What Is a DAO LLC? Discover Your Complete Guide to DAOs

The internet has revolutionized our world and the world of business. Thirty years ago, we could not simply Google our problems, buy things online, or even send a text message. Today, all that is possible, and new technologies continue to emerge. One technology that looks set to revolutionize how we buy, share, and even hold money is blockchain.

What Is Blockchain?

Blockchain is a digital platform that allows people to share information securely without relying on any organization or country to control the platform. Blockchain is the technology that enables the existence of cryptocurrency, among other things. In the case of crypto, blockchain makes it possible for decentralization, i.e., no centralized bank controls the currency.

While cryptocurrency is the thing that blockchain is best known for, there are many more possibilities for how this technology can secure information and move away from centralized, controlled activities.

Based on this idea, a relatively new concept to the world of business is a DAO LLC.

What Is a Decentralized Autonomous Organization (DAO)?

A Decentralized Autonomous Organization (DAO) is a new type of LLC in which no leading member of the organization has majority rule. In a normal LLC, some members or the CEO/CFO make the core decisions for the business. A DAO has been modeled on decentralized cryptocurrencies, and it essentially runs autonomously through a series of “smart contracts” that operate without any human interaction. This means the business can run without a traditional business structure. Instead of a food-chain style hierarchy, all “members” of the DAO have an equal say in the organization’s actions.  

However, not everything can be done legally without human input, so it is not entirely self-sustaining. A DAO is a foreign concept to many and comes with many advantages and disadvantages, which we’ll explore shortly.  

The concept of a DAO was first introduced by Dan Larimer, the founder of BitShares, Steemit, and EOS, back in 2015. and then further refined by Ethereum’s creator Vitalik Buterin a year later. It is now getting further attention as DAO LLCs are now recognized in Wyoming. Read on to understand more about Wyoming DAO LLCs below. 

How Are DAOs Created?

Forming a DAO is not all that different from forming any other business. Legally compliant DAOs are limited liability companies or LLCs. Limited liability means the company is considered its own legal entity, regardless of how it pays taxes. For example, even if a single-member LLC pays taxes through the owner’s tax return, that owner cannot be held legally liable if the company were to be sued.

Forming a DAO LLC requires a couple of additional steps that other LLCs don’t have to do. They must establish the rules for the DAO before it is formed (embedded in the code), and they must establish how the LLC will be funded before formation, too. That means the DAO’s code and any potential bugs and security issues must be tested and ironed out before the system can be deployed.

While one person or entity must form the DAO, they do not retain sole control over the DAO.

How Does a DAO LLC Differ from a Traditional LLC?

LLCs, on the other hand, are typically managed by their owners or managers appointed by the owners. Depending on the number of members, this typically means that a small number of people control an LLC. Decisions are made by members through voting or board meetings. 

On the other hand, a DAO LLC doesn’t have a traditional management structure and functions with decentralized autonomy. A DAO leverages blockchain technology and smart contracts for decision-making. This means that members can participate directly in decision-making without needing intermediaries or a centralized authority. This simplifies administration and gives many members a direct say in the DAO’s administration.

What Are the Advantages of DAOs?

There are significant advantages to a DAO, from flexible management to the potential for change, which is all amplified by the liability protection of forming an LLC. Here’s what you’ll want to consider.

1. Flexibility in Management

DAOs are more inclusive and responsive to stakeholder input because every member has an equal say. That means you don’t have to know the right people or have a certain amount of skin in the game (beyond the initial required investment) to be included in the decision-making or benefit from the organization’s profits.

2. Less Room for Human Error

Because the organization is run on an algorithm, there is less room for human error. The DAO is legally required to work out any bugs before forming an LLC, further reducing the risk of coding errors and automating systems. 

3. Limited Liability

With a DAO LLC, you gain the advantages of legal limited liability that is so advantageous to LLCs. This can help protect members in case of lawsuits or other issues. Without LLC protection, a DAO is usually considered a general partnership, exposing its members to personal liability for the DAO’s actions or debts.

