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A comprehensive interpretation of the legal structure of DAOs, from legal entity types to individual responsibilities

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If the DAO is considered a general partnership, then the DAO itself will have legal personality

Original title: "DAO Legal Entity Matrix"

Original author: Paradigm

Original compilation: xinyang@DAOrayaki.org, DAOrayaki

The legal structure of DAO has always been a matter of concern to everyone. The DAOrayaki community has put together this article, a concise and friendly resource for comparing the various legal structures used by DAOs in the US as well as some international jurisdictions. It is intended to be a starting point for founders and their legal advisors to better understand these issues as they consider potential legal structure solutions for DAOs.

We believe that Web3 can completely change the way people interact online, and a new generation of Internet applications will emerge and business, giving users ownership and economic exposure to the growth of the underlying protocol, resulting in a more flexible and powerful form of human coordination...

Summary of DAO Legal Structure

No Legal Entity

DAO has no formal operating as a legal entity.

If the purpose is for profit, or if the Token holder It is possible to vote to allocate the DAO's funds to itself, and then the DAO has the potential to be considered a de facto general partnership.

So far, the U.S. courts have not yet considered DAO as a general partnership. The question of whether holders will be considered general partners remains.

UNA packet

DAOs dedicated to "non-profit" goals (each state has a statutory definition) can form an unincorporated non-profit association (UNA, Unincorporated Nonprofit Association), which is similar to a non-profit A not-for-profit version of a corporate partnership, but may offer members limited liability.

Limited Cooperative Association
h4>

A DAO can form a Limited Cooperative Association (Limited Cooperative Association), which is an entity that combines traditional cooperatives with a more flexible capital structure and governance framework .

Isolated entity

Examples include joint stock companies and limited liability companies. A DAO (or its founders, or token holders) can form a legal entity to undertake specific activities of the DAO or agreement (for example, as a token seller), or to hold specific assets.

Complete LLC Package

DAO (or its founders or Token holders) can form a limited liability company, and DAO members will become the owners of the company.

States like VT and WYO have enacted DAO-specific statutory regimes, all of which have not been tested by the courts. DE does not have regulations specific to DAOs, but is the most common jurisdiction in the United States to form for-profit LLCs.

(Annotation: VT refers to Vermont Vermont, WYO refers to Wyoming Wyoming, DE refers to Delaware Delaware)

Organization chart of various legal structures

No Legal Entity



UNA package
Limited Cooperation Association
Isolated entities
Complete LLC Package
Best use cases for various legal structures

No Legal Entity

Highly decentralized DAOs, especially those with a narrow scope of activities/limited off-chain operations, have less real tax or regulatory enforcement risk due to decentralization and short-term operations, thus limiting the risk of not having a legal entity; or The DAO is made up of amateurs, not contractors or employees who receive regular income from the DAO.

Example: any DAO without a formal legal entity

UNA packet

DAOs with US-centric members or activities, with a genuine non-profit purpose, wanting greater regulatory and tax certainty, and "voluntary participation" in US corporate taxation.
Examples of this include:

1. Idle DAO
2.LexDAO

Limited cooperative association

A DAO with US-centric members, expects members to be active contributors to the DAO (with a few exceptions), and expects to comply with modern Cooperative Principles. Not suitable for DAOs with a volatile membership base and wish to remain anonymous.

Isolated entity

The sub-branch of DAO, or individual Token holders want to form an entity to isolate liability and taxation.

A DAO with a relatively clear member group, the regulatory risk of its activities is relatively low, Requires a legal entity to interact with traditional service providers

Examples include:
Friends With Benefits

The complete limited liability company package

A DAO with a relatively small, well-defined, highly stable membership group (e.g. an investment DAO).

Examples include:
Metacartel Ventures.
LAO/Flamingo.
Syndicate

The sub-branch of DAO, or individual Token holders want to form an entity to isolate liability and taxation.

