For Profit vs Not for Profit Schools

For Profit vs Not for Profit Schools
What are the advantages and/or disadvantages of a for profit versus a not for profit school? Is one kind of school better than the other?

Private schools are generally set up in one of two ways: as for-profit entities or not-for-profit (nonprofit) entities. The for-profit version is typically used by either a corporation or a private individual in order to make a profit but not be eligible for contributions that are tax-deductible to the extent provided for by law. Not-for-profit status is what most private schools chose to organize under so that they may make money but also receive contributions that are tax-deductible to the extent provided by law.

What then are the advantages and/or disadvantages of a for profit versus a not for profit school? Is one kind of school better than the other?

For-Profit Schools

The way in which a for-profit school is set up is to allow 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, as well as thousands of small nursery and primary schools. The school can be incorporated or a sole proprietorship or some other form of ownership.

Here is a brief explanation of how businesses are organized.

The advantage to private for profit ownership of a school is that the owner truly calls the shots and controls everything. If the parents do not like what is being offered, they can take their children elsewhere. Parental input may be sought and even entertained, but the final decisions and control rest with the owner.

Not For Profit Schools

Most not-for-profit private schools seek 501(c)(3) status from the IRS once they have incorporated. It is this non-profit status that exempts the entity from federal, state, and local taxes. It also permits the school to accept contributions which are in turn 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? Simply because 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 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 in the school.

Most not-for-profit schools will have an active board of trustees. The trustees are the mechanism by which the school governed. Depending on how the charter is set up, its powers will be quite extensive. A headmaster at such a school is hired by the board of trustees. 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 which was founded by Father Frederick Herbert Sill in 1906 and Exeter Academy which was founded by John Phillips in 1781.

Does it matter whether a school is for profit or not for profit?

And, no, one kind of school is not any better than another. A school's success is measured intrinsically by its teaching, its achievements, and its satisfied parents and students, not its governance.

It also does not matter for one other very important reason. What is that? The reasons why you are thinking about sending your child to a private school really have nothing to do with the legal manner in which schools are set up. As long as the school is operating legally, that's all that you need to be concerned about.

What matter to you and me are the basics:

  • Academics
  • Athletics
  • Extracurricular activities

If these three very important areas meet with your approval, then you are almost there. The other important item on your checklist is whether the school or schools which you are investigating are the best fit for your child.

The other items worth exploring are the following:

  • Is the school aligned to current market conditions?
  • Is it managing its financial affairs efficiently and legally?
  • Is there a strategic plan in place?

The last thing which you want to do is get entangled with a private school which is dead in the water. The answers to the three questions above will give you a better idea of how the not for profit or for profit schools which you are evaluating are indeed viable operations.

Is the school aligned to current market conditions? Demographics of communities 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 market the school 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. It only takes a few years to undo all the good which was accomplished over many years. Spending more than you have in income and dipping into endowments are two common reasons why some schools teeter 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 very important 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 important questions simply because there are some not for profit schools which don't understand how to market their school or how to manage their fiscal matters. Those schools find it difficult to plan ahead. 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 the way it is managed.

Questions? Contact us on Facebook. @privateschoolreview

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