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DAO Incorporation Basics: Everything You Need to Know

By

Leo Henkels

If you are just setting out with or considering a DAO (Decentralized Autonomous Organization), it is imperative to understand blockchain DAO legal and regulatory frameworks to operate within them. As the co-founder of MIDAO, Adam Miller brings a wealth of knowledge and experience in the realm of Decentralized Autonomous Organizations (DAOs). This blog is crafted based on his expert insights, aiming to guide individuals exploring or considering a DAO. Understanding the legal and regulatory frameworks of blockchain DAOs is crucial to operate within legal bounds. With assistance from DAO-specialized companies like MIDAO, you can navigate aspects such as liability protection and DAO incorporation with greater confidence and clarity.

A DAO is an organization that's using the blockchain for one or more of these three things: membership tracking, governance, or treasury management. You track your membership through some kind of token or smart contract or equivalent, do your governance on-chain or cryptographically, and manage your treasury on-chain. 

DAOs are organizations that are as easy to create as websites and scale at internet speed. You can have DAOs with a million members and 50 million dollars in the treasury after a few days, which wasn't possible before, leading to a whole host of new use cases. 

Legal Issues

Now, let's review the current legal issues associated with DAO incorporation. 

Code is not law, despite what many people like to say. While you can enforce code automatically using blockchains like Ethereum, Cardano, or something else, code actually has to fit into legal and regulatory frameworks to be legally binding. That matters because all organizations operate within countries and legal systems that have enforcement policies based on things like:

  • The legal implications of what they do
  • How they operate
  • Taxes

Enforcement policies are not concerned with code. However, you can actually put a legal framework around your code and around your organization so that the legal systems actually know how to treat you. You can manage risks and reduce risks, whether they're related to legal liability, taxes, ownership of digital or other assets, etc.

DAO Incorporation process

Legal issues can include:

  • Legal Framework
  • Agreements related to your organization and with other parties
  • Issues related to money and insurance banking and finance
  • Property, whether it's physical property or digital property
  • Financing,
  • Securities laws

DAOs need to deal with all of these issues.

Why Incorporate Your DAO?

There are several reasons to consider incorporation with MIDAO:

  1. Limited Liability: Without incorporation, every contributor faces significant risk and can be sued or have their assets seized if things go wrong.
  2. Corporate Personhood: If you don't incorporate, you don't have any corporate personhood, which means your DAO cannot own intellectual property, nor can it enter into agreements, higher employees, or even act as an entity in any corporate setting.
  3. Taxes: If you don't have a tax entity, the members can be held personally accountable for any taxes on net earnings generated by your DAO. For example, if you sell things like NFTs, all members would be on the hook to pay taxes from those gains even if your members never received those profits.

Let's examine each of these in more detail. 

Limited Liability

Most DAOs at least need legal entities as the cornerstone of their legal framework. It starts with liability protection. If a group of people engages in a common enterprise, the law virtually everywhere in the world will treat you with a default legal treatment called a general partnership, at least in Western systems. This means every single person involved can be held liable for the entire group's activities. 

So, if you own a house or a car, whatever property you personally own, and you're involved in a DAO, and that DAO gets sued or the government comes after it for some kind of liability, they can come after you for your house as an individual. There's no separation between your assets and the organization's assets. That's just a legal treatment that's existed for decades, probably even centuries. If you don't create a legal entity and elect for a particular legal treatment, that's the default treatment.

Corporate Personhood

DAO Incorporation is also essential. This effectively means the ability to own property and to sign contracts. Suppose your DAO wants to have a booth at a trade show, and you want the DAO to agree to all of the terms of that contract. In that case, you need a legal entity like a DAO LLC so that it's not just you as an individual or a group of people agreeing to everything with that other entity.

By creating a DAO LLC, your LLC is the entity responsible for things like:

  • Owning company property
  • Signing lease agreements
  • Arranging business agreements

Tax Optimization

Tax optimization is another critical aspect. Virtually every government in the world will come after the individual members of an organization for the full amount of taxes that the organization owes, even if those individual members never saw a penny. 

So, if your treasury had earnings of a million dollars and there are ten of you in the DAO, each of you will be held liable by the IRS or your local tax institution for taxes on a hundred thousand dollars worth of earnings. The IRS and other institutions have only just realized DAOs exist, and that's why this has yet to happen, but by using a legal entity, you can avoid that individual tax liability.

tax optimization with dao

Where to Incorporate your DAO?

The legal entity creates a corporate veil between the members and all of that legal entity's activities. So, what are examples of legal entities that anyone, DAO or otherwise, can choose between? 

There are many, not to mention that each jurisdiction has different definitions for what these entities mean. 