Relationship between Token holders and entities

No legal entity
h4>

Token holders may be de facto general partners; however, only holding Tokens without participating in more things (for example, participating in governance) Whether Token holders will not be regarded as general partners still needs to be questioned.

UNA packet

All Token holders can "consent" to become a member of UNA, which may only require the governance proposal passed by the majority and the continuous participation of DAOToken holders.

If there is no provision in the constituent documents, refer to the Model Law

By default, transfer of membership benefits is prohibited

Limited Cooperation Association

Token holders can Is a sponsor of the DAO or an investor in the DAO

If not specified in the formation document, refer to the demonstration Law

By default, the transfer of membership benefits is prohibited

Isolated entity

Token holders can become members or shareholders of isolated entities, but they need to sign a separate contract for their rights/shares


In addition, if the DAO's assets exceed $10 million, it will be limited to 2,000 members (of which up to 500 can be unaccredited members). (Annotation: The reporting company can be a company listed on a public trading platform, or a company that is not listed on a trading platform but is publicly traded.)

Complete LLC Envelope

Usually (such as Syndicate, KaliDAO, and Meta Cartel Ventures’ investment clubs), Token holders become members of a limited liability company by signing a cooperation agreement separately

Furthermore, if the DAO has more than $10 million in assets, it will be limited to 2000 members (of which there can be up to 500 unaccredited members) before becoming a reporting company . A DAO formed for minority investment would generally be limited to 100 members (see the Investment Company Act of 1940, 15 U.S.C. § 80a-3(c)(1)).

Formed meta notes

A DAO operating without any formal legal structure can be legally classified as a general partnership (if for-profit) or an unincorporated non-profit association (if not for-profit).

DAO may form a legal entity to carry out its specific business or hold its specific assets, but careful analysis should be done to define what a legal entity consists of (i.e. content of the legal entity "package"), as the DAO's activities and assets may not always co-exist with the legal entity.

The appropriate entity structure for a DAO depends largely on the circumstances of that particular DAO. There is (currently) no one-size-fits-all solution. These factors should be considered when considering an appropriate entity structure: (i) what would be the activities of the DAO (ii) what would be the activities of the proposed entity (iii) the degree of decentralization of the DAO (iv) the number of DAO members (v) the people behind the DAO What are the activities of the agreement.

Formation Requirements
 
No Legal Entity< /h4>

No legal formalities required

A general partnership is formed when two or more persons, as joint owners, engage in a business for profit (although there is no intention to form a general partnership)

A general partnership may be a type of entity that is deemed to exist before other entities are formed

UNA packet

It varies from state to state, but filing is not required in most states.

The Model Law defines a UNA as "consisting of [two] or more members, Affiliated pursuant to an agreement, oral, recorded, or implied by conduct, for one or more mutual, non-profit purposes.”

Should consider whether the activities of the DAO qualify as non-profit (distribution to Token holders is usually not eligible). A UNA may engage in profit-generating activities as long as they are in furtherance of a non-profit purpose.

Limited Cooperative Association
h4>

File the Articles of Incorporation with the Secretary of State; pay the applicable filing fee; hire an agency to handle the process of service in the filing jurisdiction; pass the bylaws.

Isolated entities (such as C .Corp. Joint Stock Company and LLC Limited Liability Company)

Submit a certificate of incorporation/formation to the Secretary of State Articles of Incorporation); pay the applicable filing fee; hire an agency to handle the service process in the filing jurisdiction; pass a Liability (LLC) or Operating Agreement (LLC).

The isolated entity will need to establish a governance structure (e.g. a board of directors if a joint stock company and executive officer, and in the case of a limited liability company, the manager (manager) or member management).

Representatives of DAOs or affiliated entities should consider the authority under which isolated entities are formed, as well as the shares/ Who will legally own the units, and whether these arrangements mean that the DAO itself is a general partnership, or that the party forming the entity is an "active participant" (defined by the SEC as a "sponsor, sponsor, or other third party (or Affiliated groups of third parties)")

Complete LLC Packet

File Certificate of Incorporation with the Secretary of State; pay applicable Filing Fee; Hire an agency to handle the process in the filing jurisdiction

LLCs will be required Choose its governance structure - member-managed or manager-managed.