4. Access to Secure Information or Funds

Blockchain gives DAOs access to extremely secure information or funds. All information and financial transactions can be recorded in the blockchain, thus improving security. While decentralization is unfamiliar, by moving responsibilities and controls away from the center, information and funds can remain more secure. Decentralized security enables risk management and security enforcement.

5. Transparent Transactions 

All transactions are recorded in the blockchain, which is secure and allows anyone to access the records of the transaction, allowing for more transparency than experienced in traditional businesses. In the era of consumer demand for increased transparency, blockchain in general and DAO LLCs specifically offer a new paradigm in transparent operations. 

6. Potential to Create Change

The technology is still in its infancy, which means a DAO offers huge opportunities to create change and be at the forefront of blockchain technology reaching mainstream consumers. However, like any emerging technology, the applications and effects could change over time. By creating a DAO LLC, companies have the opportunity to be a part of creating the change they want to see in future business iterations. 

What Are the Disadvantages of DAOs?

While there are many advantages to DAO LLCs, this emerging business structure isn’t without significant potential downsides. Here’s what you should consider before moving ahead.

1. Need for Multiple Approvals

You likely know already that partnerships in business (as a structure) rarely work well, and one of the reasons medium and large businesses are so slow to react to market changes is that they need the go-ahead from so many stakeholders. A DAO can experience the same issues, regardless of the organization’s size, because there are so many fingers in the pie.

2. Anyone Can Have a Say in Large Financial Transactions

To build on the point above, it also allows anyone of any background to have their say in large financial transactions, which may not be to the benefit of the organization (and MIT believes this structure is unlikely to yield returns).

3. Mistakes May Often Go Unnoticed

While DAOs can reduce human error, they increase the risk of computer-related errors. Because the organization runs on an algorithm, mistakes may get overlooked that a human eye would catch. 

4. Harder to Spot Security Errors

While blockchain and code leave little room for error, the fact that the entire organization has been built by someone with codes means that security errors are difficult to identify and may be targeted by hackers and could be exploited before the DAO stakeholders have time to react. 

In 2016, “The DAO,” a crowdfunding project, attracted record funding despite having documented security flaws. These flaws were exploited, and 3.6 million ETH (equivalent to around $150 million) was stolen.

This means that the rules or code have to be bug-free to be entirely secure, or investors can literally watch as funds are stolen and do nothing because the hacker isn’t breaking the rules of the code. This is difficult to do and even more difficult to be certain of without extensive long-term testing.

5. Legal Framework for DAOs Is Barely There

The legal framework for DAOs barely exists yet, though this is starting to change. While DAO LLCs offer a stronger framework, you can currently only form this specialized LLC in Wyoming. Many questions remain about who can be held responsible if a DAO makes a costly mistake. Read on to learn about Wyoming’s new bill that recognizes DAOs as LLCs and what the legislation includes.

Wyoming to Recognize DAOs as LLCs

In April 2021, Wyoming Governor Mark Gordon signed Bill 38. This bill allows Wyoming to recognize DAOs as LLCs. The bill took effect on July 1, 2021. Under this new law, a DAO LLC is defined as “a limited liability company whose articles of organization contain a statement that the company is a decentralized autonomous organization.”

Wyoming legislation dictates that the management of DAO LLCs has many of the same requirements as traditional LLCs, with additional criteria for a more complex management structure and backend requirement operations.

Wyoming is positioning itself as a technological leader and the most friendly state for digital asset innovation, and its Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology is certainly doing this with its DAO legislation. With the fast pace of technological progress, Wyoming reviews regulations and digital asset laws annually in conjunction with the University of Wyoming. 

What’s in the Wyoming Legislation?

The Wyoming legislation will allow DAOs to legally incorporate, hire employees, scale, and grow. The legislation aims to give DAOs the legitimacy they need to better establish themselves and grow in the worldwide marketplace.

The legislation will require DAO LLCs to maintain a presence in the state through a registered agent, which is required of all LLCs who register in a state other than their own across the country.

