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 California, a nonprofit business is typically organized as a nonprofit public benefit corporation, especially if it is formed for charitable purposes and seeks tax-exempt status under Internal Revenue Code section 501(c)(3). Such organizations are designed to serve the public good and are prohibited from distributing profits to owners or members. Instead, any surplus funds must be reinvested into the organization's mission or for charitable purposes. To maintain their tax-exempt status, these entities must adhere to both federal and state regulations, including registering with the California Attorney General's Registry of Charitable Trusts, filing annual information returns with the IRS (Form 990), and complying with state-specific reporting requirements. California also recognizes other types of nonprofit organizations, such as social or recreational clubs, which may qualify for tax exemption under section 501(c)(7) if they are organized for pleasure, recreation, and other similar purposes and meet the IRS criteria. It's important for entities seeking nonprofit status to follow the appropriate legal procedures for formation and to ensure ongoing compliance with all applicable laws and regulations.