The operating agreement must be executed by all members (see, for example, Syndicate.io's operating agreement format; Kali.DAO's operating agreement format; and Metacartel Ventures' operating agreement).

Administrative Requirements

No Legal Entity

If the DAO is considered a general partnership, it must file state and federal taxes, as well as tax returns from any other jurisdiction where the DAO has active members who receive payments from the DAO treasury.

Each partner shall file Form K-1 reporting their share of income

UNA packet

UNAs are required to file state and federal taxes.
UNA cannot assign to members
must submit IRS Form 8832 to be taxed as a corporation.

Limited Cooperative Association
h4>

(none)


Isolated Entity

Annual State Franchise Tax. An in-state agent is required to provide services. Must file state and federal taxes (multiple-member LLCs are classified as partnerships for federal income tax purposes. Single-member LLCs are not considered entities for tax purposes unless they elect to be taxed as a corporation ).

Complete LLC Package

Annual state franchise tax. An in-state agent is required to provide services. Must file state and federal taxes (multiple-member LLCs are classified as partnerships for federal income tax purposes. Single-member LLCs are not considered entities for tax purposes unless they elect to be taxed as a corporation).

Meta Notes on Responsibilities

Legal entities can be formed to insulate various participants in the DAO ecosystem from potential liability.

Veil Piercing. U.S. courts may disregard the limited liability protections offered by entities, and if they find the entity is undercapitalized, or lacks "corporate formalities," it could lead to direct liability of the relevant controllers.

Regulators and US courts may impose "controller liability" or disregard the legal personality of entities directly controlled by Another ego situation), may lead to direct liability of the relevant controller.

Legal personality
 
No Legal Entity< /h4>

If the DAO is considered a general partnership, then the DAO itself will have legal personality (as a general partnership)

UNA packet

Yes, provided the legal form is recognized in the relevant state/jurisdiction.

Limited Cooperative Association
h4>

Yes

Isolated entity

Yes

Complete LLC Envelope

Yes

Personal responsibility of the founding team

No Legal Entity

If the DAO is considered a general partnership, the founders may be considered partners, each liable for 100% of the partnership After the assets are paid off.

In order to solve this risk, DAO members can set up a separate entity as the owner of DAOToken , to play the role of taxation and liability segregation.

UNA packet

If the UNA is recognized as a separate legal entity, the founders would be immune from debts incurred by the DAO's activities after the UNA was established, although this has yet to be verified by the courts .

Limited Cooperative Association
h4>

Founders, as members, have the possibility of indebtedness from debts arising from activities carried out after the establishment of the LCA.

Isolated entity

Founders, as shareholders or members, are immune from liabilities arising from activities of the isolated entity after its establishment.

Founders may, however, be liable for debts not arising from the activities of the isolated entity.

Complete LLC Packet

Founders, as members, have the possibility of indemnification from debts arising from activities carried out after the establishment of the limited liability company.

Personal Responsibility of Token Holders

No Legal Entity

If DAO is regarded as a general partnership, Token holders can be regarded as general partners, just like founders and managers.

DAO members can separately form an entity, as the owner of DAOToken, to play tax and responsibility isolation The role of

UNA packet< /h4>

If UNA is recognized as an independent legal entity, Token holders may have limited liability as "members", although this has not yet been verified by courts.

Limited Cooperative Association
h4>

Token holders, as members, can be exempted from the debts arising from the activities carried out after the establishment of the LCA.

Isolated entity

Token holders, if they are shareholders or members of an isolated entity, are exempt from liabilities arising from activities carried out by the isolated entity after its establishment.

However, Token holders may still be liable for debts not arising from the activities of an isolated entity , or if the entity is not recognized by a court or regulator.

Complete LLC Envelope

Token holders, as members, can be exempted from debts arising from activities carried out after the establishment of a limited liability company.

