The Advantages of a DAO LLC: Everything you Need to Know

A DAO or a Decentralized Autonomous Organization is a common form of a business entity in the crypto and NFT space. This is the case because its structure is aligned with that of the decentralization of the crypto currency market. A recent academic article has noted that, “The decentralized structure and automated operations of DAOs raise complex questions about the determination of applicable law, corporate status, and external actions that cannot be adequately answered using classical theories.” The article goes on to outline the current theories which are used to understand the legal structure of DAOs. 

What is a DAO LLC? 

A DAO is an organization in which decisions are made for the organization by the members of the organization or by an algorithm which the members agree upon. The rules which govern the DAO are formed during the initial creation of the organization. This is also the stage in which stakeholders invest into the organization in exchange for a greater share of control over the DAO as well as a larger share of the profits of the DAO. While the original creator of a DAO does ordinarily participate in the DAO as a stakeholder after it has been created, this is not a requirement. 

Before an individual or group of individuals decide whether a DAO structured as an LLC is right for them it is recommended that they conduct thorough research on this type of organization. Given the right set of circumstances a DAO can be a supremely powerful tool. This is particularly true when the DAO is established in a manner that minimizes the liability of individual stakeholders in the business. However, it may not always be the right fit for every business or every individual. 

The Risks of a General Partnership

By default a DAO business entity is considered a general partnership in the eyes of the law. A general partnership has many similar characteristics of a DAO which include a decentralized governing body and multiple stakeholders in the business. Members of a general partnership are also subject to unlimited liability relating to the partnership, which is standard of general partnerships. This is undesirable at the best of times, but it is particularly undesirable in the case of a DAO. Unlimited liability means that were the company to suffer liability of some kind, the members and their personal funds and property could be at risk. 

The risk inherent to a general partnership exists in a double capacity when it comes to a DAO as a single investor may vote against a decision which the rest of the DAO votes for. If this decision were to cause financial turmoil, even the investor who voted against the decision would be liable for the expenses which this decision incurs. Despite the sophisticated nature of the voting systems within a DAO there exists the possibility for something unexpected or unwanted to occur. In the event that the company does take on liability, the protection of the corporate veil which a limited liability company or LLC offers is greatly desirable. 

It is always in the best interest of the stakeholders of any company to minimize the liability which they could potentially incur. A standard DAO structure does not always accomplish this adequately. However, there are ways and means of accomplishing this limited liability without the need to do away with the unique and desirable functionality which the DAO structure offers business owners.  

The Advantages of a DAO LLC

An LLC provides a business owner or owners with limited liability asset protection. This means that if the LLC incurs liability, the owner or owners of the business cannot be held liable in a personal capacity for this liability. In a similar manner, if the owner of an LLC incurs liability in a personal capacity, the LLC cannot be held liable for this liability. 

A DAO LLC is a type of DAO that is formed with the intention of it being a special type of LLC. This dual structure allows the stakeholders of a DAO to enjoy the benefits of the structure of a DAO as well as the legal and asset protection which an LLC provides. A DAO is not required to be a DAO LLC in order to function but the limited liability protection offered by an LLC structure is considered to be vital for the protection of personal assets which exists outside of any investment in a DAO. 

It is recommended that all responsible investors form a DAO LLC when they have the intention of forming a DAO for the reasons which have been outlined above. In the same manner that a general partnership is often recommended against due to the unlimited liability which that business structure entails, DAO LLCs are recommended over regular DAOs. In the eyes of the law a DAO LLC functions in an almost identical manner to the way in which a typical LLC functions. This excludes certain additional requirements for a DAO which include their governing structures and their requirements for maintenance. 

As was mentioned in the introduction, the law is not entirely clear on the manner in which a DAO LLC is administered. This is because the technology of the DAO LLC is fairly recent. Wyoming has recently passed legislation which supports the DAO structure as an LLC entity. Wyoming also has a long history of supporting the legal protections which LLCs offer when cases are brought under its jurisdiction. It is the belief that this will continue and be true for DAO LLCs. 

Final Thoughts 

A DAO LLC provides a best of both worlds scenario. The owners or stakeholders of the DAO receive the unique benefits which are associated with a DAO such as voting rights proportional to their capital contributions. Additionally, the owners or stakeholders of the DAO LLC will enjoy the limited liability asset protection which an LLC provides. While the law is still relatively new in this area and the law is subject to change, it is predicted that Wyoming will continue to uphold the rights of LLC owners and members as it has proven to do in the past.