Are you a for-profit institution owner considering an entity change? Are you curious what the benefits of being a not-for-profit educational institution are? There are several reasons you may consider converting from a Title IV for-profit school to a not-for-profit organization. Below, we highlight those reasons as well as potential challenges you may encounter when making the change.
Common reasons why schools want to convert
When there isn’t a clear successor in place to take over your responsibilities after you retire, being a not-for-profit organization might ease the transition of succession planning. (If conversion ends up not being the right option for you, you should make a succession plan.)
Less perceived regulatory reasoning includes that only proprietary schools are subject to the 90/10 revenue test. While it was eventually repealed, the gainful employment requirements loomed over for-profit Title IV schools for years.
There are additional grants available for not-for-profits, too, from the CARES Act, Fund For the Improvement Of Postsecondary Education (FISPE) and the Institutional Resilience and Expanded Postsecondary Opportunity (IREPO) – as well as more flexibility in fundraising. Further, not-for-profit entities benefit from more options with program offerings, long grants of accreditation and greater opportunities for articulation agreements with other colleges.
Challenges with Making the Conversion
A conversion of a school from a for-profit to a not-for-profit school is a covered transaction that is considered a change in control. Therefore, it will follow the traditional change in ownership procedures.
The Department of Education (DOE) employs a three-prong test for determining an Institution’s not-for-profit status, including an independent evaluation of economic benefit and control.
According to the DOE, a state authorization and IRS determination do not themselves confer not-for-profit status for Title IV purposes. The Department must make an independent determination that the institution is “owned and operated by one or more nonprofit corporations or associations, no part of the net earnings of which benefits any private shareholder or individual.”
While the change in form to a not-for-profit might be approved by the IRS (for tax purposes), the state and the accrediting body, the DOE might still consider the school a for-profit entity and require it to follow the applicable rules in order to continue Title IV funding. In order to approve the conversion, the Institution needs to demonstrate that the conversion to not-for-profit status benefits the public, and that the primary beneficiary of the conversion isn’t the owner of the for-profit school.
This is a difficult bar to clear, which requires a significant amount of planning throughout the entire process. You’ll need to make sure to properly budget and plan for the time and the legal/related costs involved. Issues can arise with determining fair value in what should be an arm’s length transaction, for tax purposes. Having a valuation done by a qualified expert, like Sikich, can mitigate this risk.
While the benefits of pursing a conversion might check a lot of boxes for you and your school, the Department’s historical response should provide some caution. Make sure your school understands the process, and talk through your specific situation with a Title IV audit expert.