Personal Responsibilities of Entity Managers

No Legal Entity

If the DAO were to be treated as a general partnership, all partners would be legally treated equally and each would be fully responsible for 100% of the partnership obligations, although practically Starting out, people who are believed to exercise functional control over the DAO, such as through multisig or as key developers, would be at higher risk as they would be more likely to be the subject of third-party claims.

UNA packet

The manager's liability is limited and can be compensated

Limited Cooperative Association

The administrators of the LCA have limited liability to indemnification

Isolated entity

The managers (Board and Executive Officers) of an isolated entity will have limited liability by: (i) being released from damages by the entity (with exceptions, including duty of loyalty claims ), (ii) indemnification (with exceptions) and disbursement of legal proceedings by the entity, and (iii) access to D&O insurance (not widely available today).

Complete LLC Package

Same as isolated entity

U.S. Securities Law Notes

U.S. regulators and courts may seek to extend U.S. securities laws to DAOs and DAO Tokens. Despite the legal structure, U.S. regulators and courts are likely to focus on the underlying economic relationship between actors, favoring function over form.

DAOToken as a security. A DAO that constructs a legal entity such that each token represents ownership of that legal entity may concede its tokens as securities. In any event, consideration should be given to whether transactions in DAOToken can be considered “investment contracts” as defined by Howey, or “notes” as defined by Reves (see Latham memo). In addition to U.S. federal securities laws, U.S. state "blue sky" securities laws may also be invoked.

DAO as an investment company. Consideration should be given to whether the DAO constitutes an investment company under the Investment Company Act 1940.

Partnership interests as securities.

U.S. courts have held that the general partner's Equities are not securities.

The US Securities and Exchange Commission believes that when Token holders do not have valid voting rights or rely on specific sponsors or "active participants", DAOToken actually The above is securities.

Consideration should be given as to whether efforts to form a legal entity would result in responsible persons being considered SEC guidance

Use of an offshore foundation or special purpose trust structure may Reduce the influence of the United States, but if the activities are onshore or affect Americans, the U.S. regulators will assert jurisdiction as much as possible; geo-blocking the URLs in the United States or taking other measures to limit the "return" of Token to the United States can reduce the risk of belonging to the United States. US Jurisdiction Risks.

Governance of entities

No Legal Entity

If the DAO were to be considered a general partnership, it would be governed by the majority of partnership interest holders (but from a practical point of view, this governance power would coexist with DAO members being able to vote on transactions , which may or may not have restrictions, so important management powers may operate outside the general partnership (e.g. need to negotiate with the development team; who owns private keys or multisig permissions, etc.).

UNA packet

Members of the UNA elect administrators who have fiduciary responsibilities to the UNA.

Members generally have no fiduciary duty to other members (do not act as stewards).

Limited Cooperative Association

The members of the LCA elect directors. "tickets" (like a typical co-op), but can also be usage-based or patronage-based, or even equity-based.

Directors are not required to be members of the LCA. Directors have a fiduciary duty to the LCA.


isolated entity

If the isolated entity is a joint stock company it will be governed by a board of directors elected by the shareholders , and may appoint executive officers. Board members will be subject to fiduciary duties.

If the isolated entity is A limited liability company, which may be directly managed by members or managers. Fiduciary duties may be waived (with few exceptions).

Shareholders/members generally have no fiduciary duty to other members (do not serve as directors/managers).

Complete LLC Package

The LLC can be managed directly by the members, Can also be managed by a manager. Fiduciary duties can be waived (with few exceptions)

Registered with Wyoming DAO LLC can only be managed by members

Tax Meta Comment

Please note that this matrix only attempts to address the more common structural solutions at a high level. For example, we did not cover S Corporations and their taxation issues. You should consult with a qualified tax professional before making a decision about any particular tax treatment or situation. (Annotation: S Corporation is also known as "inside-owned company". This type of company usually does not go public for financing, and tends to be more in the form of partnership, which is different from C Corp. by @Jessica L)

DAO as an "entity" for US taxation:

For purposes of federal taxation, whether an organization is a separate entity from its owners is a matter of federal tax law, and Does not depend on whether the organization is recognized as an entity by local law. (Treas. Regs. § 301.7701-1(a)(1).) A joint venture or other contractual arrangement may create a separate entity for federal tax purposes if the participants engage in a trade, commerce, financial business, or venture and share in the profits. (Treas.Regs.§ 301.7701-1(a)(2).)

