Can a 501(c)(3) nonprofit enter into a business activity in competition with previously established for-profit businesses?
Yes, but you need to be careful. The first question you ought to ask is whether the "business" is an "unrelated" business activity for the 501(c)(3) charity. If it is part of the charitable mission and not an unrelated business, the charity should be able to enter into the business without federal income tax problems. If it is unrelated, it will generate unrelated business taxable income which will be subject to tax. Too much unrelated business activity can cause the charity to lose its exempt status. (See Ready Reference Page "Nonprofits Often Worry About UBIT.") In Pennsylvania, if it is unrelated, it may be subject to being enjoined by a small business with which it competes. (See Ready Reference Page "Act 55 Defines 'Charity' Eligible for Exemption.")