In previous articles (see below) we have examined in detail the merits of deploying a Caymans Foundation Company and a Marshall Islands DAO LLC as a Legal Wrapper for any new DAO (Decentralized Autonomous Organization). The purpose of this article if to shine a light on a third option ie the Wyoming DAO LLC.
As previously discussed most legal systems would consider a DAO to be a Partnership with the DAO members being considered as defacto Partners. Whilst a Partnership acts as a flow through entity (ie a Partnership doesn’t pay tax – it passes on nett profits to members who then report income/pay tax on their share of Partnership profits as/if applicable) the downside of a Partnership is if ever sued the Partners would be jointly AND severally liable for any judgment debt as may arise.
Hence if you want to add legal certainty to your DAO (which would be attractive to certain kinds of investors/suppliers) and if you want to minimize the chances of members being forced to pay the DAOs debts it would be wise to create a Legal Wrapper for your DAO.
The Wyoming DAO LLC – Overview
Since decentralized autonomous organizations (DAOs) were given the same rights as limited liability companies (LLCs) in Wyoming, the blockchain and cryptocurrency industries are seeing this as a game changer in business formation and business ownership.
People forming DAO LLCs will now get the best of both worlds. The LLC model offers benefits like limited liability for its owners while having the democratized voting structure of a DAO where all members have a voice.
Most Companies issue shares have shareholders. An LLC is a form of Company which (rather than having shares) issues Membership Units that deliver certain rights, not unlike shares. Moreover an LLC is considered to be a Partnership (ia a flow through entity, see above) and not liable for Company tax.
Since DAOs in Wyoming have been given the rights of LLCs, these organizations will have the same benefits and will be established in a similar manner. You’ll enjoy these benefits if you create a Wyoming DAO LLC:
1. Protect Your Assets
LLCs, on their own, are very popular since they offer limited liability to its owners. With a DAO LLC, you get the same benefit, which can be even more appealing since the organization is only run by its members rather than owners/partners.
Limited liability is a great thing to have since any legal troubles the organization runs into won’t affect your personal assets. For example, if the organization gets sued, the members’ personal assets can’t be used to pay off debts.
2. Easy Document Drafting
Setting up a DAO LLC from scratch can be relatively easy. With a regular DAO, you’d typically start the process by creating a mission statement where the organization’s structure and its features are detailed. Things will play out differently, and maybe even easier, for a DAO LLC.
We hate to sound like a broken record, but it bears repeating that DAO LLCs will follow a typical LLC business model for the most part. And your document drafting process will start with creating Articles of Organization, which we’ll go into detail a little later.
3. Avoid Double Taxation
Like the Articles of Organization, a DAO LLC’s taxes will be handled similarly as a regular LLC.
LLCs avoid double taxation, meaning the company and the owners aren’t taxed separately. This is great since it can save you money, time, and paperwork. Since DAOs in Wyoming will follow the LLC structure, their taxes work the same way.
This is a huge plus since regular DAOs are presently (as of March 2022) in a grey area when it comes to how they pay taxes. Not so with DAO LLCs.
The organization’s profits will be taxed only once through each member’s individual income tax return. And, as a cherry on top, the organization’s members may qualify for a 20% deduction of their business income thanks to the Tax Cuts and Jobs Act of 2017.
4. Simple to Establish
The great thing about starting a DAO in Wyoming is that it will follow the LLC structure. LLCs are very popular with business owners since they offer some benefits like limited liability, appealing tax features, and an easy startup process.
In Wyoming, the process of starting a DAO LLC will be the same as starting a regular LLC. This includes mostly the same fees and steps needed to establish one as you would an LLC.
There will be a few minor differences, though, like choosing the “Decentralized Autonomous Organization” option as the additional designation for your LLC.
The Wyoming Secretary of State’s website has a complete list of FAQs for setting up a DAO LLC.
5. All Members Have a Voice
A DAO LLC’s structure can be identified as democratized. This means that each member of the organization can vote for changes to be made in how it operates, how it does business, or other functions.
In a corporation, for example, only the board of directors handles these decisions by voting on them. With a DAO LLC, things work in the opposite direction.
No one single person or group of persons do this, and it’s left up to the members of the DAO LLC. This gives everyone a voice through a vote.
6. Full Transparency
Unlike a regular LLC where the business’s inner workings are typically left for the owners to know, a DAO LLC’s members are always kept in the light about the organization’s functions.
This is a huge plus if you’re going into business with people you need to trust. Since DAOs involve people working together through the internet, 100% transparency is needed. The basic DAO model offers this, and it’s the same with a DAO LLC.
The organization’s code (that we’ll talk about later) is fully trustworthy, transparent, and verifiable to all members at all times. The only way the code can be changed is by a vote, meaning all members will be aware that a change is being considered.
7. Opportunity to Become an Industry Trailblazer
DAOs and DAO LLCs are new compared to other business types. Today’s internet users and younger generations consider DAOs to be the future of business. Wyoming is already on the forefront for making them legal entities, and DAOs appear to be picking up steam across the country. Starting one now may be the innovative move that’s right for you.
DAO LLC CONSIDERATIONS
Articles of Organization
With a DAO LLC, you’d be drafting Articles of Organization, which can be much easier since most of these documents follow the same drafting process across all 50 states. This includes adding information like the DAO LLC’s name, identifying its owners, etc. OCI can/will assist you to draft these Articles. Note that the Articles of Organization should state that the LLC is a DAO. You’ll also need to file these articles with the Wyoming Secretary of State.
