Business Incubators – Legal Organizational Structures

There are four general options of legal and governance structures for business incubators with variations on each.

  • 1) a private, for-profit corporation,
  • 2) an independent 501 (c)(3) not-for-profit corporation
  • 3) a unit operating under an existing “host” 501 (c)(3) not-for-profit corporation.
  • 4) a dept of a university

Private, For-Profit Corporation
For-profit incubators are usually established by venture capitalists or private corporations intending to spin-off internal technologies that lead to significant, short-term return on investment to corporate shareholders. Such returns are usually realized through an initial public offering or an acquisition of the start-up company.

A for-profit structure is well-suited to fast growth sectors that provide high-returns in a short period of time. This structure may be more attractive to sophisticated venture capitalists and angel investors which can increase an incubator’s ability to attract new ventures due to improved access to sources of equity capital. A for-profit structure is easily established (relative to a not-for-profit structure).

A for-profit structure may not be best suited for an incubator whose overall mission is to provide for broader economic benefit to a region. With such a mission, ventures that would grow stable small and medium size businesses – for example, those that could provide for 10 to 20 new jobs and annual sales of $5 million to $10 million – may not meet the investment criteria typically sought by investors involved in a for-profit incubator.

Independent, Not-For-Profit Corporation
Not-for-profit incubators are not driven by return on investment to shareholders and therefore can be well-suited to serve promising ventures that would provide for job creation and economic benefit to a region. A not-for-profit 501 (c)(3) structure also allows for access to charitable donations and public funds.

However, a non-profit incubator may experience greater difficulty in attracting investors and professional service providers to the program who want to see proof that a non-profit organization can be effectively run to promote the growth of new business ventures. Another challenge this structure poses is that the time required to establish a new 501 (c)(3) can be long. Incubator industry experts note that increased scrutiny by the Interna lRevenue Service has led to increasing effort and time – up to two years – required for incubators to prove public benefit and gain status as an independent charitable organization.

Host Not-For-Profit Corporation
A host not-for-profit structure entails that an incubator be established under the not-for-profit umbrella of an existing 501 (c)(3) corporation, such as a university foundation, community foundation, or economic development corporation. To be successful, incubators that operate under the umbrella of a host must meet the not-for-profit objectives of the host, but must be operated independently so that the incubator is not overshadowed by operations and culture of the host operation. Independent operations can be accomplished by establishing an incubator advisory board that acts in the capacity of a board of directors to provide strategic oversight to the incubator program while the host organization serves as the fiscal agent. The advisory board includes one or two representatives from the host corporation, and representatives from the investment and business communities who are experienced in new business start-ups.

A hosted not-for-profit structure allows the incubator access to charitable donations and public funds that are administered through the host 501 (c)(3). A hosted incubator allows for rapid roll out of the incubator project (compared to an independent not-for-profit structure). A strong host can also provide instant credibility to an incubator project.

A key concern with a host structure is the potential for conflict between the board and management of the host and that of the incubator. Such conflict can occur if the institutional culture of the host is not compatible to entrepreneurial enterprises. Careful attention to creating a governance structure that allows the incubator to operate autonomously with its own advisory council and management staff can help assuage this concern.

Structure as a Department of the University
Another structure that could be considered is to organize the incubator as a department of the UO. In this structure, incubator employees would be staff of the UO. This would entail that the UO see the incubator as an appropriate and logical extension of its current organization and mission.

A key benefit to this structure is that it could provide the human resources to expedite the implementation phase of the incubator should the project move forward. Another positive aspect of this structure is that, as a public institution, the UO is an eligible applicant for potential funding sources that appear most promising for incubator facility development.

Concerns related to this structure involve the potential that the institutional culture of the UO is not conducive to the entrepreneurial style management required for incubator operations. For instance, incubator staff could be pulled into other University initiatives that would distract from the necessary attention required for operation and optimal success of the incubator. If this structure was pursued, the UO would need to work hard to ensure it was leading the effort in a way that provides for maximum stakeholder involvement in order to build the coalition and networks necessary for success once the incubator would open for business.