For-profits converting to nonprofits to escape government scrutiny?

As explained to eCampus News by nonprofit attorney Jeffrey Tenenbaum, Venable LLP partner and chair of nonprofit organizations practice, conversion is a lengthy process, as no company can shift its corporate status automatically in any state.

“Essentially, schools set up a brand new non-profit incorporation,” Tenenbaum explained. “The previous owners often become the new officers and directors…and go to the IRS to file a 1023 form to gain tax exempt status.”

Even though converting means a loss of actual ownership and more constrained options for making money, ultimately, even nonprofit organizations can be run in a businesslike manner.

“What happens if you follow the money?” Trachtenberg questioned. “If you follow it, it turns out [previous for-profit owners] own a for-profit school now sold as a nonprofit. They’re paid as well or better, can get rent, provide goods and services…they have their hands in everything.”

“Say a previous owner of the for-profit school owns a building, but the school is not-for-profit now,” continued Trachtenberg. “They can still rent it out to the new school, they might have a stake in the cafeteria or other operations too, and they can still get a good salary. Switching might turn out to be a smart move from their perspective.”

In other words, some conversions may just be a front for keeping the same operation running without really shifting toward better preparing students for jobs.

“As a nonprofit attorney, I do have some concerns – especially from an IRS perspective,” Tenenbaum said. “It depends on how much money is being paid back to the original owners from loan agreements over the purchase of the assets of the for-profit…which can lead to potential issues with their tax exempt status.”

Additionally, converting schools need to get accredited all over again, as well as meet certain standards, all of which takes time. That being said, how much really changes for students in the long run?

“Conversion may well not change anything for students,” Trachtenberg said. “So long as the main goal of an institution, regardless of its format, has been putting its money back to improving the experience of the student, there need not be any noticeable difference for the student.”

The real test that regulatory agencies have to conduct is “whether or not the student is being served – regardless of the format,” he concluded.

Conversion done right

Though the concerns noted above have merit, these are not the case for Grand Canyon University, explained Bob Romantic, the University’s executive director of the Office of Communications and Public Affairs.

(Next page: When converting makes sense)