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 Rhode Island, a nonprofit business is typically structured as a non-profit corporation, which is organized for a public or charitable purpose. Nonprofits in Rhode Island do not distribute profits to owners; instead, any surplus funds after expenses are reinvested into the organization's mission or held for future use. These entities can apply for federal income tax exemption under Internal Revenue Code section 501(c)(3) if they are formed for religious, charitable, educational, scientific, or other qualifying purposes. To maintain this tax-exempt status, they must adhere to certain operational constraints and reporting requirements. Additionally, they must be registered with the Rhode Island Secretary of State and comply with state regulations governing non-profit organizations. Nonprofits that are more social or recreational in nature may qualify for tax exemption under section 501(c)(7), provided they meet the specific criteria set forth in that section. It's important for these organizations to consult with an attorney to ensure compliance with both federal and state laws.