be recognized as tax-exempt under this section, a PA nonprofit must apply to the IRS and meet the federal requirements, including the stipulation that its activities must not substantially benefit private interests. Additionally, the organization must not engage in political campaigning or substantial amounts of lobbying. If these conditions are met, the nonprofit will be exempt from federal income tax, and contributions to it may be tax-deductible for donors. It's important to note that while 501(c)(3) organizations are the most common type of charitable nonprofits, other types such as social or recreational clubs may qualify for tax-exempt status under different sections of the Internal Revenue Code, such as 501(c)(7), provided they meet specific criteria set forth in those sections.