For example:

A trust in Delaware differs from a trust in Switzerland or an island nation, whether it's the Marshall Islands or otherwise. 

Then you're choosing between things like:

  • Non-profit
  • For-profit
  • Tax status 
  • Foundation
  • DAO LLC
  • An association
  • A cooperative
  • An unincorporated association
  • A trust

Why Choose MIDAO

When you incorporate with MIDAO, you get a limited liability corporation that protects you and other members. This incorporation comes with a physical address located in the Marshall Islands. Services include annual document filing on your behalf, smart contract recognition, help with legal documents, automatic services like counter financing of terrorism and automated anti-money laundering services, and corporate personhood that enables your organization to own assets and enter into legally binding agreements. 

MIDAO offers several services that others do not. 

  • We are, for example, not on blacklists.
  • We don't substitute quality and security for lower costs. 
  • We don't require you to have trustees or directors
  • We avoid US jurisdiction
  • We offer options for non-profit DAOs

Why a DAO LLC?

What we have worked on at MIDAO is a DAO LLC, first popularized in Wyoming in the United States. However, it is not without its problems; Wyoming is still in the United States, which, for most crypto projects, is a non-starter right now. 

So, at MIDAO, we helped write the laws passed in the Marshall Islands, an independent nation in the South Pacific, to create this DAO LLC, a legal entity made for DAOs.

The Marshall Islands is an ideal spot because it is a sovereign nation, but it still receives government services and protection from the United States. This means it is not subject to US laws, but lawyers from all over are comfortable working with traditional incorporation that shares distinct similarities to that of the United States.

For these reasons, the Marshall Islands have long been a popular home for shipping companies. Those with experience in boating or fishing have likely seen flags for the Marshall Islands. Many of the boats are part of larger companies registered there. 

Our concept has the same framework but extends to DAOs. 

What is it about this DAO LLC that makes it different from all these other corporate types and from other jurisdictions? 

  1. It's that it doesn't require you to have a board. 

Most legal entities, corporations, and otherwise require a board or officers or trustees, and most DAOs don't want to have to have a board or officers. You may want to at first, but sometimes you do want to have a board in your DAO that you know can have veto power or something like that. Still, if you want the ability for your DAO truly to be governed and controlled legally and on-chain by the members, then you need to use a DAO LLC.

Similarly, most legal entities require you to keep all the members' names and physical addresses, but that's also a non-starter for most DAOs. 

  1. It doesn't require you to keep all the members' names and physical addresses.

That's another problem we solved with the DAO LLC in the Marshall Islands, and again, some other jurisdictions may have similar solutions.

Finally, there's the issue of record-keeping. Most corporate entities require you to keep paper or PDF records of meeting minutes and corporate decisions. If you're doing all that on-chain, why would you want a separate PDF copy of all your decisions?

  1. It doesn't require you to keep separate PDF copies of all corporate decisions. 

All of these things and more are things that we've written into legislation in the Marshall Islands, which is, so far, the only sovereign nation that has actually passed DAO-specific legislation.

why a dao llc

Real-Life Examples

What does this look like in real life?

Consider this example:

My DAO, DAO LLC, is the DAO that does governance and supports a certain DApp or protocol and builds it. But that DApp still is separate; that's just open-source software living on the blockchain where people are interacting directly with each other. The DAO is there for the community to govern that system, and maybe those members are even making money somehow by directly interacting with the protocol or the DApp, but that doesn't mean that the DAO is making money from those interactions.

What about structure? You can use a non-profit for your DAO. However, another prevalent structure is that you'll have your governance DAO here again at the top and then some other kind of traditional incorporated entity like a Delaware C-Corp if you're a US group of developers. 

Summing Up

Overall, DAO incorporation is now feasible with MIDAO. Our company has worked hard to establish legal frameworks for DAOs that don't hinder company progression with required hard copies of corporate decisions, physical addresses, or board members. When working with DAO incorporation, you can choose the business structure that works best while also optimizing taxes and adhering to securities laws.

You can make it such that your DAO can sign agreements related to your organization and with other parties, own physical or digital property, and work through issues related to money, insurance, banking, and finance. 

Whether you incorporate as a for-profit or non-profit, your DAO can reduce any limited liability for members and avoid the tax implication of members being held personally accountable for taxes on net earnings generated by the DAO. 

Contact MIDAO today to learn how DAO incorporation can empower your business. 

Legal Notice: MIDAO Global, Inc. and MIDAO Directory Services, Inc., collectively known as MIDAO, do not provide legal advice. We are not a law firm, and we are not lawyers. We recommend seeking independent legal advice regarding all decisions regarding Marshall Islands legal entities.