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 New York, a nonprofit business is typically structured as a not-for-profit corporation, which is governed by the New York Not-for-Profit Corporation Law. Such organizations are created for purposes other than generating profits for owners or shareholders, and they must reinvest any surplus revenues into the organization's mission. To be recognized as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code, a New York nonprofit must be organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, among others. It must apply to the IRS for tax-exempt status, and upon approval, it will not be subject to federal income tax. Additionally, the nonprofit may be eligible for certain state tax exemptions. It's important to note that these organizations must adhere to strict regulations regarding their operations, including limitations on political activities and requirements for public disclosure of their financial information. Nonprofit organizations that are social or recreational clubs 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.