This guide was built to help you understand the benefits of incorporating your DAO and how the process of DAO incorporation works. We help you answer questions like:
Why should I incorporate my DAO? In what geographic jurisdiction should I incorporate my DAO? What legal entity type should I choose?
Get all the information you need to make the best decisions for you DAO by reading this guide.
By
MIDAO
October 3, 2024
In the rapidly evolving world of Web3, Decentralized Autonomous Organizations (DAOs) have emerged as a revolutionary way to organize and govern collective efforts. These organizations represent a fundamental shift in how we think about collaboration and governance, but their operation in the legal world requires careful consideration. This comprehensive guide explores why DAO incorporation matters and how it protects both the organization and its members.
When a DAO operates without formal legal incorporation, it faces significant risks that many members might not realize. As Adam Miller, a leading expert in DAO legal frameworks, explains, "If a group of people engages in a common enterprise, the law—virtually everywhere in the world…will treat that group under a default legal structure called a general partnership." This default classification carries serious implications for everyone involved in the DAO.
The consequences of this default treatment are severe. Without proper incorporation, every member of your DAO could be personally liable for the organization's actions and obligations.
The reality is stark: "If that DAO gets sued or the government pursues it for some kind of liability, they can come after your personal assets—like your house—because there's no separation between your assets and the organization's assets." This vulnerability extends to every member of the DAO, regardless of their level of involvement or contribution.
One of the primary advantages of incorporation is establishing a clear legal framework for your DAO. As Miller notes, "Now, the problem that we help solve with legal entities for DAOs…is that you can actually put a legal framework around your code and your organization so that the legal systems actually know how to treat you." This legal recognition is crucial for establishing legitimacy and protecting member interests.
The tax implications of operating an unincorporated DAO are particularly concerning: “Blockchain code is much cheaper to enforce, at least, than hiring lawyers for $800 or $2,000 an hour, depending on who you choose." However, there's a solution: "By using a legal entity, you can avoid that individual tax liability."
The traditional corporate structure is evolving to accommodate the unique needs of DAOs. As Miller points out, "If you're doing all of that on-chain, why would you want to maintain a separate PDF copy of all your decisions, right?" This highlights the need for legal structures that can adapt to blockchain-based governance while maintaining legal validity.
Critical considerations for modern DAO structures include:
When selecting a legal structure for your DAO, consider these essential factors:
The incorporation of DAOs represents a crucial step in bridging the gap between decentralized technology and traditional legal frameworks. Miller emphasizes that "code is not law, despite what many like to say. While you can enforce code automatically using blockchains—whether it's Ethereum, Cardano, or something else—the code still has to fit into legal and regulatory frameworks to be legally binding."
After establishing a legal entity, DAOs must navigate various ongoing legal requirements:
Finding the proper legal representation is crucial for DAOs. Your legal counsel should have experience with blockchain technology and smart contracts. It is essential, as they'll need to understand how your DAO operates at a technical level. They should be able to bridge the gap between traditional legal frameworks and decentralized governance structures.
Your counsel should also have international experience, especially if your DAO operates across multiple jurisdictions. "Often, you'll have your governance DAO at the top and then some other kind of traditional incorporated entity," Miller explains, noting that different configurations might include "a Marshall Islands entity, maybe a BVI entity for specific purposes, a Delaware C-Corp, or a Swiss Association."
Governance protocols form the backbone of your DAO's operations. Miller emphasizes that "if you want your DAO to be governed and controlled legally and on-chain by the members, then you need to use a DAO LLC or something very similar." Your governance protocols should address the following:
First, define transparent decision-making processes that align with both your smart contracts and legal requirements. This includes establishing voting thresholds, proposal mechanisms, and execution procedures.
Second, explicit rules for treasury management should be created. This is particularly important, as Miller points out, "You can have DAOs with a million members and 50 million dollars in the treasury after just a few days, which simply wasn't possible before."
Finally, develop clear procedures for handling disputes and making amendments to your governance structure. This ensures your DAO can evolve while maintaining legal compliance.
While blockchain provides immutable records of on-chain actions, comprehensive documentation remains crucial. As Miller notes, "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 to maintain a separate PDF copy of all your decisions?"
However, maintaining proper documentation goes beyond just recording votes and decisions. Your DAO should:
Track and document all significant organizational changes, including:
Keep detailed records of interactions with external entities, particularly when dealing with traditional organizations that may require conventional documentation. Miller explains, "If your DAO wants to have a booth at a trade show and you want the DAO to agree to all the terms of that contract, you need a legal entity."
Establish clear protocols for maintaining and accessing these records while respecting member privacy. This is especially important as "most legal entities require you to keep the names and physical addresses of all members, but that's also a non-starter for most DAOs, for obvious reasons."
Beyond these core practices, successful DAO incorporation requires ongoing attention to:
Risk Management: Regular assessment of legal and operational risks, with appropriate mitigation strategies in place.
Compliance Monitoring: Stay current with regulatory changes across relevant jurisdictions. Your DAO should have systems in place to adapt to evolving legal requirements and maintain compliance.
Member Education: Ensure all members understand their rights, responsibilities, and potential liabilities within the DAO structure. This is crucial because, as Miller points out, many members may only realize the implications of their participation with proper legal structures in place.
The incorporation of DAOs represents a crucial step in bridging the gap between decentralized technology and traditional legal frameworks. While blockchain code enables unprecedented organizational capabilities, proper legal incorporation provides the protection and recognition necessary for sustainable operation in the real world.
Protection is invaluable for DAOs looking to operate safely and effectively in today's complex legal landscape.
For DAO founders and members, understanding and implementing appropriate legal structures isn't just about compliance—it's about creating a foundation for long-term success and protecting all stakeholders involved. As the space evolves, those DAOs that adequately address their legal status through incorporation will be better positioned to achieve their goals while protecting their members' interests.
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.
