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 South Dakota, a nonprofit organization is typically structured as a corporation that is organized for a public or mutual benefit other than generating profit for owners or investors. The state recognizes the federal tax-exempt status of 501(c)(3) organizations, which include those formed for religious, charitable, educational, and other specified purposes. These organizations must apply for recognition of exemption with the IRS and, upon approval, are exempt from federal income tax. Additionally, they may be eligible for certain state tax exemptions, such as sales and property tax exemptions. Nonprofit organizations in South Dakota must comply with state laws governing their formation, operation, and reporting, which are outlined in the South Dakota Nonprofit Corporation Act. This includes registering with the South Dakota Secretary of State, adhering to corporate governance requirements, and filing annual reports. It's important to note that while 501(c)(3) organizations are prohibited from distributing profits to owners or members, they must use their funds to support their tax-exempt purposes. This is distinct from 501(c)(7) social or recreational clubs, which may also be tax-exempt but serve their members rather than the general public.