How to Start a University in the United States

Every few months I get a call from someone who thinks they want to start a new university in the United States. These are usually one and done calls, because the would be university founder does not like what I have to say.

Starting a college or university in the U.S. is very expensive due to regulatory requirements. It is not a business that you can bootstrap. You have to have significant cash to invest before starting the process.

I am not a lawyer, and the following is not legal advice. It provides a very high level overview of the issues involved with starting a university.

Step One: Creating an organizational entity

The first step in the process is deciding what state to locate your university. Every state has different laws and requirements. It does not matter if you will have an online university without classrooms, you still need a physical office in the United States. You will need some sort of organization to control the university. This can be a non-profit or a for-profit company or limited liability corporation. The specific options will vary by state. Not all non-profits are charitable. To be a 5021C3 charitable organization, you also need IRS approval. If you are not concerned about collecting tax deductible donations, you do not need to worry about this status.

I like Arizona for locating a new university, if you are not concerned about where it is located. Arizona allows you to form a non-profit corporation with only one trustee. Most states require three. Also, Arizona allows you to do everything online. That is better than Delaware where most documents must be filed in person. In all states, you will need a registered agent in that state has a point of contact. There are a variety of companies that offer this as a service. You will also need a mailing address in the state, which again can be easily arranged through a variety of companies.

Once you have your organization has been created in the state, you can apply for a federal employer number (EIN). This is free, though companies will charge you a fee to do this simple task. You need the EIN for opening a bank account for the university and for paying people when you get to that point.

Step Two: State degree-granting approval

The next step is to seek approval for the university to operate. In order to grant degrees, you have to be approved by the state to do so. In the past, there were diploma mills that offered worthless degrees. The states have cracked down on those practices, and it is illegal in all states to offer degrees without state approval.

In some states, offering a “certificate” or a “diploma” can be considered a degree long with “associate’s degree” or “bachelor’s degree.” Some states are not as restrictive. Again, this is another reason why I like Arizona.

Also, some states do not allow you to describe an organization as a “college” or “university” without state approval. In some states there are other labels that are controlled. Again, Arizona is more open that most states on this issue. In many places, you will be blocked from using “college” or “university” in a organization title or name.

In many states, to pursue state licensure/approval, you need to be an accredited institution. The challenge is that accreditors require that you be licensed in a state and usually to have graduates. Some states will give you a period of time with a provision license to get accreditation. A few states like Florida and Arizona will allow licensure without accreditation.

The state license process varies by state. Even in places like Arizona, it is extensive and often involves showing financial stability. A state does not want to approve a university that does not have the resources to provide students with an education. This is why you cannot bootstrap a new university by investing revenue to establish the business. You need to invest upfront.

Many of the people who come to me want to educate people outside of the United States, but they want the university to be based in the United States. The requirement remains that you have to be licensed in the state the university is based to offer degrees. If you are operating an organization within a state, the state has a requirement to approve those operations.

If the goal is to offer education to residents of the United States, the goal is also to offer federal financial aid. That requires accreditation as well, and meeting other requirements. Financial aid is not my wheelhouse, so I am just going to leave that as a call-out for something that will be costly and take time to accomplish.

If this all sounds complicated, it is. There are alternative approaches, though.

Alternative One: Buy an Existing University

In the U.S., the easiest and quickest way to start a university is to buy an existing university with accreditation. Accreditors will review this purchase as will the Department of Education. The expectation will be that the university will continue to operate as it has, so if you are buying a university with a campus but want to offer online programs, you might be out of luck. The nuances here are complicated.

The other downside is that U.S. universities tend to be expensive to operate. It is hard to make the cost structure work for an international market. Since most U.S. universities serve U.S. residents, it can be difficult to shift the university to a new audience without triggering accreditation review.

Due to market pressures, many U.S. universities are financially distressed. Existing for-profit universities are also under regulatory pressure. As a result, there have been several high profile sales of universities for very little money. The new owner, though, will need significant cash to meet accreditor and government approvals.

Alternative Two: Non-degree Granting Education Company

If you can live without granting degrees, you can start an education company with less regulation. Generally you cannot call it a “college” or a “university,” and there can be other restrictions. Most states regulate any education company that claims to prepare students for careers or occupations. There are exceptions in most states. If you can live within this exception zone, you can avoid state licensure. Even if you cannot, if you do not need to be degree granting, the approvals are usually less of a burden.

There are many education providers that operate illegally. States do not always notice when someone is operating without a license, until someone complains. There have been significant fines assessed for education providers operating without a license. In most cases, I think it is just ignorance of the requirements, but that is not an accepted defense.

Alternative Three: Partner with an Existing University

Another option is to partner with an existing university. There are multiple ways to partner. Some individuals invest the money to have a university start a new program. Other times, an outside entity will provide curriculum to be used in a university program. A partnership can also be a university co-branding an educational offering with another organization.

A partnership will generally be cheaper to set-up, but it also means giving up control and finding a university open to the specific partnership. Depending on the specifics, this can trigger accreditation reviews. I have worked on several of these partnerships over my career. Each one is unique.

Higher Education as a Business

In the United States, higher education takes three forms: public (government sponsored), non-profit (private but operated for public interest), and for-profit (private and owned like a business). The politics around for-profit higher education have been intense over the last decade. As a result, many for-profits have converted to non-profit status. I would advise against starting a new for-profit university in the U.S. as there are additional regulatory requirements.

If your goal is to start a university as a money-making enterprise, not being for-profit makes things more complicated. There are ways to mitigate this, but it does require additional planning. A non-academic (non-degree-granting) learning company is fine, but I think it will only get harder to be a for-profit university in the future. I have worked in all three forms, and I am not making any claims that one is better than the others. It is just the regulatory environment.

Get Expert Help

Whether you want to start or buy a university or start a non-academic learning organization, you will need expertise on the regulatory and financial issues. Because each state is so different, it is important to find someone versed in the requirements of that state. I always enjoying learning what new ideas people have that they want to see reflected in starting a new university, and I am delighted to have an initial conversation. Just don’t be too disappointed with what you hear.