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 Connecticut (CT), a nonprofit business is typically organized as a nonstock corporation under the Connecticut Nonstock Corporation Act. These entities are designed to operate without the goal of distributing profits to owners or shareholders. Instead, any surplus funds must be reinvested into the organization's operations or used for its designated charitable purposes. Nonprofits in CT may include charitable foundations, and they can apply for federal income tax exemption under Internal Revenue Code section 501(c)(3) if they are formed for religious, charitable, educational, literary, artistic, scientific purposes, among others. To maintain this tax-exempt status, they must adhere to specific regulations, such as not engaging in political campaigning or substantial lobbying. Additionally, they must ensure that their earnings do not benefit private individuals or shareholders. Nonprofits that are social or recreational clubs may qualify for tax exemption under section 501(c)(7), provided they meet certain criteria, such as being organized for pleasure, recreation, and other nonprofitable purposes and conducting most of their activities for their members.