The Kings Science Academy in Bradford said Sajid Raza Hussain, who founded the school, would be replaced by an interim principal.
He is on bail following his arrest over alleged fraud offences at the school.
The school's governors also said they had asked the government to help find a suitable academy trust to join.
The academy, one of England's first free schools, opened in September 2011 and was praised by Prime Minister David Cameron when he visited it in March 2012.
The Department for Education (DfE) investigated the school after a whistleblower made allegations about its governance, and found nearly Â£80,000 of public money had not been used for "its intended purpose".
In a report, the DfE said it had found "serious failings" with the school's financial management.
A free academy principal who was arrested over fraud allegations has been dismissed following a disciplinary investigation by the school.