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 Arizona, a nonprofit business is designed to operate without the primary goal of making profits for its owners. Instead, any surplus funds after expenses are reinvested into the organization's mission or for charitable purposes. Nonprofit organizations in Arizona may qualify for federal income tax exemption under Section 501(c)(3) of the Internal Revenue Code if they are established for religious, charitable, educational, scientific, or other qualifying purposes, including the prevention of cruelty to animals and children, and fostering amateur sports. To maintain this tax-exempt status, these organizations must adhere to specific regulations, such as avoiding political campaign activity and ensuring that earnings do not benefit private shareholders or individuals. Additionally, Arizona nonprofits must comply with state laws governing charitable solicitations, registration, and reporting to the Arizona Corporation Commission. Nonprofits that are social or recreational clubs may qualify for tax exemption under Section 501(c)(7) if they meet certain criteria, such as being organized for pleasure, recreation, and other nonprofitable purposes, and limiting their membership. These clubs are distinct from 501(c)(3) organizations and have different tax implications and requirements.