Meeting Necessary Requirements
Also remember that since your DAO will use the LLC legal entity status, it will need to meet certain requirements as stated in the Wyoming DAO law. For example, it must have a registered agent (a service OCI Can provide as we hold a Wyoming Corporate Service Provider Sublicense)
Wyoming DAO LLC History
Wyoming officially recognized DAOs, specifically DAO LLCs, as a legal business entity on July 1, 2021. This business type is the first of its kind, paving the way for future business owners to see just how beneficial the structure is.
If you’re familiar with LLCs, then you might be wondering what the point of merging one with a DAO model is. Both have their upsides, and combining them can be something that could bring a handful of benefits like the ones we went over above.
The Wyoming DAO LLC as a DAO Legal Wrapper
Most online guides on the Wyoming LLC for DAO incorporation provide only the information on registering the company as a Wyoming LLC for DAO purposes. It’s hard to use this information to make an informed decision on whether to choose this option for your DAO or whether they may be more suitable options offered by alternative jurisdictions.
We’ve created this guide to help you decided whether a Wyoming LLC could work for you as a DAO Legal Wrapper and also to help you better understand how it works for a DAO from a legal standpoint.
Why might Wyoming work for your DAO?
Like the Marshall Islands, Wyoming has drafted a special regulation for DAO, under which a DAO can be established in Wyoming in the form of an LLC, with certain characteristics. From our point of view, the advantages of this US jurisdiction include:
- The flexible legal system of the U.S. common law;
- Easy and relatively inexpensive establishment process;
- Quick setup—a company can be registered in as little as 2 weeks;
- Your project will be structured in the U.S., which is considered an investment Mecca;
- Wyoming offers one of the first working legal regulations for a DAO wrapper;
- Limitation of personal liability: the DAO LLC members are not personally liable for the LLC’s debts or legal liabilities;
- No Corporate tax: LLCs have a “pass-through” taxation system: the DAO LLCs receive “pass-through” treatment allowing allocated profits to be taxed only once on each member’s individual income tax return; and
- Less bureaucracy and paperwork as the registration process is very simple with minimal documentation required.
However, establishing a DAO LLC in Wyoming for the purpose of creating an investment DAO is not considered a great option due to the strict securities regulations in the U.S. There is a risk that your token (if publicly issued) will be deemed as a Security by the U.S. Securities and Exchange Commission. Instead, the Wyoming DAO LLC is usually recommended as a pure governance DAO for your project, due to the transparent and specifically designed regulation.
How does a Wyoming DAO LLC work?
The main concern with a DAO is that your DAO, if you have no proper legal wrapper, could be recognized as a general partnership, exposing its members to personal liability for any of the DAO’s actions and obligations. At the same time, an LLC is a recognized legal/business structure in the U.S. (and throughout the world) that protects its owners from personal responsibility for the company’s debts or liabilities.
Management of the DAO LLC must be vested in its members (similar to the classical model of LLCs) if it’s member-managed, or in the smart contract if it’s algorithmically managed (similar to the classical DAO model, where decision-making is encoded in the protocol).
No member of the DAO LLC shall have any fiduciary duty to the organization or any member with the exception that members shall be subject to the implied contractual covenant of good faith and fair dealing or unless otherwise specified in the articles of organization or operating agreement. Fiduciary duty requires that a particular person works in another person’s best financial interest in certain circumstances. For example, directors of corporations (or managers of LLCs) are charged with certain fiduciary duties in fulfilling their managerial responsibilities. The primary duties are the duty of care and the duty of loyalty. In the case of a DAO LLC, the members have no such duties to the DAO LLC and, therefore, have more freedom for their business activity.
How does decentralized governance work in a Wyoming DAO LLC?
Articles of organization and smart contracts take the role of the operating agreement in the DAO LLC in terms of what they govern. But, to the extent the articles of organization or smart contract do not otherwise provide for, an operating agreement may supplement the operation of the DAO LLC. Under the applicable law, an algorithmically managed DAO LLC may only form if the underlying smart contracts can be updated, modified or otherwise upgraded.
The articles of organization and the operating agreement of the DAO LLC are effective as statements of authority. Where the articles of organization and operating agreement conflict, the articles of organization shall take precedence over any conflicting provisions. But where the articles of organization and smart contract conflict, the smart contract shall take precedence over any contradictory provisions of the articles.
Taking this into account, it is wise to very clearly and very consistently “build” the governance and management provisions in all the constitutional instruments of your DAO LLC: smart contract, articles of organization, and operating agreement.
Each article of organization of the DAO LLC must contain certain statements about DAO, the wording of which you may find in the special regulations for DAOs. It must also include information on:
- the rights and voting rights of members;
- transferability of membership interests;
- relations among the members and between the members and the DAO LLC; and
- activities of the DAO LLC and the conduct of those activities, etc.
Registering a Wyoming LLC for DAO
First of all, a DAO LLC may be formed by either establishing a new legal entity or converting an existing LLC to a DAO LLC by amending its articles of organization to include the statement provided for in the relevant regulation.
Any person may form the DAO LLC (which must have at least one member) by signing and delivering one original and one exact duplicate or verified copy of the articles of organization to the secretary of state for filing. The person forming the DAO LLC should not be a member of the DAO LLC. You can deliver these documents either online or by mailing the paper form. Each DAO LLC must also have a registered agent.
Getting started with your DAO Legal Wrapper
If you need a Legal Wrapper for your DAO and are planning, among other things, to accumulate profits or distribute them among DAO members, you may want to consider Wyoming as an option. The main benefits of this jurisdiction are investment attractiveness, simplicity, speed, and flexibility.
You might also like to check out the Wyoming Secretary of State FAQs re DAO LLCs: https://sos.wyo.gov/Business/Docs/DAOs_FAQs.pdf
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From 2nd year $990
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DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.