An entity not expressly organized as a corporation may generally elect It is treated as a partnership or corporation for income tax purposes. However, entities classified as "publicly traded partnerships" cannot be classified as partnerships (I.R.C. § 7704).


The potential tax implications of the following types of events should be considered. (i) transfer of assets to an entity/DAO (for example, funding a treasury); (ii) transfer of assets from an entity/DAO to a third party ( (e.g., grant projects); (iii) revenue or fee-based activities carried out by entities/DAOs (e.g., staking/liquidity mining projects); and (iv) portfolio diversification (e.g., trading stablecoins with native tokens).

Considerations for US ECI:

Foreign entities with a U.S. trade or business are subject to U.S. tax on income effectively connected to a U.S. trade or business (form 1040-NR required)

If the foundation is considered a subsidiary of or controlled by a U.S. corporation, the income of the foundation may be considered income of the U.S. corporation.

If the foundation is considered to be conducting US business activities, it may be subject to US taxes.

Work Around: Onshore or Tax Exempt Eligibility for Offshore Locations (Cayman).

US FATCA Considerations :

The Foreign Account Tax Compliance Act (FATCA) requires entities that may have dealings with U.S. taxpayers to report to the IRS about those taxes information about people and their financial transactions. If they do not, any payments made to them will be automatically subject to a 30% withholding tax, which will be imposed on anyone who makes payments to these entities.
 
DAOs should carefully consider whether they need to comply with FATCA and possibly be subject to tax withholding requirements.


US CFC Considerations:

CFC (“ CFC", controlled foreign corporation) refers to any foreign company whose American shareholders directly, indirectly or constructively own more than 50% of the total number of shares entitled to vote in all categories. (Internal Revenue Service, "4.61.7 Identification and Qualification of Controlled Foreign Corporations, CFCs, and U.S. Shareholders.") U.S. shareholders of controlled foreign corporations are subject to specific anti-deferral rules under U.S. tax law, which may require controlled foreign U.S. Shareholders of Corporations Report and Pay U.S. Taxes on Undistributed Earnings of Foreign Corporations (Internal Revenue Service, "Instructions for Form 5471 (01/2021), Class 5 Filer, CFC.")
 
DAOs should consider whether they are CFC compliant and subject to potential reporting requirements.

Taxation at the Entity Level


No Legal Entity
 
If the DAO is considered a general partnership, and the general partnership is a pass-through entity for tax purposes, then DAOToken holders may have taxable income from a range of DAO activities.

Depending on the jurisdiction, if a DAO is considered a general partnership, it may have Declaration and payment obligations, not only income tax, but also indirect tax, withholding tax, stamp duty, etc.

UNA packet

UNA is taxed as a corporation (21%) unless another election is made (e.g. DRE). However, since dividends cannot be distributed to members without disqualification from UNA, taxation is effectively limited to the entity level.

Estimated tax payments must be filed quarterly and annual tax returns must be filed.

Limited Cooperative Association
h4>

LCA is taxed at the entity level but can take advantage of specific income deductions

isolated entity

joint stock company as The company pays taxes. Single-member LLCs are not considered, and multi-member LLCs are taxed as partnerships (on a pass-through basis), unless another election is made.

Estimated tax payments must be filed quarterly and annual tax returns must be filed.

Complete LLC Package

Not taxed at entity level; income passed on to members (possible phantom income issue).

Can choose to be taxed as a corporation.

