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Source: Miles Jennings and David Kerr
Original title: How to pick a DAO legal entity
DAO - Decentralized Autonomous Organization - is an important empowerment tool to realize the advantages of web3, which can enable participants in the organization Fairer ownership, less censorship, and greater diversity.
DAO enhances the advantages of web3 by enabling decentralization. This organizational form allows developers to hand over control of developed networks and protocols to users, often by distributing governance tokens. This process effectively turns the network and protocols into a public utility that users can build on, knowing that no centralized control agency will suddenly change the rules and extract benefits from them. DAOs are often used to manage the treasury that incentivizes the continued development of networks and protocols, ensuring that web3’s open source and decentralized technologies receive sufficient resources to continue to innovate and improve.
In addition to network and protocol types, DAOs also have the following categories:
- DAOs established for investment. Individuals, friends and colleagues form a club to invest in web3. Startups
- Collector DAOs, specially designed for collecting NFTs.
- Social DAOs established , convening web3 communities
- Collective/cooperative DAOs, in which groups of artists and engineers provide services to other DAOs
- Charitable DAOs that promote good causes and the development of public goods
The thriving diversity of DAOs demonstrates that communities around the world revolve around shared interests, ideas, and passions And got together. The booming development of
DAOs is an exciting frontier in the evolution of the Internet, but this phenomenon also raises many legal, tax and operational issues. As the number of DAOs increases and their internal practices evolve, the question arises: how these organizations exist as legal entities. We began a series of studies last year on the legal framework for DAOs to help builders, founders, and members evaluate their options in an evolving regulatory environment. A few weeks ago, we released a reference guide – flowchart and feature comparison – to help web3 builders. In Part II – which can be downloaded here – we propose a new practical entity selection framework and conclude that domestic legal entity structures in the United States can bring clear and far-reaching benefits to DAOs, thus Conducive to the overall development of web3.
Developing the legal entity concept of DAO
The formation of DAOs is not an easy task, especially when considering the complex issues of coordinating a diverse community. Looking around the world, the lack of clear supervision of web3 and DAOs makes this problem even more obvious. In the United States, there has been virtually no legislative action, and agencies like the SEC, and IRS have not provided meaningful guidance to web3 builders. This environment heightens the uncertainty when choosing a DAO legal entity.
In the short history of DAOs, there are two entity forms that have been most commonly used, and both of them are risk-free. The first is the disembodied form, which in some ways represents the ideal form of decentralization, but it limits the functionality of the operation because it lacks a legal presence, cannot pay taxes, and potentially exposes participants to unlimited liability (or at least is to determine liability in obstruction proceedings). The second, offshore foundations, can achieve tax advantages by being headquartered outside the United States, but in practice they may be susceptible to government scrutiny, thus severely undermining their value proposition.
Finding matching legal entities
Our work provides web3 builders with a practical, hands-on approach. For example, we believe that the status of U.S. members and their activities in the DAO limits the long-term viability of adopting a disembodied structure and an offshore foundation structure.Instead, we propose the use of indigenous legal entity structures, particularly UNA (unincorporated not-for-profit associations), where appropriate. UNA is a compelling choice that provides a legal presence for unincorporated organizations, similar to what most DAOs encounter. Please refer to the introduction to our original publication UNA for more details. This structure is operationally flexible and adheres to the principles of decentralization (governed by token holders, anonymizers, etc.) Despite the name, this does not prevent UNA from being profitable. (UNAs, by contrast, are limited in how members distribute profits, which is in addition to existing federal securities laws.)
Not all DAOs are right to choose UNAs. Some DAOs are best set up as LLCs (limited liability companies), LCAs (limited cooperative associations), or other structures. Match depends on the circumstances of the particular project. If you are a builder, a potential DAO creator, member, advisor, or simply a participant interested in web3, in order to have the best options, you should at least wait until new legislation is passed or regulators provide Before regulations provide clearer guidance, familiarize yourself with the options you have now.
To help guide you: When thinking about which DAO legal entity is best for you, ask yourself the following questions
4 Questions to Help You Choose a DAO Legal Entity
1. Should you form a DAO? Although this question may seem obvious, it's worth thinking about. In order to catch up with the wave of DAOs, simply implanting blockchain concepts into existing business operations ignores the significance of building in the web3 world, and will cause huge regulatory, liability and tax risks. If blockchain and decentralization are not necessary for your project, you should not benefit from creating a DAO, and your organization may be better suited to another structure.
2. Does your DAO need a legal entity structure? legal entities have more power than their unincorporated counterparts. Legal entities can more easily manage a community's property, own assets and knowledge products, employ people and generate revenue, and interact with external organizations. In short, a legal entity provides the legal existence of the DAO, reduces the liability of participants, and helps the organization determine and meet tax obligations. While there is no perfect legal entity structure for the vast majority of DAOs, choosing an appropriate legal entity structure can help mitigate risk.
3. What type is this DAO? The purpose of DAO often dictates which legal structure is most appropriate, but there is no one-size-fits-all approach. The legal structure adopted by a DAO to oversee blockchain networks and smart contract protocols may not be suitable for another type of DAO (if you are participating in a network/protocol DAO, please go directly to the last question). An investment DAO might be positioned as LLC (limited liability company), like many existing clubs. Collector, social or charitable DAOs are best served as LLCs (limited liability companies), or UNAs (unincorporated non-profit associations), depending on their characteristics. Collective/cooperative DAOs might want to consider LCAs (Limited Cooperative Associations), a form that works well for many existing businesses. When deciding on the legal entity for a DAO, reference to the framework of existing analogs is a good starting point.
4. For network/protocol DAOs: Does have a significant number of US members or operate within the US, or does the DAO exercise control over the network/protocol's revenue or treasury? If the answer to the above is no, perhaps you can consider choosing a structure without a personal entity. However, if the answer to any of these is yes, then the activities of the organization may give rise to U.S. tax liability on the part of the DAO or its members. We believe the U.S. entity structure provides a clear path for how to meet these obligations.
is a guide to four questions in the form of decision tree :
Editor in charge: Felix