Like LLCs, DAOs will be required to include a designation in their name, such as “DAO”, “DAO LLC”, or “LAO”. The DAO can be member-managed, like an LLC, or algorithmically managed, in which case the smart contract must be editable, upgradable, updatable, and modifiable.

The articles of the DAO, or the smart contract, must contain information about how the DAO will govern members, their rights and duties, distributions, and amendments. No member will have an ownership or fiduciary duty for the DAO besides the implied contractual expectations that they will be doing fair dealings. These articles must be amended if there is a change to the smart contract(s), if the DAO name changes, or if an error needs to be—or has been—fixed.

The legislation in Wyoming is still in its infancy, and many open-ended questions may require further refinement to keep pace with the technology.

Why Create a DAO LLC?

The biggest reason to create a DAO LLC is for the legal protection an LLC offers. If an organization chooses to create the DAO first before forming a DAO LLC, there is no legal protection for the investors and stakeholders from legal liability for that DAO. 

Of course, pinpointing the liable parties in a large DAO may be difficult, but it still leaves the DAO investors and stakeholders open to legal backlash should something go wrong.

When you’re handling financial matters, especially in technology so new as blockchain, failing to form an LLC around the DAO is extremely risky. Without the protection of an LLC, an investor in a DAO may face having their personal assets seized or subject to a lawsuit if the DAO were to be sued. An LLC will insulate any stakeholder from personal risk, so only the DAO will be liable in a legal case.

A DAO has the added complication that the stakeholders may be global, and so only the stakeholders in the country, where the case is being heard, will be liable. This makes the risks of a DAO without the protection of an LLC even higher. 

For example, suppose Americans form a DAO with citizens of other countries. In that case, the people from foreign nations will not be held liable if an American sues the DAO because the damages can be recovered from the American citizens’ personal assets through the legal system. It would be up to those citizens to try to recover the damages from the other DAO stakeholders, which would likely prove difficult, if not impossible.

If a DAO forms a DAO LLC, then this cannot happen. The DAO’s assets are the only assets that can be at risk if the DAO is sued. This makes forming a DAO LLC essential for any DAO.

What Is an Example of a Decentralized Autonomous Organization?

Technically, any organization that does not have centralized governance can be called a DAO, which makes almost every cryptocurrency network a DAO. Here are a few of the most successful ones:

• BitShares – BitShares is a decentralized cryptocurrency exchange.
• Dash – Dash launched in May 2015 is the PayPal of the cryptocurrency world, allowing people to hold money, get paid, and shop instantly for less than a cent per transaction. It’s just as accessible as PayPal and is a fast-growing payment platform.
• Augur – Augur is a decentralized prediction market platform (a betting platform) with no limits. It aims to make the betting industry fair.
• Steemit – Steemit is a blogging and social media site with an interface similar to Reddit, that rewards users with their unique cryptocurrency for publishing and curating content.
• MakerDAO – MakerDAO is a cryptocurrency called Dai that aims to give any individual or business access to the benefits of a digital currency.
• DXdao – DXdao is a collective that develops, governs, and grows DeFi protocols and products.

Is Wyoming the Best Place to Create a DAO?

Currently, Wyoming is the only place it makes sense to create a DAO as a distinct legal entity with the same legal protection as any other LLC. If you are involved in forming a DAO, your next natural step once you’ve solidified your rules and funding is to start forming your DAO LLC. The LLC will protect you and all the other stakeholders should the DAO become the subject of a lawsuit or another legal dispute. See more on when should you start a DAO instead of a C-corp. 

Need Help in Incorporating an LLC in Wyoming?

If you’re in the process of forming a new company and believe a DAO structure will be right for you, doola is here to help. We can guide you through the process to ensure you have everything you need to incorporate your business. 

doola offers registered agent services in Wyoming, along with a US business address, annual compliance reminders, US tax filing services, and many more services to ensure incorporation and maintaining your DAO LLC in Wyoming goes smoothly, no matter where you are in the world.

You can chat with us anytime online to find out more. Alternatively, schedule a time to chat, and we’ll be more than happy to discuss your needs and ensure you have all the information you need to move forward.

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