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 Illinois, a nonprofit business is typically organized as a not-for-profit corporation under the Illinois Not for Profit Corporation Act. Such organizations are created for various purposes, including religious, charitable, educational, and scientific endeavors, among others. To be recognized as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code, an Illinois nonprofit must apply to the IRS and demonstrate that it meets the federal requirements for tax exemption. This includes the stipulation that the nonprofit does not distribute profits to owners and that any surplus funds are reinvested into the organization's mission or for charitable purposes. Additionally, Illinois nonprofits may be eligible for state tax exemptions, such as relief from sales and property taxes, provided they comply with state-specific criteria and application processes. It's important to note that 501(c)(3) organizations are distinct from social or recreational clubs, which may qualify for tax-exempt status under Section 501(c)(7) if they fulfill the IRS criteria for those types of organizations.