Service Provider and Remittance Element Note

A DAO with a formal legal entity will be better able to hire professional service providers (such as lawyers), hire (and provide benefits to) employees, obtain bank accounts, and otherwise conduct business.

The implications of local employment laws should be considered when engaging service providers, especially if they are full-time and salaried.

You should also consider whether you need to meet any anti-money laundering/know your customer (AML/KYC) obligations when transferring digital assets to service providers

If an offshore structure is used, DAOs should consider whether having a local service provider helps reduce ECI and other audit risks (see for example the EU list of non-cooperative jurisdictions).

Capital Channel Meta Note

Not every legal entity is a viable fundraising vehicle, so DAOs should carefully consider which type of entity to use to raise funds, it is possible to form more than one entity

Capital channel

No Legal Entity

DAOs may choose to raise funds by selling tokens, but potential securities law and tax issues should be carefully considered.

UNA packet

In general, not a typical fundraising vehicle
Assets can be transferred to UNA, but not assigned to members
Projects may use independent US operating companies or foreign entities for funding.

Limited Cooperative Association
h4>

The LCA allows investor members with voting and economic distribution rights, making it a potential fundraising vehicle. However, most LCA statutes do not exclude the issuance of interests to investor members from application of state securities laws.

Isolated entity

A joint-stock company will be the most familiar to investors, able to sell convertible securities (seed stage), equity and Token rights.

Complete LLC Package

Limited liability companies can also issue convertible securities, equity and Token rights, but in view of the negative upstream tax impact of limited liability companies on investors, so It is less common than joint stock companies.

References

UNA packet


A Look at the 1996 and 2008 Uniform Unincorporated Nonprofit Association Acts
David Kerr, Miles Jennings - A Legal Framework for Decentralized Autonomous Organizations
Uniform Law Commission - Uniform Unincorporated Nonprofit Association Act
Uniform Law Commission - Revised Unincorporated Nonprofit Association Act

Complete LLC Envelope

Wyoming Secretary of State - DAO FAQs
Gabe Shapiro, Sydney Abualy - Wyoming』s Legal DAO-saster
Metacartel Ventures - Grimoire

Related Links

1. Idle DAO: https://gov.idle.finance/t/legal-structure-for-the-idle-dao/682
2. LexDAO: https://github.com/lexDAO/LexDAO-Handbook/wiki/LexDAO-membership
3. Metacartel Ventures: https://github.com/metacartel/MCV/blob /master/Legal/Grimoire%20and%20Exhibits/MCV-Grimoire-Final-All-Exhihbits.pdf
4.LAO/Flamingo: https://flamingodao.xyz/
5. Syndicate: https://syndicate.io/
6. Model Law: https://law.justia.com/codes/colorado/2016/title-7/associations/article- 58/part-6/section-7-58-603/
7. Syndicate: https://syndicatedao.gitbook.io/syndicate-guide/web3-investment-clubs/add-members -to-a-club
8. KaliDAO: https://app.kalidao.xyz/
9. Meta Cartel Ventures: https://github.com/metacartel/ MCV/blob/master/Whitepaper.pdf
10. SEC definition: https://www.sec.gov/news/press-release/2017-131
11. Operation Agreement format: https://syndicatedao.gitbook.io/syndicate-guide/web3-investment-clubs/create-a-legal-entity/legal-document-examples
12. Memorandum: https:/ /www.jdsupra.com/legalnews/the-limits-of-applying-reves-v-ernst-5896777/
13. Jessica L: https://www.zhihu.com/people/Jessicazylu
14.ECI: https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci
15. Controlled foreign companies, CFC and Identification and Eligibility of US Shareholders: https://www.irs.gov/irm/part4/irm_04-061-007#idm140370044872944
Instructions for Form 16.5471 (01/2021), Category 5 Filer , CFC: https://www.irs.gov/irm/part4/irm_04-061-007#idm140370044872944
17. EU non-cooperative jurisdiction list: https://www.consilium.europa. eu/en/policies/eu-list-of-non-cooperative-jurisdictions/

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