For-profit vs. Not-for-profit Schools

For-profit vs. Not-for-profit Schools

Private schools are generally organized as for-profit or not-for-profit (nonprofit) entities.

A corporation or a private individual typically uses the for-profit version to make a profit, but is not eligible for tax-deductible contributions to the extent provided by law.

Most private schools opt to operate under a not-for-profit status, enabling them to generate revenue while also receiving tax-deductible donations to the extent permitted 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? Let's look at some answers.

Canva generated this image.

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 a group of individuals, as is often the case with many preschools and some elementary schools. Another form of ownership is a corporation.

This is often a corporation owned and operated by a group of local individuals. Typically, for-profit private schools are owned by a corporation that operates schools in multiple locations.

For-profit schools are typically in business to generate revenue or make a profit. They pay taxes on those profits.
Parents pay for the school's services just as they would for any other service.

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. The advantage of private for-profit school ownership is that the owner has the autonomy to make decisions and control all aspects.

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.

Here is a brief explanation of how businesses are organized.

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 tax-deductible contributions to the extent permitted 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.

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 the purposes of 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 serve as the governing mechanism of the school.

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.

This video explains what is involved in setting up a not-for-profit corporation.

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 the satisfaction of its parents and students, rather than 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 with 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.

Canva generated this image.

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 can take only a few years.
Spending more than they 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 have a strategic plan. 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.

Conclusion

In conclusion, the legal status of a school is not nearly as important as its effective management.

Unlock the Secrets to Choosing the Right 17�Թ� for Your Child

Are you considering the best educational path for your child? Understanding the differences between for-profit and not-for-profit schools can be crucial in making an informed decision. Explore how these two models impact governance, funding, and ultimately, the quality of education your child receives.

Take the First Step Today!

Learn More about the advantages and disadvantages of each type of school. Discover how governance structures influence decision-making and educational priorities. Find the Best Fit for your child by comparing the unique offerings of for-profit and not-for-profit schools. Visit PrivateSchoolReview.com to dive into the world of private education and ensure your child gets the best possible start in life.