This page explains. It doesn't advise. Which structure is right for you is a question for a CPA or attorney.
Why structure matters for money
Most funders decide who can apply by legal structure, before they ever read your story. The same school can be a "yes" for one program and a flat "no" for another just because it's an LLC instead of a 501(c)(3).
We don't know how most Arkansas microschools are set up. A check of 74 Arkansas microschools that accept EFA found about a quarter with their own 501(c)(3) on file with the IRS, a few confirmed LLCs, and most unknown. (See what we found.)
What each structure can usually reach
| Money source | LLC / for-profit | 501(c)(3) nonprofit | Church-run school (ministry of a church) |
|---|---|---|---|
| Arkansas EFA tuition (as a participating school or approved provider) | Yes | Yes | Yes |
| SBA 7(a), 504 and microloans | Yes (must "operate for profit") | No | No, unless a separate for-profit entity |
| Arkansas CDFI small-business loans (ACC Capital, FORGE, People Trust, Southern Bancorp, Communities Unlimited) | Yes | Some programs only | Ask |
| The Lending Lab | Yes | Yes (pending 501(c)(3) OK) | Only if the borrower is the legal entity that runs the school (no DBAs or fiscal sponsors) |
| Christian credit unions (ACCU, AdelFi) | Ask | Yes | Yes |
| Small-business grants (Verizon Digital Ready, Amber Grant, NASE) | Yes | Amber only | Rarely |
| Walmart Spark Good, Whole Foods garden grant, Dollar General literacy | No | Yes | Yes, if it meets the 501(c)(3)/NCES test |
| Arkansas foundations (Arvest, Tyson, Union Pacific, Ross, ARCF Giving Tree) | No | Yes | Usually yes |
| Tax-deductible donations | No | Yes | Yes (gifts to a church) |
The three structures in plain English
LLC (or other for-profit company). Cheapest and fastest to form in Arkansas: the Secretary of State charges $45 online / $50 paper for a Certificate of Organization, plus a $150 annual franchise tax due May 1. You can borrow from SBA and small-business lenders and enter small-business grant contests. You can't take most foundation grants, and donors can't deduct gifts to you.
501(c)(3) nonprofit. You form an Arkansas nonprofit corporation ($45 online / $50 paper; the annual report is free, due Aug 1), then apply to the IRS. Schools can't use the short Form 1023-EZ. Its worksheet asks "Are you a school, college, or university…?" and a "yes" rules you out, so a school files the full Form 1023 ($600 user fee). A private school seeking exemption must also adopt and publicize a racially nondiscriminatory policy and certify it every year (IRS Pub 557). You gain grants and deductible gifts, but you need a real board and lose owner profit.
Church-run school. A school operated by a church can sit under the church's own exemption. IRS Pub 1828 says churches "are automatically considered tax exempt and are not required to apply," and Pub 557 lists "a school below college level affiliated with a church" among organizations not required to file an annual return. The school still owes the racial-nondiscrimination policy (Form 5578 if no 990 is filed). Downside: the church controls it, and some funders want the school to be its own legal entity.
Questions to take to your CPA or attorney
- Will I ever want grants or tax-deductible gifts, or mostly tuition and loans?
- Do I want to keep profit, or build something a board will own?
- If a church is involved, is the school a ministry of the church or a tenant?
- Could a companion nonprofit run a charitable piece (like a tuition-help fund)? See Fiscal sponsors and companion nonprofits: can a for-profit school get nonprofit grants?.