Microschool Governance Simplified

Starting a school from scratch seems like a daunting task. Even a microschool that's serving a small student body still needs to choose curriculum, create culture, and assign roles. A small but important part of formally launching a microschool can be creating the legal entity that is the microschool in the eyes of the law.

Of course, some microschools operate entirely informally—parents may take turns supervising one another's children during home-based schooling. But at the point where a school starts buying materials, hiring a teacher (or learning coach), and serving multiple families, it's probably time to start a formal legal entity for the project. Doing so has some minimal costs in time and money, but it provides an important protection: limited liability. 

When a microschool operates informally, the individual responsible adults are exposed to personal liability if something happens. In other words, if something happens that leads to a lawsuit, that individual adult is getting sued. And if he loses the lawsuit, it's his retirement savings and house that are the assets available to pay the damages. 

Creating a legal entity provides a layer of insulation between the adults involved in the microschool and the tort and tax liability of the organization. Once an entity is created, it's the organization, not the individual, that is the first thing responsible. That's not a complete shield if an individual adult commits a crime or acts irresponsibly, but it provides some protection at least.

The first practical question in creating an entity is whether you will create a non-profit corporation or a for-profit corporation (or a for-profit limited liability company, or LLC, which is often a great option for small businesses). Corporations and LLCs are registered at the state level, with a state agency like the Secretary of State or Department of Financial Institutions. 

Whichever path you pick, the next step is to register with the Internal Revenue Service for an EIN, or employer identification number. You'll almost certainly need an EIN even if your school doesn't actually have any employees. Think of it like a social security number for an organization -- you just need it for all the forms you'll fill out. Your EIN will likely be necessary when you register with your state tax authority as well, which is the other next step. If your school is operating as a non-profit, you may also wish to apply for 501(c)(3) charitable status or a certificate of sales tax exemption from your state. There is usually a nominal fee necessary to create the organization, but no fee for an EIN.

Applying for nonprofit status as recognized by this section of the federal code can be involved, but need not be difficult. Give a read to the federal form 1023, the main IRS application for nonprofit status. This may be the most time-consuming part of the process, and approval by the IRS can sometimes take 3 months.

If you plan to stay small and expect annual revenues of less than $50,000 for each of your first three years, you may be eligible to use the short and simple 1023EZ form, and receive your approval very quickly.

When creating a new entity, the state's form will ask you some basic but important questions: who are the directors of your corporation? What are your by-laws? What is your mission statement? Don't let these questions intimidate you out of moving forward. There are lots of good, free model by-laws on the internet so you don't have to start from scratch. Don't fear that you have to run everything according to Robert's Rules of Order -- you can stay pretty informal if you want. By-laws just ensure good practices like having an annual meeting and an annual budget.

Also, be thoughtful about who you ask to serve on your board. You should plan to have at least two board members who are not related by family or business. Just remember - your board will have legal control over your activities, and your checkbook, so trust is essential.

In a future post, I'll discuss concerns around regulatory frameworks for microschools. But in this post, my goal is to show it's actually pretty simple to create a legal entity -- for a small fee and a few hours of paperwork, you can easily create Your Microschool, Inc. Doing so gives important legal protections, but also projects an organized, professional image to your community and the families you serve.

Daniel Suhr is senior legal fellow for the National Microschools Center. He’s also managing attorney at the Liberty Justice Center, a national non-profit law firm with a focus on education reform. This column is general legal advice and does not create an attorney-client relationship. Consult a lawyer in your own state for advice specific to your state and situation.