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 Iowa, a nonprofit business is typically organized as a nonprofit corporation under the Iowa Nonprofit Corporation Act. These entities are designed to operate without the primary goal of making profits for owners or shareholders. Instead, any surplus revenues are reinvested into the organization to further its mission, which must align with purposes recognized as charitable under Section 501(c)(3) of the Internal Revenue Code. Such purposes include religious, educational, charitable, scientific, literary, and other activities that serve the public interest. Nonprofits in Iowa that obtain 501(c)(3) status are exempt from federal income tax and may also qualify for exemptions from state taxes. It's important to note that these organizations must adhere to specific governance and reporting requirements, including registration with the Iowa Secretary of State and the Iowa Department of Revenue. Additionally, they must ensure that their operations and organizational documents comply with both state and federal laws governing tax-exempt entities. This is distinct from social or recreational clubs, which may qualify for tax-exempt status under Section 501(c)(7) if they are organized for pleasure, recreation, and other similar purposes and do not distribute earnings to members.