A sampling of common misperceptions regarding tax exemption for non-profit corporations are:

Non-profits are automatically tax-exempt upon incorporation.  Generally incorrect.  Although there are some exception on the federal level, generally, to receive an exemption from federal and state income and California sales and use taxes, a nonprofit corporation must apply for federal tax exemption on IRS Form 1023, and if necessary, for California state tax exempt status on Franchise Tax Board Form 3500.  Additional tax exemption, registration, and licensing procedures may also apply to any given nonprofit, depending on a variety of factors.

All non-profits are 501(c)(3)'s.  Again, not true.  Some non-profits are not tax exempt at all, some are 501(c)(3) tax exempt entities, and some are tax exempt but not are not 501(c)(3) organizations.

501(c)(3) is often defined as a charity, but in fact 501(c)(3) is a subsection of the Internal Revenue Code under which charitable organizations engaged in one of the following activities may obtain exemption from federal taxation: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the preventing cruelty to children or animals.

There are other subsections of the Code under which a non-profit may apply for tax exemption.

Once I have my organization's 501(c)(3) tax status approved, I'm home free.  State tax exemption is a separate undertaking and is in California generally necessary to avoid state taxes on a non-profit.  A separate application and approval process is required, and - as stated above - additional exemptions / approvals may also be required.

I can earn a lot of money by starting my own non-profit corporation.  Non-profits are subject to numerous federal, state, and local laws, regulations, and restrictions.  The most basic principle of non-profit is right in their name - they are not for profit in the sense that they cannot be owned or sold by, or operated for the benefit of, an individual, group of individuals, or regular (for profit) corporation.  Doing so constitutes fraud that various governmental agencies are always on the lookout for.  If you establish a non-profit, you may be able to serve on the board of directors and may possibly be employed by the non-profit; however, your compensation must be reasonable in relation to the number of hours you work for the non-profit, the type of work, your skill level, experience, and training in performing such job tasks.

In general, the more control and the more pay or benefits the founders or any small group of individuals are receiving from a particular non-profit entity, the more difficulty that entity is going to have obtaining and maintaining tax-exempt status.  In sum, a non-profit is a way to provide for others and for the community at large, not a road to riches for its founders.  Those who work for non-profits, whether they are founders, board members, or otherwise, generally make less than they could make working for a profit corporation.

For more information, see also:

Nonprofit corporations, non-profit incorporation