Are charter schools for-profit? In almost every state, no: the charter itself must be held by a nonprofit organization that cannot distribute earnings to owners or shareholders. The complication is that roughly one in eight charter schools hires a for-profit company to run its daily operations, and that private company does earn a return for its investors. So the school is a nonprofit on paper while a business sits behind the scenes collecting management fees.
The Nonprofit Legal Structure Most Charters Use
Charter schools typically incorporate as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code. That section requires the organization to operate exclusively for educational purposes and bars any of its net earnings from benefiting private individuals.1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. The IRS generally treats charter schools as public schools, which means they qualify as public charities.
A volunteer board of directors governs each nonprofit charter school. Board members owe a fiduciary duty to the school, meaning they must manage its money and assets in the school’s interest rather than their own. The school has no shareholders and cannot pay dividends. Leftover money at year-end stays in the school’s accounts for classrooms, teachers, or facilities.
Transparency is built into the structure. Organizations with $50,000 or more in annual gross receipts must file Form 990 with the IRS each year, disclosing executive compensation, revenue sources, and major expenses.2Internal Revenue Service. Exempt Organization Annual Filing Requirements Overview Every tax-exempt organization must also make its Form 990 available for public inspection.3Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications – Public Disclosure Overview Anyone can look up a charter school’s Form 990 to see what its top employees earn and where the money goes.
How For-Profit Companies Get Involved
The charter is held by a nonprofit, but that nonprofit often hires an outside company to actually run the school. These operators fall into two categories. Charter Management Organizations (CMOs) are themselves nonprofits that manage networks of schools. Education Management Organizations (EMOs) are for-profit corporations. As of the most recent national data, about 23 percent of charter schools were managed by a CMO and 12 percent by an EMO.4National Center for Education Statistics. National Charter School Management Overview, 2016-17 The main difference between the two is tax status, not how much control they exercise over daily operations.
For-profit EMOs provide services like curriculum development, hiring, payroll, accounting, and building maintenance. They earn revenue through management fees paid by the nonprofit school board. Because the EMO is a private company, it does not have to disclose its own internal profit margins, executive pay, or financial details the way the nonprofit school does. That opacity is where most public skepticism about charter school profits comes from.
What Management Fees Actually Look Like
Management fees typically take one of two forms: a flat dollar amount per student, or a percentage of the school’s total per-pupil revenue. Reported fee structures vary widely. Nonprofit CMOs averaged about 7 percent of per-pupil revenue in management fees in one multi-school study, while for-profit EMOs charged 16 to 17 percent at some schools. The actual range depends heavily on how many services the management company provides. A company handling only back-office accounting will charge far less than one running the entire school operation.
The management company may also own the school building and lease it back to the nonprofit board. This creates a second income stream for the private entity beyond the management fee itself. The IRS examines whether these leases reflect fair market value and whether an independent appraisal determined the rental rate.5Internal Revenue Service. Charter School Reference Guide When the management company leases a building from a third party and then subleases it to the school, the markup should cover only the company’s administrative costs for handling the sublease.
Facilities put real pressure on charter budgets. Buildings often consume 15 to 20 percent of total annual operating costs, and charter schools face a significant funding gap for construction compared to traditional districts. A 2020 national study found charter schools received roughly $7,800 less per pupil than district schools overall, a gap of about 33 percent. District schools spent more than double what charter schools did per student on new construction. That squeeze is one reason many charter boards turn to private companies that can provide or finance a building as part of a management package.
The States That Allow For-Profit Charters Directly
A small number of states permit for-profit corporations to hold a charter directly, meaning the school itself can be a commercial entity rather than a nonprofit. These states are the exception. In the vast majority of jurisdictions, the charter must be held by a nonprofit or a governmental body, and any for-profit involvement happens through a service contract.
The trend over the past decade has moved toward tighter restrictions. Several states have passed laws prohibiting for-profit companies from operating or managing charter schools, requiring existing for-profit arrangements to convert to nonprofit status or shut down. State authorizers hold the power to grant and revoke charters, and financial mismanagement is one of the most common grounds for revocation. Most states require charter schools to undergo annual independent financial audits, and the results are typically public.
Warning Signs the Nonprofit Shell Is Doing Real Work
The biggest risk in the model is a “sweeps contract,” where the nonprofit board hands over nearly all of its public funding to the management company in a single lump sum. The company then decides how to allocate spending, and whatever is left is its profit. These arrangements effectively transfer control of public education dollars to a private entity. One recent state investigation into a charter network found that a single management organization had collected $57 million in public funds over eight years while resisting efforts to disclose how that money was spent.
The IRS considers the dominant issue in charter school tax-exemption applications to be the risk of impermissible private benefit flowing to a management company.5Internal Revenue Service. Charter School Reference Guide When reviewing a charter school’s exempt status, the IRS looks at whether the school board is genuinely independent from the management firm and whether the management contract was negotiated at arm’s length. Red flags include:
- A board controlled by the management company, which formed the school, selected the board, or drafted the bylaws.
- No competitive bidding, meaning the board never compared costs across multiple management companies.
- Revenue-based fees with no expense accountability, which lets the company profit by cutting costs at students’ expense.
- Termination penalties that trap the school, so ending the contract would mean losing the building, curriculum, brand name, or key staff.
- Contract terms longer than five years, which reduce the board’s leverage to renegotiate.
When a transaction crosses the line into an “excess benefit,” the IRS can impose excise taxes on the recipient and on managers who knowingly approved it, and the school itself can lose its 501(c)(3) status entirely if net earnings are found to benefit private individuals.6Office of the Law Revision Counsel. 26 USC 4958 – Taxes on Excess Benefit Transactions1Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc. Losing exempt status would strip the school of its ability to receive tax-deductible donations and could jeopardize its charter.
How to Check Your Own Charter School’s Books
Parents and taxpayers have concrete tools to investigate how a charter school spends its money. The most accessible is the Form 990, which every nonprofit charter must file annually with the IRS and make available for public inspection.3Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications – Public Disclosure Overview Sites like GuideStar (now Candid) host these filings for free. The Form 990 shows total revenue, the compensation of the school’s highest-paid employees, and major contractor payments. If a management company is receiving a large share of the school’s budget, it will appear there.
Beyond the 990, most states require charter schools to publish annual audit reports. These audits are often more detailed than the IRS filing and break down spending by category. Look for the management fee as a line item and compare it to the school’s total revenue. A fee consuming 15 percent or more of the budget warrants a closer look, particularly if the school is also paying the same company for facility leases or ancillary services.
Board meetings are another avenue. Charter school boards generally must hold public meetings, and the agendas and minutes often include contract approvals and financial updates. Sitting in on a meeting where the management contract is up for renewal is one of the most direct ways to understand the financial relationship between the school and its operator.