Private schools are generally organized as for-profit or not-for-profit (nonprofit) entities. The for-profit version is typically used by a corporation or a private individual to make a profit but not be eligible for tax-deductible contributions to the extent provided by law. Most private schools choose to organize under not-for-profit status so that they may make money but also receive tax-deductible donations to the extent provided by law.
What are the advantages and disadvantages of a for-profit versus a nonprofit school? Is one kind of school better than the other?
For-Profit Schools
A for-profit school is set up by allowing it to be controlled by an owner. That owner could be an individual or group of individuals, as is often the case with many pre-schools and some elementary schools. Another form of ownership is a corporation. This often is a corporation owned and operated by a group of local individuals. More typically, for-profit private schools are owned by a corporation that has schools in several locations. For-profit schools are usually in business to make money or turn a profit. They pay taxes on those profits. Parents pay for the school's services just as though they were customers. Examples of this sort of school include Le Rosey in Switzerland, Sylvan Learning Centers, the Nobel Schools, and thousands of small nursery and primary schools. The school can be incorporated, a sole proprietorship, or some other form of ownership.
Here is a brief explanation of how businesses are organized.
The advantage of private for-profit school ownership is that the owner calls the shots and controls everything. Parents who dislike what is offered can take their children elsewhere. Parental input may be sought and entertained, but the final decisions and control rest with the owner.
Not For Profit Schools
Once incorporated, most not-for-profit private schools seek 501(c)(3) status from the IRS. This nonprofit status exempts the entity from federal, state, and local taxes. It also permits the school to accept contributions, which are tax-deductible to the extent provided by law. Not-for-profit status was designed for entities that operate for the greater good of the community. A school generally meets that test.
This video explains what is involved in setting up a not-for-profit corporation.
Why do schools need tax-exempt status? Donors are much more likely to give money to an institution when their contributions are tax-deductible. This is particularly true of major donors. For this essay, I characterize major gifts as $25,000 or more.
Some schools are set up so that parents own shares in the corporation. The ownership formulae vary, but most seem to depend on the number of children enrolled.
Most not-for-profit schools will have an active board of trustees. The trustees are the mechanism by which the school is governed. Depending on how the charter is set up, its powers will be extensive. The board of trustees hires a head of school at such an institution. This governance mechanism allows the school to outlive its founder and, all things being equal, last for generations. Examples of this sort of school include Kent School, founded by Father Frederick Herbert Sill in 1906, and Exeter Academy, founded by John Phillips in 1781.
Does it matter whether a school is for-profit or not for profit?
No! One kind of school is not better than another. A school's success is measured intrinsically by its teaching, achievements, and satisfied parents and students, not its governance.
It also does not matter for one other essential reason. What is that? The reasons you are considering sending your child to a private school have nothing to do with the legal manner in which schools are set up. As long as the school operates legally, that's all you need to be concerned about.
What matters to you and me are the basics:
- Academics
- Athletics
- Extracurricular activities
If these three critical areas meet your approval, you are almost there. The other essential item on your checklist is whether the school or schools you investigate best fit your child.
The other items worth exploring are the following:
- Is the school aligned with current market conditions?
- Is it managing its financial affairs efficiently and legally?
- Is there a strategic plan in place?
The last thing you want to do is get entangled with a private school that is dead in the water. The answers to the three questions above will better explain whether the not-for-profit or for-profit schools you evaluate are viable operations.
Is the school aligned with current market conditions? Communities' demographics change over time. Where once there was an ample supply of young families fueling demand for places, now the community is no longer affordable for young families. I have seen this happen many times over the years. One way of keeping the school viable is to market it effectively. Reaching outside the old boundaries to attract new families from other nearby communities will replenish the applicant pool.
Is it managing its financial affairs efficiently and legally? You would be surprised how often bad financial management will put a school on the ropes. Undoing all the good accomplished over many years only takes a few years. Spending more than you have in income and dipping into endowments are two common reasons some schools are on the brink of financial disaster.
Is there a strategic plan in place? A visionary board of trustees will be constantly looking ahead. It worries about such mundane but essential things as what market conditions will be like a year from now, three years from now, and so on. It frets over maintaining the school's physical plant. It dreams about increasing the school's endowments. And so on.
I mention these three critical questions simply because some not-for-profit schools don't understand how to market their schools or manage their fiscal affairs, which makes planning challenging. How will you know that these matters are an issue? Do your due diligence. Visit the schools. The answers will be in plain sight.
In conclusion, then the legal status of a school is not nearly as important as how it is managed.
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