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 Alabama, a nonprofit business is typically organized as a corporation under the Alabama Nonprofit Corporation Act. These entities are designed to operate without distributing profits to owners or shareholders. Instead, any surplus funds after expenses are reinvested into the organization's operations or used for its designated charitable purposes. Nonprofits in Alabama may include charitable foundations, and they can apply for federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code if they are formed for religious, charitable, educational, literary, artistic, scientific purposes, or other qualifying activities such as preventing cruelty to animals or children, and fostering amateur sports. To maintain this tax-exempt status, the organization must adhere to certain regulations, including restrictions on political activities and requirements to file annual information returns with the IRS. Additionally, Alabama nonprofits must comply with state-level regulations, including registration with the Alabama Attorney General's Office if they solicit funds, and they may be eligible for certain state tax exemptions as well. It's important to note that 501(c)(3) organizations are distinct from social or recreational clubs, which may qualify for tax exemption under Section 501(c)(7) if they meet specific criteria.