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 Kentucky, a nonprofit business is typically organized as a nonstock corporation under the Kentucky Nonprofit Corporation Act. These entities are designed to operate without the primary goal of making profits for owners or shareholders. Instead, any surplus funds after expenses are reinvested into the organization's mission or for charitable purposes. Nonprofits in Kentucky may include charitable foundations, and they can apply for federal income tax exemption under Internal Revenue Code section 501(c)(3) if they serve religious, charitable, educational, scientific, or similar purposes. To maintain this tax-exempt status, they must adhere to specific regulations, such as avoiding political campaign involvement and ensuring their earnings do not benefit private individuals. Nonprofits that are not 501(c)(3) organizations, such as social or recreational clubs, may still be tax-exempt under different provisions like section 501(c)(7), provided they meet the criteria set forth in the Internal Revenue Code, which typically includes being organized for pleasure, recreational, or other nonprofitable purposes and no part of the net earnings inuring to the benefit of any private shareholder.