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 Hawaii, a nonprofit business is typically organized as a nonprofit corporation under Hawaii Revised Statutes Chapter 414D, which governs nonprofit corporations. These entities are designed to operate without the primary goal of distributing profits to owners or shareholders. Instead, any surplus funds after expenses are reinvested into the organization's operations and mission-driven activities, which may include charitable, religious, educational, and other purposes outlined in Section 501(c)(3) of the Internal Revenue Code. To gain federal tax-exempt status under 501(c)(3), a Hawaii nonprofit must apply to the IRS and demonstrate that it meets the criteria, including being organized and operated exclusively for exempt purposes. Additionally, these organizations must ensure that none of its earnings inure to any private shareholder or individual. It's important to note that while 501(c)(3) organizations are exempt from federal income tax, they may still be subject to state regulations and taxes, although Hawaii does offer certain tax exemptions for qualifying nonprofits. This is distinct from social or recreational clubs, which may qualify for tax-exempt status under Section 501(c)(7) if they meet specific requirements, such as being organized for pleasure, recreation, and other nonprofitable purposes and providing no net earnings to any private shareholder or individual.